For Microsoft, middle age has arrived. Some recent events are the first evidence that Microsoft is really concerned about its future revenue, and that the period of rapid growth may be coming to an end. The threat is not immediately from the thin client - that is more distant - but from a serious erosion of its major cash cow, MS Office, which yielded around $3 to $4 billion of Microsoft's $8.67 billion revenue in the financial year ending 30 June. Microsoft has made changes in its top management, but has also made some quiet moves to minimise the effects of any downturn in revenue. It was put about on 2 December that Microsoft intended to issue dividend-paying preferred stock. In the past, Microsoft has scorned the idea of having preferred shares that would receive a dividend, officially because of the need for cash to fund research and development. In practice, the R&D is nearly all development, since required technology is purchased and does not result from Microsoft's fundamental research. The unofficial reason was that if Microsoft executives received dividends, there would be a tax liability. So far this year, Microsoft shares have risen by around 80 per cent, but when Microsoft's shares fell seven per cent in one day earlier this year, it was realised that the volatility resulted to some extent from the lack of any dividend-paying shares. The announcement that Microsoft wanted to issue $750 million of income-yielding preferred stock, convertible to common stock or cash after three years, provided an investment for fund managers who needed a guaranteed principal, as well as interest and an unspecified return (expected to be a maximum of 25-30 per cent). The quarterly cumulative dividend is a hedge against a fall in the value of Microsoft's shares. The only time that Microsoft has issued shares to the public was in its initial public offering in 1986. Goldman, Sachs and Morgan Stanley are the lead managers, with options that they could exercise for another $112.5 million. In Microsoft's filing with the Securities and Exchange Commission, Microsoft proposes that it be allowed to repurchase its common shares with the proceeds of the new issue - or use the net proceeds for general corporate purposes. Although the $862.5 million is less than one per cent of Microsoft's current $102 billion capitalisation, having this mechanism in place makes it easier to raise large sums in future, should revenue fall. Microsoft also has some $7 billion in cash and short term securities. Had the real reason for the new issue been "responding to the desire of some investors for an income-yielding stock, while still allowing them to participate to a significant degree in the growth potential", as Mike Brown, the chief financial officer, claimed, it would have been expected that the announcement would have been made at the same time as the two-for-one stock split three weeks earlier. The news was not released through Waggener-Edstrom, Microsoft's PR agency, but directly by Microsoft. Coming the day before the top management reorganisation, it looks as though Microsoft wanted to put this mechanism into place quietly. Microsoft has made other moves to cushion the effects of lower revenue. One was to defer revenue recognition. Brown said: "We've always been in favour of not getting out ahead of yourself in terms of recognising revenue." Microsoft deferred a further $91 million in the quarter ending 30 September, with $651 million previously deferred at the end of its financial year. Brown gave the reason as "not having delivered the products to complete our contracts", but it was not made clear which products had been paid for in advance. A related stratagem is Microsoft's new relationship with the American Institute of Certified Public Accountants (AICPA). In a videoconference, Bill Gates told the AICPA in October how a joint initiative would provide the training and tools for the 328,000 members. Shortly afterwards, it became known that as a result of an AICPA initiative, it is likely that software companies will have to defer revenue recognition. The proposal is now before the AICPA's Financial Accounting Standards Board, and the SEC. The effect would be to disadvantage Microsoft's competitors by ensuring that they had a worse year, and so draw attention away from any poorer results from Microsoft. Some analysts saw the move as Microsoft using revenue recognition tricks to manipulate its share price. The day after the announcement about raising new cash, there was a significant shake-up in Microsoft's top management. The rather pretentiously-named Office of the President is being changed to a more conventional executive committee, that is strengthened by the promotion of Jim Allchin and Brad Silverberg. Microsoft has had some bad experiences with its presidents, so in 1992 chairman Bill Gates established the Office of the President, initially with executive vice presidents Steve Ballmer and Mike Maples (who retired in 1995). Bob Herbold, executive VP and chief operating officer, joined in 1995, together with group VPs Paul Maritz and Pete Higgins, and Jeff Raikes, senior VPof sales. Until this year, top management changes had generally taken place when somebody left. Now the intention seems to be to keep the structure revised to reflect the new Internet strategy, as well as the ActiveX moves. Structural changes have also been made in an attempt to counter internal dissent and friction, for example between the Windows 95 and NT development teams. Senior VPs Allchin and Silverberg are often attributed with having had product development success, but a closer examination shows that history is being rewritten. Maritz appointed Allchin to oversee NT development, but Allchin was unable to terminate the NT filing system as he wished and to substitute an object file system then being developed as a much-heralded feature of Cairo. Allchin also failed to control NT coding, because of objections from Dave Cutler, the NT architect. Allchin will take over the Internet server applications that were being developed under Silverberg, and will now have control of the personal and business systems group, including Cutler's team, all other Windows development, servers, and the associated marketing. Brad Silverberg, who has the reputation of being something of a street fighter, was responsible for the Windows 95 launch which is now seen as having been over-hyped - hence the low-key release of Windows NT 4.0 recently. He will have responsibility for the applications and Internet client group, and the continuing battle against Netscape. After the strategy volte-face in December 1995, Silverberg was made responsible for making Microsoft Internet-centric, although five months ago there were rumours that he was going to retire. He will now be responsible for applications - especially the further development of the MS Office suite - which is Microsoft's biggest business, although it is faced with the joint threats of a saturated market, aggressive marketing by Corel's revision of Wordperfect, and stiffening opposition from Lotus' Smartsuite. SofTrends of Port Washington, New York found that in September 1996, Corel's office suite had 50.9 per cent of the north American retail market, with Microsoft having 40.7 per cent and Lotus 5.8 per cent. In the OEM market, Corel has a five million-unit deal with Packard Bell, and says it will be announcing additional major OEM successes in January. Silverberg has responsibility for tools, Web authoring, developer relations and the associated marketing. It is also rumoured that Microsoft - concerned that many users will not update to the fat Office 97 - will now turn its attention to a thin version of Office, as well as a new application for Internet content creation. Microsoft's formal management structure is far from being flat, but the informality does counter the hierarchy. There are now more than 30 VPs in four tiers, below which there is a layer of directors and managers, each with its own hierarchy. In many ways Gates adopts a hands-off approach to management, and it is thought that his frequent travelling to give keynote speeches and meet customers is encouraged by his executives as a way of keeping him at arm's length. Allchin's and Silverberg's divisions will continue to report to Maritz, who as group VP of platforms is effectively Microsoft's strategist. Senior VP Craig Mundie will continue to look after the consumer platforms division and report to Maritz. Group VPs Pete Higgins and Nathan Myhrvold run the applications and content group. Following the departure of former senior VP Patty Stonesifer of the interactive media division, Higgins has been seconded to taking over her responsibilities for the mixed bag of MSN, entertainment, strategic partnerships and information. In an organisation as dynamic as Microsoft, it is far from certain that these changes will be enough, even in the short term. What could be very useful would be for Microsoft to appoint a president again, to look after internal coordination and to focus of the important issue of future revenue protection. As the Chinese aphorism suggests, prophecy is very difficult, especially with respect to the future, so whether these moves are too little too late will only be revealed with Microsoft's results in the later quarters of 1997.
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