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!
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.
"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.