Tumblr Icon RSS Icon

The Folly of Empire

By Matthew Yglesias  

"The Folly of Empire"

Share:

google plus icon

MG Siegler has an interesting TechCrunch item about Microsoft’s eye-popping losses in its online business:

Microsoft released their Q1 2011 earnings today. The results were very good except for one very big blemish: the Online Division. Last quarter, the division lost $560 million for Microsoft. That’s better than the previous quarter when it lost a staggering $696 million, but it’s much worse than a year ago, when it lost $477 million. In the past year, Microsoft has lost well over $2 billion from the division.

Let me repeat that: 1 year, a $2 billion loss.

Obviously, any startup that did that would have long since gone under — with that kind of burn rate, they probably would have gotten the plug pulled a few weeks into existence no matter how well-funded they were. But Microsoft keeps pumping money into the division. And they have to. Because even they realize it’s the future.

There’s an interesting divergence here between the perspective of Microsoft qua institution and Microsoft as a cooperative enterprise undertaken for the benefit of its shareholders. The conventional wisdom is that Microsoft needs to expand beyond its super-profitable core businesses because “[t]he web is making Windows (and every operating system) less vital, while at the same time coming up with free and/or cheap tools to replace the relatively expensive Office.” Therefore, the smart strategy for Microsoft is to take the giant profit margins of Office and Windows and plow them into new ventures.

An alternative approach would be to just say “we’ve got a great core business here that’s still great today and may or may not be obsolete in the future, so we’re just going to keep doing what we do well and pay out giant dividends.”

In practice that never happens. As firms like Microsoft mature, they do start paying dividends, but they never really go “all in.” Psychologically, successful business executives are bound to regard themselves as above-average businessmen who can maximize shareholder value by keeping profits in-house. And from a talent-retention/recruitment perspective it would probably seem demoralizing to just say “eh, we’re giving up on growth.” And of course it’s more fun to be the CEO of a large growing firm that’s a vital player on the cutting edges of technology than to preside over a stagnant-though-wealthy mechanism for funneling billions of dollars from corporate IT departments to shareholders. And in practice, the logistics of hostile takeovers are horrible and they’re rarely attempted.

And Microsoft is by no means unusual in this regard. Google is very aggressively pushing into new businesses instead of sitting on its existing cash cows, and Apple has a famously gigantic cash stockpile being presumably conserved for some nebulous future M&A activity.

‹ The Disastrous Health Care Phase-in

The Party of Medicare ›

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.