Microsoft: The (not so) Evil Empire

Ah, Bill Gates.

Growing up, William Henry Gates III was the kid you loved to hate:

With an IQ of 160, a today's dollars-trust fund worth north of $20mm, AND politically connected parents, he was smarter than you, richer than you, and had a brighter future.

But hey, you were better looking!

And today?

Not much has changed, except now Bill is a better person than you too, having donated more than $50 billion dollars to charity since 2000.

Microsoft made Bill his billions, and it's one hell of a company.

Enfant Terrible

"There are three ways to make money in this business: be first, be smarter, or cheat." - Margin Call

The original empire of the information age, $MSFT was founded in 1975 by Bill and fellow dropout Paul Allen.

Their initial product was a BASIC interpreter - a computer program that translates human-level programming into machine readable code - that Gates & Allen developed on borrowed (read: stolen) mainframe time at Harvard.

It was an overnight success.

Using Micro Instrumentation and Telemetry Systems (MITS) as a commercial vehicle, they sold thousands in the first month.

Paul Allen's business card. Tastefully thick, I think it has a watermark...

It was so popular that enthusiasts began bootlegging copies and sharing them with friends.

Heralding wars to come, Gates picked a fight with the pirates, prompting his infamous "Open Letter to Hobbyist's."

Bill even battled MITS for distribution rights to his interpreter (spoiler: Bill won, exploiting a legal technicality to his advantage).

This was Gates' first taste of the legal system, and it set a precedent for the future of Microsoft.

The Wonder Years

"There are no heroes...in life, the monsters win." - George R.R. Martin

Bill might have the body of a geek, but he has the soul of a lawyer.

Beginning in 1980, Mary Maxwell Gates - Bill's mother - chaired the executive committee of the United Way, where she served alongside none other than IBM CEO John Opel.

IBM was arguably the most powerful company in the world at the time, and after Mr. Opel heard about Bill's fledgling software company, he asked Microsoft to develop an operating system for IBM's PC line.

Rather than go through the hassle of, you know, building an OS, Gates made arguably the most important acquisition in computer history, purchasing exclusive rights to what became DOS from Seattle Computer Products for $50,000 in July 1981.

The foundation of an empire. The Matrix has you

Gates neglected to tell SCP about his agreement with Opel, and when he licensed DOS to IBM, Bill exercised his legal chops by making the deal non-exclusive.

The personal computer market exploded in the 80's, and Microsoft sold DOS to every major PC manufacturer, serving as a trojan horse for future MS products.

Over the next 15+ years, Gates & Co. stormed across the software landscape, releasing multiple versions of Windows, Office, Encarta, Expedia, SQL, Visual Basic, and the bane of both Bill and his customers, Internet Explorer.

Bumps in the Road

For 11 hours of comedy gold, check out the Gates deposition on Youtube, where Bill argued over the definitions of words such as "compete", "concerned", "ask", and "we."

MSFT first drew government ire in 1992, when the FTC investigated on monopolistic grounds. As part of a settlement, Microsoft agreed not to tie additional products to the sale of Windows.

This concession formed the basis of the DOJ's anti-trust case, and it's a good thing Bill's father was a named partner at Seattle's most prestigious law firm, because the government pulled out all the stops to prosecute Microsoft.

The Feds sent David Boies, one of the most brilliant legal minds in America, to argue that bundling Internet Explorer with Windows violated Microsoft's agreement with the FTC and unfairly squelched competition.

Boies won the battle but lost the war - the courts ordered a breakup of MSFT in 2000, but backtracked on appeal in 2001; Microsoft emerged largely unscathed.

Around this time, Gates stepped down from the CEO role and replaced himself with this man, Steve Ballmer:
They say opposites attract.

People like to shit on Steve for his tenure as CEO, but during his 14 years at the helm the man tripled sales and double profits.

Ballmer's problem was always despite being a smart guy (scored higher than Gates on the Putnam!) with general business ability, he was never a technologist.

Microsoft is about as close as it gets to a pure science project while still functioning as a commercial entity, employing a plethora of:

  • Turing Award winners
  • Fields Medal winners
  • MacArthur Fellows
  • Dijkstra Prize winners
  • Child Prodigies, Geniuses, Mad Scientists, and more

...so it simply can't be run by "just" a business guy.

So where are we today?

What's Old Is New Again

The new Microsoft is actually the old Microsoft - Marc Benioff, after discovering Satya Nadella had slipped a mole into the Salesforce braintrust.

(As I was writing this post, a report came out that Microsoft surpassed Apple to once again become the world's most valuable company)

One could be forgiven for assuming $MSFT is a has-been, what with all the hoopla surrounding the FAANG's...

But that's not so.

When they hear "Microsoft," most people think Windows (or Excel/PPT if you're on this site), but today - and this surprised even me - operating systems account for only 9% of MSFT's annual revenue:

Office still has a stranglehold on productivity, and their hardware and search businesses contribute meaningfully to the bottom line.

Most interestingly, depending on who you ask and how you run the numbers, Microsoft is actually #1 in cloud computing, beating out Amazon's AWS for the top spot...

But that's today, and investors must look to tomorrow.

The Road Ahead

If he strongly disagrees with what you're saying, Bill is in the habit of blurting out, "That's the stupidest fucking thing I've ever heard!"

With a P/E of 44, Microsoft isn't cheap, so I think the question we need to ask is:

"Can Microsoft (finally) stitch everything together and offer a one-stop shop for all your computing needs?"

In the past I would have said not a chance.

Collaboration is king in the modern compute environment, and companies tend to look & act an awful lot like their founders...

Microsoft's Org Chart

...but shockingly, Bill Gates and Steve Ballmer agreed on Microsoft's next CEO, and made a great decision selecting Satya Nadella.

Anathema to Microsoft's modus operandi, Satya has led the charge into open source, contributing heavily to the community and shelling out $7.5bb for global repository GitHub.

Better still, Nadella acquired LinkedIn, making connectivity and interoperability a strategic lynchpin in the quest for world domination.

Furthermore, Microsoft, through its Research arm, has nearly 3 decades worth of top flight experimental data and intellectual property in areas as diverse as:

  • Quantum topological computing
  • Computational economics
  • Artificial Intelligence
  • Precision Medicine
  • Cyberphysical Systems
  • and on and on and on...

Modern innovation is multidisciplinary, and with Research and Corporate "joined at the hip" for the first time, MSFT is finally in a position to capitalize on the fruits of its labors.

Perhaps most impressively - and **great* on him for having the confidence to do this - Satya asked Gates to return to MSFT in an advisory capacity.

All Warm and Fuzzy

Symbols matter, and nerdy though he may be, Gates is the Godfather of software - his presence matters.

The final word?

I think downside risk is limited, and given the convexity of payoffs in the tech sector, there is real positive optionality here.

If you think a recession is inbound (checkout @thebrofessor's thread for a lively discussion on the topic) and you still want exposure to big tech, I think $MSFT will weather the storm better than its peers.

Good Hunting.

Cheers,

CC

Comments (45)

Nov 28, 2018

well done bro. I'm still long btw

    • 1
Nov 28, 2018

I think it's a smart bet.

Nov 28, 2018

Outstanding post @CuriousCharacter, been long MSFT for ~8 years now. I love companies that continue to innovate while weathering economic and industry turbulence, but that's just me. Satya's push to make MSFT more of a "subscription" business has been brilliant. That said, the more I read about these founders who make it big the more I realize the idea of making it "on your own" is generally bullshit. The idea of the Zuckerberg's and Gates' of the world being some plucky dropouts that worked hard to make it big is comforting, but also nonsense.

    • 3
    • 2
Nov 28, 2018

Yeah I work in tech, and every successful startup founder I know has a profile similar to Zuck, Gates, et al. (Upper middle class+, top schools, supportive parents, etc.).

Learn More

Boost your resume and land a finance job by passing the FINRA SIE. 264 pages & 1981 smart flashcards written by a former 8X top Fidelity instructor. Try it for 0 bananas here.

Nov 28, 2018

Don't you think it is a bit disingenuous to compare whether or not you're a "success" to the WORLDS two or three most valuable companies? For every Microsoft / Amazon there are dozens of smaller companies netting top line revenue of 5, 10, 15, 20mm a year and the founders walk off with a cool 6 to 7 figure paycheck.

I agree, though, that Bill had every advantage. Great post. +1

    • 1
Nov 28, 2018

Gates is a smart dude, but I doubt he's as smart as everyone thinks he is. If he really was reeking of excellence, every atom in his body, his first venture Traf-O-Data wouldn't have been a failure.

Lastly, at his level, most of the work done is done by delegation.

What I will give credit to gates is for his:
Drive/Ambition
Tenacity
Dynamic ism
Leadership skills
Team management
Emotional IQ and street smartness/business acumen

Anyone who knows anything about Traf-O-Data knows Gates is just a life long schemer. If it wasn't Microsoft, it would've been something else. People like gates think of money all day, and how to make it.

Gates like John D Rockefeller or JP Morgan, is a schemer. They see an idea, see the money in it, and pursue it relentlessly. Any business, any industry - the goals are the same, the means to the end change.

I personally like Bill Gates, but I doubt IQ point for IQ point, he's really all that. A guy with godly intelligence would get everything right at first go. Microsoft had some missteps. Not to mention, it was Gates' second company. Gates of course, being ever so glad to oversell his successes and hide his shortcomings, will be grinning when all the suckers dismiss the convenient facts that make him as mortal as anyone else.

Bill Gates = used car salesman + programmer + encyclopedia + financial analyst + pleasant neighbor + Elon Musk ambition x 3

^==== Nowhere above will I ever add words like Einstein, blah blah.

D.I.

    • 1
    • 4
Nov 28, 2018

Larry Ellison, on someone suggesting that Gates was brilliant:

"Bill Gates, brilliant? Really?... I think Bill is a very bright guy, but I don't think his strength is in his intellect at all. It's in his relentlessness."

That said, dude came in 3rd in Harvard's notoriously difficult Math 55 course...

Nov 28, 2018

Look, Bill Gates is a smart guy. But he doesn't pee excellence and poo diamonds. That's my only assertion.

If he was anywhere near as smart as people think he is - his first company and business Traf-O-Data would've been a success since the grand genius would've had it all figure from day 1.

Without the success of Microsoft, nobody would know or even hear of Bill Gates and he'd just be another get rich quick schemer who tried.

Bill Gates life paths alter quite a bit

Life after Traf-O-Data : Give up on business, finish school, stay at some job or keep tinkering with business schemes with dubious levels of success. No wikipedia page, no fame and name, no private jets. Just another schemer amongst the millions.

Let's also not forget that the contract for the operating system was supposed to go to a guy that died in a bar room brawl.

Bill Gates had an insane amount of success in his life that is more or less equivalent to his levels of luck. I know people in America that are born to heroin addicts and have been conditioned from childhood to become blue collar workers.

But Bill Gates' real genius lays in understanding his level of luck, exploiting his networks and using his vantage point in the world economy to propel himself into the titan of business he is today. And for that reason, I'll salute him because it takes a competent person to do so. But all the pixie dust and bill gates high god from heavens is BS. I don't find it impressive when someone works a gazillion people under him like dogs, makes billions, and then gets all the credit.

I've met a billionaire or two, and they're bright no doubt, but the secret of their success is mostly based on the competence levels of the hordes that they hire and work to death.

D.I.

    • 1
Nov 28, 2018

there's also a theory like malcolm gladwell believes that if they weren't born in the mid 1950's, they wouldn't have attained the wealth they did, I mean the fac tthat 14 of the 75 richest people in recorded history were all born within 9y of each other says something.

then again, there were 41 million people born in the 50's, and over 4.1 million people born the same year as Gates, and there's only one Bill Gates, so idk how you square that.

    • 2
Nov 28, 2018

What I took from outliers:

Special people are a result of special genetics shaped by special circumstances.

It works for outliers on the other end of the spectrum too: the worst known serial killers were all active in the 70's & 80's, meaning born in the ~50s... something to do with post WW2 births?

Lately I've gravitated to the idea that Free Will is an illusion, that we're all just slaves to the laws of physics.

Funniest
Nov 29, 2018

bill gates

    • 8
Nov 29, 2018

.

Nov 29, 2018

I love the attention to detail and overall layout of these write ups.

One suggestion might be to put your main point first.

I don't need to read "I LOVE MSFT!!!" in the opening line. But it would help if you lead the reader whichever way you're leaning in a much more deliberate but still subtle way.

Happy hunting and please keep the write ups coming.

    • 1
Nov 29, 2018

Very well written write up, good job

Nov 29, 2018

Shit post

    • 3
Nov 29, 2018

Why Microsoft at 44 times versus Apple at 11?

Honestly I don't know Microsoft that well. They are obviously operating extremely well right now. But I have trouble buying Microsoft at these levels when Apple and google are a lot cheaper.

Obviously a lot of people disagree with me on this.

I am also not the biggest believable that all of apples hardware sales are durable and they can maintain margins. But I do like Apple better here at these valuations.

Maybe I'm stupid and using simple metrics, but Apple is a lot cheaper.

Array
Nov 30, 2018

bro, it's not one or the other, it's both.

    • 1
Nov 30, 2018

+1

Nov 30, 2018

Could be true but the valuation heavily tilted Apple. Microsoft does seem stretched to me but the market rarely punishes a stock on valuation alone.

Array
Nov 30, 2018

What I find perplexing about incredibly successful and brilliant and breathtakingly rich people, such as Bill Gates and Mark Zuckerberg, is how little insight they have into public policy and how ineffectively they spend their money on their own public policy priorities.

Take Zuckerberg, for example, who pissed away $100 million on an attempt to "reform" Newark public schools in a way that people of average IQs and deep pockets of DEBT knew would fail miserably (and it did btw).

The Bill and Melinda Gates Foundation is a net positive on the world, but the Gateses would have done a far better job fighting poverty and disease if they had invested their tens of billions of dollars into for-profit enterprises in the developing world. It's an insight that Bono had several years ago--market capitalism is the best fighter of poverty and misery in the Third World rather than charity, which is ineffective relative to capital investment.

I will never understand how people so intelligent could be so ineffective with their billions. The road to Hell is paved with good intentions.

Dec 1, 2018
real_Skankhunt42:

The Bill and Melinda Gates Foundation is a net positive on the world, but the Gateses would have done a far better job fighting poverty and disease if they had invested their tens of billions of dollars into for-profit enterprises in the developing world. It's an insight that Bono had several years ago--market capitalism is the best fighter of poverty and misery in the Third World rather than charity, which is ineffective relative to capital investment.

You think so? Gates' foundation practices "philanthro-capitalism" and looks at lives saved per dollar spent. It's specifically designed to address market failures.

Dec 1, 2018

And could you provide an example of this "philanthrocapitalism"? I'm not finding any world changing policies.

The Gates Foundation has more money than the GDP of many countries. Had they wanted to, the Gateses could have single-handedly lifted millions of people out of poverty through direct capital investment. While the org does good things, its good is pretty finite whereas economic growth is a permanent change that could lift millions permanently out of poverty.

Dec 1, 2018
CuriousCharacter:

t's specifically designed to address market failures.

A market failure? Are you serious? Very specifically, which Third World country is a "market failure"? Which specific country had a capitalist regime that failed to generate wealth so that the nation did not have the national wealth to build hospitals and provide vaccines to the people?

It's very important that you give specific examples of these failed capitalist countries. Because the entire premise of a $50 billion charitable fund that leans on charity rather than investment rises and falls on the existence of these market failures.

Dec 3, 2018

How could they have done a far better job?

Capitalism takes two parts - capital and an entrepreneur. They didn't necessarily have the latter or great ways to distribute that cash to the right people at scale.

Witness 1mdb. Ya the money just got stolen. Running market practices in countries without entrepreneurs or with weak corruption practices could be a problem.

Array
Dec 3, 2018

Do you have anything to add @real_Skankhunt42 ? It's OK to admit you're wrong.

Or were you just trolling?

Aug 8, 2019
Comment
    • 1