BuffettRaikes.pdf This .pdf link is to an email that is alleged to have been sent from a Microsoft sales manager in 1997 to Warren Buffet. Since 1997, this Microsoft sales manager, Jeff Raikes, has gone on to become President of Microsoft Business Division. Although I can’t attest to the legitimacy of the email (see update below, the email is legit), I do find it a very simple, easy to follow analysis of Microsoft’s core business. Raikes does a great job communicating some of the basics of Microsoft in a way that the average man can understand. It’s interesting to read this historic email in comparison to the recent Gates/Ozzie emails that came out.
From the email: “There are a certain number of PC’s that get sold, a growing amount of Microsoft software per PC, the power to use the brand to sell even more software, some pricing discretion, international market growth, and the opportunity to grow revenue by further reduction in piracy. Obviously I’m not going through all the details we’d discuss in a couple hour session, but that is the heart of the business. Of course there is the R&D; invested to build the software, but that is similar to Disney continuing to produce new content, or Nebraska Furniture Mart continuing to keep their format fresh, and an investment that BillG manages very closely.
Even some of the new “media” businesses are really not that new or different. Take our WebTV acquisition or the Comcast deal. I see articles covering those investments and describing Microsoft as becoming a media company. The real goal is to figure out a way to get an “operating system” royalty per TV. 10’s of millions of TV’s per year at $10-$20 per TV is a nice little “operating system” business.”
Jeff also mentions the biggest threat to Microsoft’s business being that of a major paradigm shift.
“In the absence of a paradigm shift in technology, market shares seldom change by more than a few points. With a paradigm shift, the shares can rapidly change by dozens of points. I spent my first ten years at Microsoft building Microsoft Office. We were way behind in share most of that time (less than 10%), but the shift to graphical user interface was the paradigm shift that allowed us to displace the old leaders (Lotus 1-2-3 and WordPerfect) and now be at 90% share.”
“In technology, the moats may be narrower. It is amazing how fast the internet exploded. Or how quickly Java gained notoriety. We have some great moats, but even so, 18 months ago analysts were questioning whether we could move quickly enough.”
Warren Buffet of course has notoriously avoided the technology markets and has invested very little in technology businesses over the years. He does, in response to Raikes however, concede that Raikes analysis is pretty good. In response to Raikes Buffet writes:
“Your analysis of Microsoft, why I should invest in it, and why I don’t could not be more on the money. In effect the company has a royalty on a communication stream that can do nothing but grow. It’s as if you were getting paid for every gallon of water starting in a small stream but with added amounts received as tributaries turned the stream into an Amazon. The toughest question is how hard to push prices and I wrote a note to Bill on that after our December meeting last year. Bell should have anticipated Bill and let someone else put in the phone infrastructure while he collected by the minute and distance (and even importance of the call if he could have figured a way to monitor it) in perpetuity.”
It’s funny how as I read this email from 1997 that I find it still today a fairly accurate rendering of Microsoft’s business today. Of course new paradigm shifts do arise and certainly as Google and others build new paradigms of technology Microsoft will adapt and protect their franchise the best they can. But at core, they still control the OS and it’s revenue stream, they still sell add on software to add incremental value, they still are trying to get into the living room and get a TV royalty and they still have a significant and hated piracy problem. And they still build initiatives to adapt to the changing paradigms around them as can be seen in some of the upcoming initiatives from Ray Ozzie, live.com, and a new emphasis towards expanding and promoting the world of RSS.
Update: I checked with Robert Scoble about the legitimacy of this email and Robert was able to have it confirmed that the email is in fact a legitimate email from Jeff Raikes to Warren Buffett from 1997. I think this email still, in many ways, describes Microsoft’s core businesses today — still some 8 years later. Jeff obviously has a lot of passion for Microsoft and I’m sure that this, in part, is what’s allowed him to get to where he has in the company.
Update #2: Apparently this email has been out there before — although I had not seen it. Todd Bishop of the Seattle PI just pointed me to an article that he wrote on it back in 2004. It came out as part of the discovery in Microsoft’s anti-trust trial. Thank’s Todd.