Talking more about what we're not talking about

Meanwhile, analysts continue to tally the cost of Microsoft's business - including the amount it's reinvesting in Xbox 360 supplies, and in shoring up MSN's lagging advertising revenues - and even with the notable rises, something's still not adding up. 

What is Microsoft up to? Is it, asked the Merrill analyst, staking a few billion bucks to make MSN topple Google in the search and services arena? Granted, that's the type of question to which no one genuinely expects a Microsoft executive to respond with, "Why, sure!" What's interesting, and what's informative, is the way the Microsoft executive does not say no.

"Relative to the starting base of fiscal year '06, I would characterize it as being a broad-based approach across multiple fronts," Microsoft's CFO Chris Liddell responded. "I don't think there's any Trojan horse there that we haven't talked about, that is sitting below the surface, that we don't want to talk about. I would say to the extent that there is a difference between your expectations of where we're coming in, I would list the sort of twelve to fifteen things that I mentioned before, and we would be accelerating the pace in virtually all of those, relative to, possibly, your expectations. So there are some big numbers there, that is certainly true. And there's certainly some big potential spending and opportunities that we foresee in the MSN and Windows Live area, so that's certainly true. But we're not building into our guidance things that we're not talking about."

In other words, there's a general cost of doing business, and that continues to rise. The tide rises for all boats simultaneously, and that's a big number of boats. But if the tide seems to be rising larger, and there appear to be more boats on the water now than before, then if there were a difference to be measured, Microsoft's not going to talk about it. Notice that's not a "no."

The company has intentionally chosen, Liddell said, to make a strategic trade-off, and re-invest some of its earnings, as a way of shoring up its position for a better chance at monetization later. Meaning, if we re-invest in businesses now, the payoff will eventually come. Is this a strategy that will continue over the next few years, Liddell was asked, where the company is willing to sacrifice earnings growth, so that it continues to lag below revenue growth? While Liddell refused to give guidance into 2008 and beyond, he did admit, "Clearly, from our point of view, we have made a strategic decision, with respect to next year, that given the set of opportunities and the revenue growth potential that we see, we're willing to make that tradeoff next year...and not only next year, but to get ahead of it, if you like, in the third and fourth quarter as well."

The question may still be hanging in the air, but it's hanging rather heavily: Is there a big strategic investment that the company is planning for? Other analysts tried to whittle the numbers down, to see if there were some expenditures they missed. Is the company really planning to fork over that €2 billion per day fine the European Commission keeps threatening? While not really saying no, CFO Chris Liddell said Microsoft's not reserving any more for legal expenditures than it usually would. Is the company planning to issue vouchers to customers, good for discounts toward future purchases of the delayed Windows Vista? If so, that could be considered a cash write-off. That's a possibility, Liddell conceded, but something which Microsoft hasn't decided on yet, and with nine months to make that decision, he said, that's plenty of time to think it over. Does the fact that Microsoft projects lesser growth in the PC market per year - only 10% for next year, versus as much as 17% a few years ago - play a role in its valuation? Yes, conceded Liddell, but not a very large one.

So if the Merrill Lynch analyst is correct, that leaves a possible increase in the cost of business that's ironically just as big as one of those huge barriers-to-entry that Microsoft used to be so good at constructing. Pay no attention, the financial wizards seem to be saying, to that four-legged animal behind the curtain.