Microsoft announces that it will spend about $2 billion to fend off rivals such as Google and thwart Sony's video game ambitions, and the company loses more than $30 billion in market capitalization in a day. Fair trade or overreaction?
Probably a little of both, according to experts at Wharton. Microsoft certainly isn't hurting financially. The company reported net income of $2.98 billion on revenues of $10.9 billion for the quarter ending March 31. But the big question is whether that performance will be maintained over the next decade. According to Wharton finance professor Andrew Metrick, the reaction to Microsoft's increased spending plans for 2007, which were detailed in the company's fiscal third quarter earnings report April 27, may reveal concerns about what has become an increasingly competitive landscape. "Spending $2 billion doesn't lose you $30 billion in market cap," says Metrick. "Let's face it; $2 billion to Microsoft is like a pimple on an elephant. The reaction was the market inferring that the company is much more scared than investors thought it was about the future."
Indeed, Microsoft is a company in transition, and investors, customers and the entire technology industry would be wise to pay attention. At issue is whether Microsoft has grown too big to be nimble enough to compete with its long list of rivals on many fronts: Google in Internet search and advertising, Sony in video games with the launch of its Playstation 3 on November 17, Linux inside the corporation, and Apple Computer in digital media, to name just a few. Meanwhile, Microsoft's Vista operating system will miss the peak holiday season: While it will be available to volume-licensees in late 2006, other businesses as well as consumers won't see it until sometime in 2007. By extending its reach into new markets, such as mobile communications and digital entertainment, Microsoft may be stretching itself too thin without getting sufficient returns, say analysts.
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