Reflections of a Microsoft shareholder

Editor's Note: Michael McDonald, a longtime Microsoft investor, will be attending his first Microsoft shareholders meeting Wednesday morning. In advance of the event, he shared these opinions.

On election eve, November 2000, I purchased 100,000 shares of MSFT at a split-adjusted, average price of $36 per share for a total cost of $3.6 million.

In these last eight years, I have witnessed an appalling decline in shareholder value of this extraordinary business enterprise. My personal shareholder value has been steadily destroyed both in actual and potential value.

It is not unreasonable to expect Microsoft, the world’s software leader, enjoying a high-margin monopoly on more than 90 percent of the world’s computers, to have annual stock appreciation of 9 percent over this span of eight years. At this compounded rate, MSFT should now be selling at twice the price I originally paid. Instead, it is selling at half the price I paid. (The current economic meltdown hasn’t materially altered the underlying, long-term price trend of MSFT shares). In this same time frame, my Berkshire-Hathaway shares have tripled. Perhaps Bill Gates should be more alert at the bridge table and the board table with Warren the Oracle from Omaha.

Apple, meanwhile has experienced a nine-fold growth in share value during this period.

Gates and CEO Steve Ballmer each own so much MSFT stock and are thereby so wealthy that they have no real-world sensitivity to the unrelenting diminution of the MSFT stock price. Paradoxically, five out of seven of the non-employee directors up for re-election have minimal share ownership (stakes less than mine), and they are impotent as a counterbalance to the two out-of-touch titans.

Microsoft is, as its name implies, a software company that enjoys extraordinarily high profit margins and an enormously high volume of sales. It should not be in the hardware business selling low-margin, low-volume games and devices such as Xbox.

Microsoft has no proven skills in the business of advertising, either as a marketer of its own products and services or as an advertising service provider in the Google space. (We are currently witnessing the instability and unreliability of the Internet media business and are seeing the demise of some of the biggest users of Internet search and display … notably autos and retailers.) Compare the last eight years of Microsoft’s own brand advertising with Apple -- the proverbial David, relentlessly beating the clumsy Goliath, Microsoft, with a slingshot. Imagine with horror, the waste of $300 million on the short-lived, inane Gates/Seinfeld ad campaign that has now morphed into a feckless series of sophomoric testimonials with absolutely no sense of what a brand is all about.

Along the way, Microsoft has fallen from being the world’s most respected brand to that of an also-ran. This has real negative economic ramifications … short and long term.

How many billions of dollars have been wasted on poor acquisitions?

How many billions has Microsoft squandered on losing legal battles (as well as on Pyrrhic victories) that have severely damaged the brand’s reputation and credibility around the world?

Where are the tangible results of the billions spent on R&D?

Where is the accountability for the lateness of the Windows Vista operating system and its poor design and performance? This 21st Century version of New Coke has done much to greatly damage the Windows brand and future iterations while reducing it to commodity status akin to Linux/Open Source, all the while elevating Mac OS and computers to super-brand status.

The desktop revolution is over and the crown jewels of the MSFT Empire are still fundamentally intact, even if tarnished. It’s now time for the two principal owner-players to stand down and bring in a talented, professional manager. Ballmer and Gates should, for their own good and that of shareholders, bring in the best CEO that money and challenge can buy. A Lou Gerstner-type leader will develop a compelling, overarching business STRATEGY for Microsoft that will unlock shareholder value, revive the image of the brand and enable the Microsoft elephant to dance.

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