The world’s largest software company, Microsoft Corp., and Internet giant Google Inc. have more in common than the dominance of their respective markets. Both are also essentially one-trick ponies that have used their prodigious cash flows to pursue a host of side projects in attempts to diversify. And neither has had much success.
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A trying economic climate is changing that. Google recently axed its print advertisement ambitions and Microsoft sold its long-held stake in cable operator Comcast Corp. Their other non-core projects should be next.
Microsoft’s core competency remains software—its ubiquitous operating system and various other programs. These account for 82% of its revenues and nearly all of its operating income. The company has used a lot of those profits to support forays into products like videogames and online search.
But those haven’t become the money-spinners it hoped for. Microsoft’s Xbox gaming console just turned its first profit last year after seven years on the market. In 2007, the company had to take a $1 billion (Rs4,890 crore) charge to repair defective units.
Microsoft’s online search effort has also struggled. Its MSN portal has a dismal 8.5% share of the US search market and the unit that houses it lost $480 million last quarter.
Google, meanwhile, makes virtually all its revenues from advertising related to Internet searches. Still, that hasn’t stopped the company from pouring money—and employee time—into online video, cloud computing and lobbying for renewable energy projects.
For example, it snapped up YouTube for $1.65 billion in 2006. Analysts think the video site remains barely profitable. The same goes for Google’s free online software initiative, in which it has invested heavily.
Of course, some loss leaders can be strategically valuable. Google’s online utilities, for example directly threaten search-rival Microsoft’s cash-cow software business. And Microsoft’s hordes of loyal Xbox gamers may add a crucial bit of cachet to the otherwise-stolid reputation of its software.
But with shares of both companies down sharply over the past year, and few of these non-core projects spinning money, shareholders have diminished tolerance for using profits to fund long shots. Investors would probably applaud if Microsoft and Google shed more of these non-essential distractions.