A month or so ago, the world got a chuckle when Microsoft’s British arm announced plans for portable toilets with Web access. The product, called iLoo for the British term “loo”, gave comics some good material for a few days before corporate higher-ups killed the idea.

A friend inside Microsoft Business Solutions wrote off the flurry as a blip. But what if iLoo represents a sign that Microsoft is losing some control? This is not the kind of idea that companies in control let onto the market. Microsoft is still an incredibly strong player. But what if Microsoft is losing control of the ability to set the agenda for the market? I’ve compared Microsoft’s dominance IBM’s in the 1980s. IBM lost its position of overwhelming leadership, but still maintained its role as a powerful player, the likely course for Microsoft.

What are the other signs? Dell Computer and Hewlett-Packard are shipping Java on their systems, so that users don’t need a Microsoft operating system to run applications. Linux continues to make gains. Companies worry about being dependent on one supplier. And perhaps recent heavy stock sales by both Bill Gates and Steve Ballmer, aimed at diversification, point out that the game has changed.

Microsoft is a victim of its own success. It cannot guarantee the kind of growth it once had. But slower growth raises issues--for example, in employee salaries. Microsoft employees have generally expected strong stock appreciation—the whole company was basically on commission—to aid their pay packages.

How else to ensure stock growth? A traditional way is to increase the dividend—technology companies have been slow to embrace any dividend, and Microsoft’s is a paltry 8 cents a share annually. Another is to increase sales or improve margins, a tough job for Microsoft, which had 87 percent gross margins in the last quarter of calendar 2000, before it got into the app business. In the March quarter 2003, that was down to 80 percent. (Microsoft does not report gross profit in SEC filings. It reports cost of revenue as an operating expense.)

If Microsoft increases its foothold in applications, it’s hard to see the number improving. Look at Epicor, which made a 5-cent-a-share profit in the March quarter on a 56.7 percent gross margin. Microsoft Business Solutions is not making 70 percent gross margins (a figure not reported) and getting a 45-percent negative operating margin unless somebody is dumping a lot of expenses onto the books. (Microsoft overall had a 54.5 percent operating margin.) Even if MBS can sell $2 billion worth of Solomon, it’s not going to get 80-percent gross margins on that.

Maybe that’s one reason Microsoft is coming out with SQL 2000 Reporting Services this year to compete with Crystal Reporting. Its vendor, Crystal Decisions, had a 78.3 percent gross margin in the March quarter. Microsoft could use some higher margin products.

Any way it goes, it’s hard not to believe that the glory days are over, even though things largely look the same at the moment. As Winston Churchill said, “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

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