Robert Cringely has an article up at the NY Times about Chrome vs Bing.  It’s a fine piece, but there’s a bit in the middle that makes me shake my head:

Microsoft makes most of its money from two products, Microsoft Windows and Microsoft Office. Nearly everything else it makes loses money, sometimes deliberately.

This is not an uncommon refrain, though most times people call MSFT a one trick pony.  This continues to confuse me.  I sat down with Scoble a couple of weeks ago at the Structure09 conference and we talked about MSFT.  He’s a former employee, and he too made this quip when the topic of Bing came up.

I read through the most recent 10-Q for Microsoft to see if I could pull out proof of what I am about to state, but the content wasn’t there.  There’s more detail in the 10-K filing from last year, so here goes.  If we start from the premise that Microsoft did $60B in revenues in 2008, and Office and Windows are the only products we have, where does that leave us?

The client business was $16.8B, but includes Windows Vista, XP, Media Center, and Tablet.  Note, it doesn’t include Windows Server, a completely different product.  Each of the client variants of Windows could certainly come under one product banner.

For Server you would have to look at the Server & Tools business (STB), which for 2008 turned in $13.7B in revenue.  STB consists of Windows Server and SQL Server.  It also includes our tools business, which is Visual Studio.  Let’s not forget Exchange or System Center.

Our online services business, though a money loser (at the operation income level), and perhaps the one that draws most of Cringely’s ire, put out $3.2B in 2008.  This includes all of our search and all online properties.  That’s multiple billion dollar revenue businesses right there.  Are costs out of control?  Sure, but it’s not like building a billion dollar business is something at which you sneeze or can do in a garage.

Next up is the Business Division.  This one churned out $18.9B.  Office is a part of that business, but so is Project, Dynamics, and Sharepoint.  I don’t have specific numbers, but those are not small products by any stretch of the imagination.

Last we have Entertainment & Devices.  E&D has the Xbox, all of our games, Zune, and our hardware.  Zune may not be a money maker on the revenue side, but we sell a lot of mice and keyboards, and those Xboxes are doing OK.  Our game attach rate is very high, and with some top selling first party titles.

We also have businesses built around premium support and consulting services, and those aren’t small businesses either.  Just consider what the scope must be given our product base.

So, for a company that apparently only has 2 products, the list I enumerated of “large” products – businesses that could be stand alone multi-billion dollar market cap companies – is pretty impressive.  There are only 332 companies listed on American exchanges that have market capitalizations north of $10B, and we could fill that list with at least 10.

There’s an interesting article out this morning about the death of YouTube.  Granted, the article is penned by a competitor, so it’s always necessary to take such proclamations with a grain of salt.  However, the article elucidates some interesting data about the massive online video property.

Credit Suisse estimates that YouTube is losing $470 million a year for Google.  That’s a staggering number, and one that is only addressed in the article as the potential for YouTube as a going concern.  How long, the article asks, will Google front the cash to support this loss generator?

As a finance nerd, and GOOG shareholder, I like to think about things a little differently.  What is the implied impact of YouTube to Google shareholders?  Doing some simple math reveals the following:

YouTube represents a 12% drag on share price.  Never mind the cash that was spent on the acquisition, but we’re talking about the here and now.  That’s a pretty astonishing number, and I am guessing that it’s not one that is a temporal blip, but more of a long term trend that could potentially take years to get to break even.

The theory has always been that Google will find a way to monetize the property.  However, having pulled out of newspaper print advertising, and pulled out of their radio advertising program, one should consider whether the maxim that Google can monetize anything other than search, specifically as it pertains to existing media channels (i.e. video).

As a shareholder, I can only wonder what is going on inside of Google with their acquisitions.  JotSpot, Dodgeball, and others, all seemed like promising properties before being purchased, and they have all have varying levels of success with some of them getting killed outright.  Purchasing threatening companies to kill them has long been a strategy of the savvy M&A strategist, but carrying a $1.5 billion purchase, and carrying a $470 million yearly loss (in perpetuity?), is not looking like a great strategy.  Hoping they can monetize YouTube brings to mind one of the best lessons I have learned from one of the best bosses I have ever had: “Hope is not a strategy.”

I am not the first person to write a review for the financial software service Mint.com.  Nor will I be the last.  However, after using the product for just a week, I felt compelled to reach out to my readers and let them know that if you have as much of a deep seeded hatred for personal financial software tools (*cough* Money…*COUGH* Quicken) as I do, then you have most likely given up on the category entirely.

Myself, I needed another run at a personal financial software tool like I needed another run at dealing with the tech support line at the cable company.  With the impending arrival of my third child, and the economy being in the state in which it is, it is no longer suitable to utter "leave it to me" to my wife when issues of our personal finances come up.  You see, she went to the bank and withdrew a pocket full of "I don’t give a shit" for whenever I would try to insist that my Wharton MBA was sufficient credential for her to avoid such topics.

Any time I have tried to use any of the aforementioned software packages, they would prove too onerous for the family to use.  Further, it was complicated to ensure that we could share a file across machines.  Synchronization became a complete pain in the ass.  Bottom line – I loathed the software.

The number one problem I had with any of these packages was simply getting started.  The need for the opening balance was enough to derail most efforts.  Don’t you dare try to use Quicken or Money without reconciliation of that opening balance.  You want to get your transactions into the system?  Sure, no problem.  Want to have them categorized?  You’re on your own.  Want the data that the bank provides to be enough so that your software would simply figure out how to auto-classify new transaction?   Good luck with that.  Forget to download transactions for a month and you only use your debit card for all transactions?  Your night is ruined.

I am willing to go out on a limb and suggest that there is an entire mini-generation of computer savvy young professionals who may never use personal finance software because of the horrors of the on-boarding and maintenance processes of the old guard packages.  This is where Mint.com shines.  Shine is not strong enough a word.  The sun is melting my eyeballs it’s so bright.

The first thing you need to know is that Mint is read only.  There’s no concern that someone can compromise their site and gain access to your accounts.  Mint is a reporting tool, not a money management package.  It’s this delineation, in my opinion, which ultimately frees them from the design decisions which have destined others to fail.  They chose to do one thing (reporting) and do it very well.

When you create your account, you need nothing other than an email and a password.  There’s no personally identifiable information about you stored at Mint.  When you add your bank accounts, you simply provide the login credentials to your bank online service.  If you are like my wife, that last bit was a non-starter.  Mint understands this, and provide this great starter page about privacy and security.  It got my wife over the hump.

I put in our account credentials for our bank, and a few moments later it said it had validated the information.  Iwas not prepared for what happened next.  My last 90 days of transactions had been downloaded, and mostly (probably 95%) auto classified.  I can count on two hands the number of transactions which were incorrectly classified.  Gas, hair cuts, groceries.  It was all done automatically.  All the data was there, and beautifully presented with charts, graphs and data tables.  I didn’t have to do any heavy lifting.

As a reporting tool, Mint strives to give you the tools you need to track transactions, your cash flow, budgets, etc.  They auto compute moving averages for your spending categories and let you know how you are doing against those averages for the month on a real time basis.  They will also send you emails (or SMS)when you go over your budgets for the month.

If you want to get really nerdy, you can plot your spending against the US at large, against a state, or even a city.  All of that data is presumably pulled from their own data sources.

The usability is top notch, with plenty of clean interface decisions that make for a, date I say it, enjoyable personal finance experience.  I really like being able to drill down into the pie chart of my monthly spend and see the transactions and amounts for the category types.  There are some usability nits and nats, but overall I am really impressed with the product.

I am always interested in things that we all notice but don’t quite put together for what they really are.  I think we can all agree that the economy is tough right now.  I’m a little shielded from that with my job and employer doing well enough, so that makes things a little easier.  However, I know that it’s tough times out there for many people, and that bums me out.

My wife came by for a quick visit and we turned it into lunch with daddy at work.  During the conversation, she shared that she had been at the mall with the kids.  She also noted that “the ratio of men to women in the play area is going up during the middle of the week.”  Just last week, when I was on daddy day care last week, I noticed that there were quite a few dudes there as well.

So with the economy on the skids, upward goes the number of men with nothing to do in the middle of the day.  With an eye toward painting a silver lining on things, at least they are getting to spend more time with their kids.

Just when you thought that technology had advanced the human conversation as far as it could possibly go, the leaders of the esteemed CNBC network give us their newest innovation.  First called out as the Octobox by Jon Stewart, he brought the new and improved Decabox to our attention this evening.  Having seen this concoction in action, I am at a complete loss as to how this “feature” made it through any semblance of a design review.  Two or three talking heads, coupled with the host, is generally sufficient to guarantee a cacophony bordering on the unintelligible.  The mere suggestion that the addition of heads four or five should have been an offense worthy of dismissal, but 10 heads.  Really?  10?  Really?  I now refer you to Garrity’s Law:

The intellect of individuals in a group decreases exponentially as the number of individuals in the group increases.

This holds true for a meeting of any kind, especially one where television cameras and a national audience are involved.  Yeeessh…

You know, the funny thing about rallies in the market these days, especially the largest one day gain by a country mile, is that it’s hard to know what’s driving the move.  There’s an old saying about the markets, and it relates to dead cats.  I am in no way equipped to make market prognostications given the current turmoil, but it’s hard to look at the advances today and not think that there is something along the lines of a dead cat bounce happening.

The funny thing (depending on your point of view) is that the darn things bounce pretty high when they have had as far a fall as the Dow has seen in the last month.  Recall, we’ve seen 26% decline in the last month alone.  Is now the time to stand up and cheer about the policies working, or a time to sit back and mull over the realities of the market positioning and where things are going?  I’m not sure which it is, but I would really hate for a bunch of people to start congratulating themselves with high-fives and back slaps around the notion that “the plan is working.”  We simply do have enough data at this point to call it.

From Techcrunch: It’s Going To Be A Grinch Christmas: Slowdown Forecast For Online Holiday Sales

There’s been discussion about consumers spending less this winter shopping season, and how the credit crisis is the culprit.  I would like to introduce a thought here, and one that extends a little further down the rabbit hole.  Consider for a moment that demand destruction has in fact occurred.  Consumers are scared and are holding back purchases – everyone understands that concept.  However, the new construct I would like to introduce is the notion that demand destruction will not exceed supply destruction.

What did that mean exactly?  Most retailers, specifically consumer focused retailers, tend to turn profitable around Thanksgiving.  That’s one of the reasons why the day after Thanksgiving is called Black Friday.  This is directly tied to demand coming in the front door (actual or virtual) of the business.  It’s possible that the exogeneous factor of the credit crisis may delay Black Friday, and in fact keep the year in the red.  However, if one also considers the reduced ability to borrow, things get even more challenging for the retailers to turn profitable.

Retailers need to stock up inventory ahead of their selling season.  Inventory is taken on credit terms.  Whether it’s a “net X day” payable, with the ability to return the goods if unsold, or borrowing against the value of the inventory is irrelevant.  Someone, somewhere, needs to borrow funds to make the stuff.  If the ability to borrow is impacted, whether by higher interest rates (pushing down margins and borrowing power), or borrowing is negated all together, the retailer themselves will be harmed because they will have reduced inventories to sell.  With reduced inventories, retailers will be challenged to hit their “black” date.

This puzzle becomes ever more challenging when you consider psychological factors on pricing.  To wit, if retailers fear reduced demand, they may start jumping the gun and offering sales, at reduced prices (and thus reduced margins), to spur demand.  This will have the perverse effect of pushing out even furhter the date at which they would turn black.  An even bleaker picture could envision inventories running out, and credit not being there to keep up with even a reduced demand, at reduced margins.

I can say this – I would not want to be long any retailers for the next two quarters.

From Politico.com:

Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages.

I will, for the most part, stay away from political issues on this blog.  No need to incesnse half my audience, one way or the other.  That said, I find this demonstration of our government at work too difficult to let go.

That’s my emphasis above.  Somehow the bill managed to go from a pamphlet to a novel.  Never mind the fact that the cost of this thing has swelled over 20% from the original ask.  If you have an opinion one way or the other on this thing, I suggest you let your congress  person and/or senator know what you think.  You don’t get to complain if you don’t vote, whether by way of your actual vote in November, or your proverbial vote with a phone call to your representatives.

Suspend your imagination for a moment and imagine that Treasure Secretary Paulson is a one time successful entrepreneur who is coming to a VC looking to raise money for his next venture.  Perhaps that conversation would go something like this:

Paulson: So, I’m here to raise $700 billion dollars for my new venture.  I see a unique opportunity in the marketplace of which I want to take advantage.  I have built out the business plan, and am here to raise some money.

VC: OK.  So what’s the idea?

Paulson: I want to invest in some mortgages.

VC: Interesting.  And how do you plan to make money?

Paulson: Didn’t I cover this already?  I have a business plan.

VC: But we haven’t seen the business plan.

Paulson: And you won’t.

VC: I see.  Do you need all this money at once?

Paulson: Not really.

VC: Why are you asking for it all then?

Paulson: These are uncertain times, and I need to give the appearance that I have money.

VC: Oh, I see.  Do you have a plan for how you are going to use the money?

Paulson: Yes, I plan to make money with it.

VC: And what do I get for my money?

Paulson: <irritated> Business plan…

VC: What I meant to ask was whether I will get equity in this business?

Paulson: No.

VC: No upside for my money.

Paulson: Yeah, not really.

VC: Interesting.  Do I get a board seat?

Paulson: No.

VC: Any controls?

Paulson: Nope.

VC: No oversight?

Paulson: None.  Oh, and you have 2 days to make your decision.

VC: Well, that’s quite a bit of money, and not a lot of time.  Are you speaking with other investors?

Paulson: Nope.  You guys are the only game in town, but if you don’t invest now, you won’t see this opportunity again.  I will walk right out the door.

VC: And go where exactly?

Paulson: The door probably leads outside, no?  Listen, you look like a nice guy.  Let me share a little bit of my business plan with you.

VC: That’s pretty optimistic.  How accurate and or robust is your model?

Paulson: I can tell you this much…it’s better than the ones used to value the mortgages in the first place.  We actually handle a 10 sigma event.  We even went so far as to model an 11 sigma event, but that won’t ever happen. 

Of course, I say all this with my tongue placed firmly in cheek, but I have to say, I am pretty surprised at the evolution of this package and the discussion around it.  I want to be very clear on my economic viewpoint: liquidity and credit availability in the market are absolutely critical right now.  However, if the American public is going to take on the role of investor, there should be a well thought out plan, controls, and upside participation.  Huge risk with little upside is hardly a good investment.  Why is it that Warren Buffett is the only investor who can negotiate a great deal?  The bailout package is being sponsored by an entity with vastly more money in their coffers than Mr. Buffett.  It’s a funny thing, the way deal making is supposed to work – when you have the money, and the other person needs the money, and they need it very badly, you are generally in the better position.

It should go without saying that the current financial crisis is going to loom large over the business plans of young and new software companies.  In fact, there is an article out that suggests that the removal of Lehman and Merrill from the buyer pool has reduced the IT budget of the financial services sector by 6%.  Let’s let that marinate for a moment.

It’s one thing to have a cyclical contraction in spending.  It’s another thing entirely to compound that problem with demand destruction.  Worse still, the demand destruction is not due to a symptomatic pricing issue, but rather the abject removal of key buyers from the market.

Even more complicating is the difficulties in financing businesses operations.  I’m not talking about raising venture money, but good old commercial credit.  Many companies use debt for expansion, and many times that expansion includes computer systems.  Companies are now having their hands forced to not just pay lip service to lowering their CapEx associated with IT, and moving it to OpEx.  They have no CapEx dollars left.  They need (must) find a way to fund software and services.  Enter SaaS business models, and the Cloud more broadly.  I would expect a knee jerk and rapid migration of buyers in the market to seek out SaaS solutions for line of business applications, and a reduction in spending on CapEx associated with IT.

Here’s the sad irony of the current financial debacle.  IT is what got us here.  IT has been wielded as an offensive asset for many of these firms.  The calculations required to price and model out many of the derivative products they were buying in insane.  I almost took a job at Merrill working on their Fixed Income Derivatives desk back in 1995.  Scary.  Here’s what’s more scary: my Fixed Income homework from my FNC235 class (*there’s a nod to all Wharton peeps who ever had Prof. Basak) is what got me the job.  The MD actually said “hire this guy.  I can’t make heads or tails of his homework and he got them all right.”

People worry about Google being the current incarnation of Skynet, but I would look more to the systems which have been handed the ability to make trades for humans based on human created models which very few people understand, much less can maintain in such manner as to adapt to what are being called 10 sigma events.

I was in NYC when 9/11 happened.  I remember a quote that still hangs with me: that we suffered a failure of imagination in our ability to stop the terrorist attacks.  There’s a similar sentiment to be had here.  The failure of imagination in the building of these models has led to many models essentially acting (reacting?) the same way, causing herd like behavior in a flight to or from assets.  The combination of programmed trading, naked shorts and no uptick rule has led to some serious unintended consequences.