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The Cody Blog: Cody on RM: Tech's Not a Zero-Sum Game

Monday, July 10, 2006

Cody on RM: Tech's Not a Zero-Sum Game

Tech's Not a Zero-Sum Game
7/10/2006 2:51 PM EDT

You need a whole lot more than money
You need more than to survive
You need to keep your Love
Keep your Love alive
-- Heart

If I hear one more pundit or so-called analyst explain to me how Microsoft (MSFT) today is IBM (IBM) 20 years ago, I'm going to pull the bytes out of my hard drive -- er, the hair out of my head. OK, OK, we get it -- someone smart explained at some point how there are some parallels to the Internet wars between Google (GOOG) and Microsoft and the PC wars that pitted Microsoft and IBM back in the day. The fact is, I think both Google and Microsoft are positioned to be big winners in the next few years, though I plan to own Google longer than I plan to own Microsoft.

Specifically, the conventional wisdom (and, seriously, if there was ever a time to call something "conventional wisdom" in technology and the stock market, this is it) goes something like this:

IBM utterly dominated the computing world and was making money hand over fist as it had grown to dominate mainframe and centralized computing. Microsoft, with software purchased from the slums of Albuquerque, N.M. (one summer in college, I lived on the same block where the beginnings of Microsoft were developed), was about distributed personal computers and bringing computing power to the masses. IBM froze and refused to accept the new paradigm, and Microsoft rose to dominate computing so much that it's still being punished for being too successful -- er, for supposedly being a monopoly.

Fast forward to 2006 and everyone (as in everyone) can explain to us how Microsoft dominates the computing world and is making money hand over fist as it has grown to dominate the distributed PC world. And now Google and others are coming up with all kinds of ways to distribute software and computing power over the Internet. The commentators then go on to explain how Microsoft is -- and this is where the conventional wisdom falls apart -- frozen and refusing to accept the new paradigm.

As Cramer used to title his columns back when I first read him in 1997, "Wrong!"

Look, Microsoft gets it. Bill Gates, Ray Ozzie and even the much-maligned Steve Ballmer understand that technology has gone, and is going, through another major paradigm shift that is enabling the masses yet again. And they're actively positioning the company to leverage that paradigm shift. They're rolling out a new operating system that will be the most user-friendly interface they can devise. They're integrating networking capabilities into every possible facet of the software.

With 98% of the world's billions of computers still running a Windows OS, Microsoft certainly has an entrenched user base to leverage. With that type of a base, I wonder when Softee will get serious about the voice-calling business. When it does, the rules of Metcalfe's Network Effects (scaled down from the original theories as they are) will really kick in for free voice calling as billions of people will have instant access to it. Wonder if eBay's (EBAY) Skype will join hands with Microsoft's voice services someday down the road.

"Yeah, yeah, Cody, but PC growth is dead, you're wrong about any upgrade cycle next year," you might be thinking. Well, Microsoft is addressing those issues, too, as it has developed operating systems for mobile phones and other mobile devices. It's getting into gaming, rolling out new gaming consoles for the living room. It's getting into the Internet advertising distribution business, which is indeed the future of advertising and a business that will make a lot of companies, including Google and Yahoo! (YHOO) , a lot of money. It's not like Internet advertising is a winner-takes-all sector.

Indeed, despite all the catcalls, Microsoft is having some meaningful game-changing success. MSN has become one of only three meaningful portals on the entire Internet (Google and Yahoo! being the other two, of course). How's that AOL.com site doing?

To be sure, there's plenty of execution risk with Microsoft because regardless of its strategies and tactics, the company might fail to deliver results on those decisions.

A couple of years ago, when Google had first come public, I used to rail against the conventional wisdom that Google was in trouble every time Microsoft rolled out a competing product. In those days of yesteryear, Google would get hit just about anytime Microsoft sneezed in GOOG's direction. A few hundred days and a few hundred billions of dollars in market cap swings later, I think the pendulum has swung too far in the "Microsoft is helpless" direction. Both of these companies are likely to be big winners in the latest historic new paradigm of computing that we are all witness to. Technology's not often a zero-sum game, you know?

At the time of publication, the firm in which Willard is a partner was net long Microsoft and Google, although positions can change at any time and without notice.


Anonymous tree said...

excellent post!

7/10/2006 06:59:00 PM  
Anonymous Anonymous said...

God I hate fundamental analysis! Everyone always "knows the future." Yeah, right. However, there are some interesting technical (i.e. stock price and chart) comparisons---but for the start of IBM's 1981-87bull run. Way back, IBM bottomed out months before the broad market, in Nov. 1981. By the time the rest of the market found its low, in Aug. 1982, IBM was already 40% up. I think this time around MSFT has put in its low about six months ahead of the rest. That's the similarity I find---and I think it's the only one that matters.

7/10/2006 07:28:00 PM  
Anonymous Jim said...

Whats with that gay pose in your picture??? Relax man, your a writer/hedgefund manager, not a leather jacket model!!

7/11/2006 12:29:00 AM  
Anonymous Anonymous said...

Lighten up Jim. Cody is hot. We've been asking for a shirtless pic for a while now, but we're making do with the current pics. Even a pose in a "wife beater" would make me happy.

7/11/2006 03:22:00 PM  
Anonymous Anonymous said...

I would like to have you list your earnings forecast for microsoft for the next 3 years sir.

7/11/2006 09:00:00 PM  
Anonymous Anonymous said...

re: fundamentals

I don't think cody does fundamental analysis for stocks. he doesn't really list details, he just like sayd the internet is getting big so google is good

7/17/2006 06:04:00 PM  
Anonymous Anonymous said...

cody, you could write absolute gibberish (as you often do) and you'd still be read by the same hard-core gay male audience that fawns over your every word and fantasizes about a threesome with you and Lance Bass. Come to think of it(pardon the pun), I think Lance has more intelligent things to say about the market than you do!

7/27/2006 03:57:00 PM  

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