Sidney

Commentary: Swallowing companies works well

By John C. Dvorak
Last Update: 12:01 AM ET Jul 21, 2004

SAN FRANCISCO (CBS.MW) -- Microsoft may have finally announced what it's going to do with its huge pile of cash, but it's unlikely to change the company's fundamental operating methods.

Microsoft (MSFT) is not a difficult company to understand if you look at its history. The company began in the mid-1970's by deriving a BASIC language program (based on a DEC BASIC) for use on Microcomputers.

Then around 1980 it bought Seattle Computer Products QDOS and fooled IBM into thinking that the operating system was somehow developed by Microsoft. This pattern of derive and acquire has been the key to Microsoft's success ever since.

That and recognizing a cash cow when they see one. Windows and Microsoft Office are the two big producers for the company and the entire company strategy is to use its expertise in Derive and Acquire to protect those two products.

And because the company made more from DOS (acquire) than from BASIC (derive) it does a lot more acquiring than anything else. Many of these companies get re-branded into Microsoft products such as Front Page which was acquired in 1996 from Vermeer. Or Visio, acquired in 1999.

Long list

The Powerpoint that everyone uses was acquired in 1987. Other companies such as LinkAge (1997), Blue Ribbon Soundworks (1995), One Tree (1994), seem to disappear into some sort of black hole in the Redmond compound.

The list includes: Bruce Artwick, Dimension-X, VXtreme, Colusa Software, EXOS, Aspect Engineering, Aha! Software, OmniBrowse, Firefly Networks, Flash Communications, Zoomit, Jump Networks, Sendit, etc. etc.

This is just touching the surface and I'm just getting into the 1999 acquisitions. It really gets going after that. STNC, NCompass Labs, Drive Off, Peach Networks, and on and on.

At some point when you see these companies get swallowed up -- and mostly disappear with no apparent benefit to the company -- you wonder if Microsoft could be making even more money than it already does if it was less cavalier in its acquisition strategy.

But in fact the strategy is genius.

First of all it creates the image of a monster that will buy the competition if it has to. I've run into more than a few entrepreneurs who say that they are starting a company hoping to get bought by Microsoft. This means that start-up development strategy is "thinking Microsoft." This mind-set protects and perpetuates those holy cash cows. Buying companies willy-nilly also maintains Microsoft's desired image, that of the 800-pound gorilla. While it's idealistic to think that Microsoft could have saved all this buy-out money and distributed it to the shareholders, squandering billions of dollars like this is a smart strategy. In fact the stock dividend and buyback are the result of not being able to buy companies fast enough.

Another benefit of the acquisitions is that Microsoft often picks up some good code, a few smart people and -- once in a while -- a saleable product. But above all the cash cows are kept pristine and ready for continuous milking.

Consumer services

The company does a marvelous job of covering up this simple business model with constant references to "innovation" and "giving users what they want."

In fact its products are only very slowly upgraded, if at all. Many products such as Vermeers Front Page actually deteriorate under the Microsoft aegis. Many are simply dropped. When the company ventures into new ideas they tend to be off-the-wall such as the long defunct Microsoft Bob, a cartoony interface that was socially engineered. We've seen weird keyboards, plush toys, educational software, CD-ROM books, conventional publishing, and all sorts of other experiments that led nowhere. On the plus side, these experiments do make the company look more dynamic than it actually is.

And, finally, there is one last piece to the simple Microsoft puzzle: Manipulation.

It manipulates the press and has always made a point to manipulate the forecasters and analysts by painting grim pictures and then coming up roses when it announces earnings. How long this technique will work remains to be seen. If the company actually does misstep someday it will be so out of character I expect they'll get slammed hard by everyone. But as of now everything the company does is a routine that it has always done and will continue to do. It works. It works well. Nothing new to see here, move along.

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