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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

February 5, 2013 at 10:03 AM

Dell goes private, how about Microsoft next?

With Dell going private, perhaps it’s time to revisit whether Microsoft should do the same.

Two years ago I reported that Microsoft had looked into the possibility, with its treasury department analyzing the possibility.

To me it makes sense because Microsoft cannot win back Wall Street, despite steadily growing sales and profit through the recession, Apple’s ascent and even the restructuring of the traditional PC industry. Dell’s in the same boat.

Part of the reason is that people still view Microsoft and Dell mostly through the PC prism, which distorts their perspective and makes it hard to grasp the evolution of the companies’ enterprise software and services businesses. When Microsoft reports double-digit growth in its server business, nobody pays much attention because they are gawking at iPad sales numbers, looking for evidence of Microsoft’s demise.

Dell’s stock suffers from the same effect. Its core PC business is suffering but it’s steadily built a huge and profitable enterprise hardware and services business with about $20 billion in yearly sales; last year it produced about half the company’s profit margin.

PC sales will look bad for a while as companies and consumers reconsider the mix of computing devices they use at work and home. During this transition, traditional PCs are being replaced less often. That’s partly because the notion of a personal computer is evolving, and PC makers are struggling to keep up. During this period of uncertainty, they’ve lost favor with consumers and investors.

Meanwhile, enterprise spending continues as companies around the world rebuild their infrastructure and incorporate more online services. Microsoft and Dell need allies as they battle with Amazon.com, IBM and other major online infrastructure vendors.

This 2011 photo by Times photographer, Steve Ringman, gives you a sense of what’s going on. The building at left is Dell’s new cloud-services datacenter rising adjacent to Microsoft’s datacenter in Quincy.

quincy 8.JPG

Here’s another way to look at today’s deal.

Imagine that you’ve got $65,000 saved up and banks are offering about 1 percent interest. You’ve got a buddy with an undervalued business that you understand well and believe will prosper in the coming years. Would you put $2,000 in that business if you had a chance? Add six zeros and you’re Steve Ballmer and Michael Dell.

Some may chuckle at today’s deal, seeing the Titanic throwing a rope to the Lusitania. But Microsoft and Dell will probably have the last laugh.

Really, Microsoft is making a smart bet with its cash pile. Worries about alienating other PC companies are overblown — those companies already have plenty of reasons to resent Microsoft, and the Dell deal won’t change things too much.

Microsoft issued a statement emphasizing that it’s providing a loan to Dell. Analysts told Bloomberg this arrangement may be more palatable to other PC makers than an outright investment.

Hewlett-Packard has been stomping around the PC patch looking for ways to dump Microsoft for years, even before Microsoft began producing its own Surface computers.

HP spent $3.3 billion in 2010 and 2011 in a failed attempt to produce its own operating system for PCs and mobile devices. It also offers Linux and now Google’s Chrome on its hardware, but most of its customers still buy computers running Microsoft software. Until that changes, Microsoft’s investments are a secondary issue for HP.

PC makers didn’t seem to care much when Microsoft invested $150 million in Apple back in 1997, in part to end a legal dispute. The deal helped Apple regain its footing, and it eventually came back to bite Microsoft and its partners.

Microsoft sold its Apple stake too soon for a crazy windfall, but it profited from the deal in other ways. Its Office software became the best-selling application on Apple computers, presumably bringing more than $150 million back to Redmond.

A decade later, Microsoft invested $240 million in Facebook, in 2007, receiving a 1.6 stake that’s now worth about $1 billion. Perhaps more valuable to Microsoft was the relationship with Facebook; the social network is now woven into Microsoft’s PC and phone platforms and works closely with Bing on search.

Ballmer’s investing record isn’t perfect. Last year Microsoft wrote off $6 billion invested in Seattle online ad giant aQuantive, but that may not reflect the value of ad technology and expertise Microsoft gained from the deal.

As ZDNet’s Mary-Jo Foley noted today, Microsoft’s big 2011 investment and partnership with Nokia hasn’t repelled other phone makers from the Windows Phone platform. It did cement Nokia’s commitment to Microsoft’s software, though, and could lead to Nokia producing Windows tablets, as well as phones.

Considering the various ways that Microsoft benefits from these investments, it looks like a smart decision to finance Dell’s move.

Maybe the learning Ballmer & Co. get from the deal will finally persuade them to take Microsoft private as well.

Comments | Topics: Billionaire techies, Bing, Dell

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