R&D SPENDING REQUIRES FOCUS

In a recent article with InfoWorld this campaign is referenced. As with any activist campaign, it is understood that there will subsequently be opposition. There will naturally be groups, analysts and other parties that will fail to agree with an activist campaign.

With the Microsoft Subnet article, (refer to http://www.networkworld.com/community/node/38350 ),the campaign stated that Microsoft was required to pursue an acquisition of Sprint. Mr. McDonald stated that he preferred Research In Motion over Microsoft acquiring Sprint. Mr. Barnicle, an analyst with Pacific Crest Securities stated that he was oppossed to Microsoft pursuing a mobile acquisition.

The campaign conducted analysis and perceived that based on the trend towards handheld and the report by Citi analyst Mark Mahaney that Microsoft required an acquisition to better compete in this sector. In the same Microsoft Subnet article there are two oppossing views by both Mr. McDonald and Mr. Barnicle. However, as mentioned, this oppossition is natural. There is the old adage "You cannot please all the people all the time".

Where this campaign takes issue is when the premise of "The New Strategy" is not understood in its entirety and opinions are then expressed. The campaign was approached by an author seeking to conduct an interview concerning R&D spending with Microsoft. The interview was conducted and the article was published in the British magazine PC Plus.

The article states that Microsoft has increased its R&D spending. It also states that Microsoft is required to focus its R&D spending on creating products that secure consumer loyalty. The article refers to patent 7,296,946 which is a ring binder for containing pages. This is subsequently a waste of capital. The premise of the "New Strategy" was correctly and accurately communicated. (Since the article is not online it cannot be added to this post)

Recently, an article was posted on InfoWorld concerning this campaign and its "New Strategy" for Microsoft. Refer to http://www.infoworld.com/d/developer-world/increased-rd-spending-vital-software-industry-707

The article essentially is well written, well communicated, insightful, and worth reading. The issue is that it also fails to communicate the real intention of "The New Strategy".

Within the article Mr. McAllister makes reference to The Crandrea Group. However, with the article the author makes a couple of critical editorial mistakes. The author indicates:

"Up to this point it's hard to argue with Montgomery's findings. What bothers me, though, are the Crandrea Group's proposed solutions. "It is critical that Microsoft utilize its R&D budget and focus on improving its core products," reads the group's strategy statement. "Rather than deploying capital to create new products, it is crucial to direct capital to improving existing products to secure consumer confidence and loyalty."In other words, the problem isn't that Microsoft's attempts to innovate have failed. The problem is that Microsoft tried to innovate in the first place!Whither software innovation?See what I mean about investors focusing on short-term gain?"

The author fails to comprehend the core of the "New Strategy" for Microsoft. Throughout the activist campaign it has been communicated that a long-term shareholder value strategy was being pursued. The campaign indicated that it was seeking to obtain analysis from MSFT employees to edit and revise the "New Strategy".

It was indicated that MSFT employees could provide the greatest analysis to ensure a long-term strategy was pursued. Subsequently, the campaign is not seeking a short-term band-aid approach, but rather, it is seeking to pursue a long-term strategy. In the post the author is referring to, it is indicated that the "New Strategy" is seeking the following:

"It is critical that Microsoft utilize its R&D budget and focus on improving its core products," reads the group's strategy statement. "Rather than deploying capital to create new products, it is crucial to direct capital to improving existing products to secure consumer confidence and loyalty."

MSFT employees confirmed that MSFT currently and historically has produced poor products. Employees referred to MSN, Zune, Vista. MSFT employees indicated that MSFT is losing loyalty in OS and is failing to be competitive with MSN, and Zune.

Poor company image was confirmed by Mr. Barnicle in the Microsoft Subnet article. This is the primary reason that "The New Strategy" focuses on improving brand perception. This leads into the necessity for Microsoft to improve its brand perception not only through advertising and marketing, but, it is also required to adopt this mentality within its R&D spending.

The "New Strategy" which was edited and revised by MSFT employees specified that focusing on the core was essential. If the company is committing $9 billion on R&D, instead of pursuing new innovation it should concentrate capital towards improving existing products. It was communicated that it should not role out new products until it masters existing products. The campaign based on MSFT employee feedback is not oppossed to R&D spending. However, it is oppossed to deploying capital towards initiatives that will fail to secure revenue and consumer confidence.

Deploying capital towards improving core products is fundamental. This is demonstrated in the Apple ads. A pretend Bill Gates is dividing capital between advertising and improving products. Mac suggests "is that enough" at this point Bill places more money in the advertising pile. MSFT is perceived as creating poor products. Therefore, what employees have indicated is that if the company is going to improve its image, enhance revenue, secure consumers, it has to do what the Apple ad suggests and place capital towards improving existing products. Refer to : http://www.youtube.com/watch?v=MimCZikP8cY

Microsoft has to ensure that Win 7 delivers on its promises and is better than Vista. If it fails, then more consumers will abandon MSFT for other operating systems. Therefore, the campaign is stating "to improve the company, it must improve the "core". Subsequently, this is not a short-term goal, but, it is a long-term necessity. Microsoft is required to ensure that its OS is not "a" operating system but rather it needs to ensure that its "the" operating system.

Consumers have for several years complained about poor products. If the company is deploying $9 billion, a portion of that is required to be allocated to improve the "core" products, and not just seek new innovation. Therefore, if the company has committed to deploy $9 billion in R&D, instead of deploying the entire budget towards useless patents, it is imparative that a portion of that $9 billion be allocated towards ensuring WIN7 is not just a updated Vista.

It essentially reverts to the April 3 post on this blog "Microsoft Requires an Image Makeover". If the company image is battered then "Goal" Number One, the main directive needs to be "Improve the Image". However, as outlined in the April 3 post, Microsoft continues to fail.
Refer to http://www.marketwatch.com/news/story/microsofts-ad-counter-offensive-against-apple/story.aspx?guid=%7B95EC30F8%2DC0B7%2D4AF6%2DBD7E%2D3B0E27905B4C%7D&dist=TQP_Mod_mktwN Also refer to the link within the above post or follow:http://www.marketwatch.com/News/Story/microsoft-needs-help-mad-men/story.aspx?guid=%7B3F67FAE3%2D4733%2D4BC3%2DB30A%2D143EAA9399C6%7D

In the above report the author refers to the notion that through these commercials Microsoft is ultimately admitting that it is Number 2. This is not going to improve Microsoft. It is perhaps the worst move possible to further damage the company image. In essence it is Microsoft admitting defeat. To improve the company image it has to demonstrate through advertising that it is Number One. It has to demonstrate that it has the superior OS not Apple. However, this campaign also has stated that advertising this statement is not enough. To state it is "Number One" then not deliver on the promise is counter-productive. Microsoft is also required to have the "Number One" product.

Brand expert Rob Frankel states that the new commercials by Microsoft will prove detrimental to the company. Refer to: http://www.newsfactor.com/story.xhtml?story_id=65597&full_skip=1

It stands to reason that this focus is required to be translated into R&D spending. Microsoft employees, consumers and reporters have indicated that in various markets Microsoft is not "Number One". Reports also indicate that in OS, although its still "Number One" it is losing share. The long-term required "Goal" of Microsoft is to deliver on its promise, improve its image and produce superior products. This will improve the company image. As a result of improving the image marketshare will follow. Subsequently, this will increase revenue and the long-term health and stability of the company.

What the campaign is stating is simply "image focus" is required in advertising and R&D spending. If you commit $9 billion, a portion is required to be spent on improving the core. Microsoft has to spend capital on making the best OS available to consumers. This will gain consumer loyalty. It will prevent further erosion of share towards consumers switching to Mac OS. This is a long-term strategy that will improve the company image.

Microsoft is required to spend a portion of the $9 billion on improving its online platform. It has to improve this division. It is required to get focus and spend capital that threatens Google's marketshare. Historically, Microsoft has deployed capital and after several years has failed to increase its marketshare. Refer to http://www.pcworld.com/article/161222/report_microsoft_us_search_share_hits_12month_low.html?tk=rss_news

What this campaign is stating is "focus" and deploy capital that will finally cause Google executives to sweat as oppossed to laugh at Microsoft's efforts.

In Mr. McAllister's article it states "See what I mean about investors focusing on short-term gain?"

This campaign is focused on long-term gain. If Microsoft continues deploying tremendous capital towards R&D and continues to produce poor products the end result will be wasted capital. However, if it adopts focus on improving the core products and improve the company image it will ultimately result in long-term gain.

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