Microsoft’s Growth Strategy Revisited

On April 10, 2005, almost immediately after I started this blog, I had written a piece called Microsoft’s Two Should-Be Acquisition Candidates, from the point of view of addressing the growth trends in the SME markets. The two candidates were: Autodesk (ADSK) and PayChex (PAYX).

I have to pay close attention to Microsoft, since my financial advisor, Diane, at Merrill Lynch, keeps urging me to sell the stock. So far, I have chosen to hold on to it, but as time goes by, and as I watch them faltering at every step, and losing important battles, if not the war itself, I get increasingly concerned.

In this piece, I want to go back and explore the status of the SME market, and those two companies – Autodesk and Paychex – once more.

The SME market is clearly a growth market worldwide, not only in America. A number of companies have been established at this point who are each leveraging the SME growth trends effectively, and might I say, a lot better than Microsoft. Salesforce.com, Webex, Qualys – to name a few. All three (and many others) offer the value proposition of hosted, On-Demand Software-As-A-Service to small and mid-sized companies around killer apps like CRM, Web Conferencing, and Security respectively. Others like Rightnow (RNOW), Concur (CNQR), Taleo (TLEO) cover other applications like Customer Service, Expense Report Management, and HR, respectively, in a similar mode.

It is disheartening that Microsoft has not yet executed on a compelling strategy to capture its share of the SME growth engine. It tried with the Great Plains and Placeware acquisitions, but neither product has succeeded in becoming a market leader. Meanwhile, both Salesforce.com and Webex are going gangbusters.

Also going gangbusters is my earlier recommendation, Autodesk, which has moved up from $7.5 Billion to a $9 Billion market cap. Paychex too, has grown steadily, and appreciated from $12.3 Billion to $15.23 Billion.

I see Microsoft chasing Google’s tail, doing blocking and tackling, in the same way that I have observed Yahoo chasing Google’s tail. Neither has so far played to their OWN strengths.

This SME – SaaS area is much more aligned to Microsoft’s strength, the Internet Search area a lot less so. If they really want to play the Online Advertising market, they need to be a great deal more creative. Read: What is this sea Change?

XBox may be a sexy product for Microsoft to experiment with, but the real shareholder value is locked up in other areas, and I submit, SME-SaaS is a critical dimension that the company has put very little emphasis on. And now, with Google’s attack on its Office franchise, they’re playing yet another block and tackle game, which really needs to stop.