What Microsoft's First Loss in History May Signify

Make no mistake, a $6.2 billion acquisition write-down is big.

But it is not uncommon and it is far from the largest such action ever taken. What it may signify, however, could be positive.

The reasons have to do with the company's culture, strategy and ability to compete after having been dismissed as a sadly diminished dinosaur.

Companies, like people, generally have to admit mistakes before they can begin to recover from them. By taking the aQuantive write-off when it did, the company signaled that it recognized its error in judgment and was ready to move on. The significance of that action lies in its subsequent moves. Internal politics, a famously disruptive influence at MSFT, have sometimes clouded strategic decision-making. This most recent action suggests that the company recognizes both its problems and opportunities. And that it is ready to address both.

It also suggests that Microsoft's leadership is neither giving up nor ceding ground to its younger and more web-oriented rivals. Which leads to another lesson: Microsoft is really, really big. It has been around for a long time. It has a lot of cash, a lot of smart people, a deep reservoir of knowledge and experience. And a far more ferocious competitive spirit than many give it credit for. It can afford to make mistakes. A lot more of them than can any of its latter-day detractors.

That it is willing to acknowledge the loss - no doubt painfully embarrassing - shows that it believes in its future and will endure the short term trauma. This is not to say it can keep shelling out $6 bill indefinitely and watching it evaporate. But it can afford to experiment. And test. And learn. They will clearly not always get it right. But neither will they always get it wrong.

Anyone who takes them lightly does so at their own peril. JL

Matt Warman comments in The Telegraph:

When Microsoft paid $6.3billion for aQuantive in 2007, it was a clear response to Google’s increasingly dominant position in web advertising. The plan was to separate online advertising from internet search – a challenge to Google’s whole business model – but as we see from today’s increased revenues at Google, that didn’t work. It’s led to Microsoft’s $6.2 billion write-down that pushed them into the red for the first time. The aQuantive fiasco would never have happened had Microsoft previously been more sure-footed in handling the web – but this was the era when the company was still defending Windows Mobile, and was telling the world that Windows Vista was worth spending money on. Those days are long gone.

Since then, however, it’s the rest of Microsoft’s business that has been challenged by the growing dominance of the internet, too – tablet computers led by the iPad rely for much of their success on the web, and so do the dominant Android and Apple mobile phones.

But while Microsoft has been slow to sort out its strategy, earnings and profits have held up well and the plans for Windows 8, Microsoft Office and other vital products such as SharePoint look remarkably strong. Where there ought to be a dip immediately before such major launches, in fact existing products are continuing to perform very well.

Microsoft still grew its revenue by 4 per cent year-on-year for the Q4, and that’s 7 per cent after adjustments. Profits in the Office division rose to $4.1billion from $3.8billion.

Two major challenges remain, however: while Microsoft’s Windows 8 provides an excellent tablet operating system, it is playing catch-up to Apple and Android just as Windows Phone is. That battle is not going well. Microsoft will rely on business customers continuing to favour its software over others, yet it must now operate in a world where more and more consumers bring their own devices. In particular, users are irritated with corporate IT departments that have valued security over ease of use for too long, and left millions stuck with Windows XP and IE6 when much better products are available. The resultant distaste for the Microsoft products enforced upon users rubs off on Microsoft itself, and will pose enduring challenges. The brand desperately needs some cool, but with Windows 8 it may yet find some.

The purchases of Yammer, providing businesses with social networking integration, and Skype to combine communications, also demonstrate that Microsoft now seems to know where the holes in its own expertise lie. That self-awareness, and a new humility that comes from operating as the underdog in challenging environments, may yet prove to be Microsoft’s greatest strengths for the future. If the company faces problems, today's losses are simply a red herring.