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The software business: your risk model, should you need one.

I was just going back over Microsoft’s announcement from January when they announced their “cost cutting initiatives” (it was referenced in a friend’s “my last day at Microsoft” email), when I noticed at the bottom the bit about “forward looking statements”.

These sections are usually pretty bland and generic – however, what is fascinating is that Microsoft have actually broken out all of their downside risks into a list for everyone to see: check out the list below. If you’re running a software business and don’t have a risk model, here you go. 😉

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challenges to Microsoft’s business model;

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intense competition in all of Microsoft’s markets;

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Microsoft’s continued ability to protect its intellectual property rights;

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claims that Microsoft has infringed the intellectual property rights of others;

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the possibility of unauthorized disclosure of significant portions of Microsoft’s source code;

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actual or perceived security vulnerabilities in Microsoft products that could reduce revenue or lead to liability;

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government litigation and regulation affecting how Microsoft designs and markets its products;

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Microsoft’s ability to attract and retain talented employees;

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delays in product development and related product release schedules;

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significant business investments that may not gain customer acceptance and produce offsetting increases in revenue;

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changes in general economic conditions or the availability of credit that affect the value of our investment portfolio or demand for Microsoft’s products and services;

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adverse results in legal disputes;

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unanticipated tax liabilities;

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quality or supply problems in Microsoft’s consumer hardware or other vertically integrated hardware and software products;

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impairment of goodwill or amortizable intangible assets causing a charge to earnings;

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exposure to increased economic and regulatory uncertainties from operating a global business;

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geopolitical conditions, natural disaster, cyberattack or other catastrophic events disrupting Microsoft’s business;

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acquisitions and joint ventures that adversely affect the business;

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improper disclosure of personal data could result in liability and harm to Microsoft’s reputation;

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outages and disruptions of online services if Microsoft fails to maintain an adequate operations infrastructure;

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sales channel disruption, such as the bankruptcy of a major distributor; and

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Microsoft’s ability to implement operating cost structures that align with revenue growth.

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Ray Ozzie: Cloud lowers margins shocker

Ray Ozzie at Microsoft has gone and said the unsayable: the economics of Cloud Services will yield lower margins than packaged software for Microsoft. Uh, yeah. The company’s gross margin for the quarter ended March 31 was 79% – is that sustainable in a new industry paradigm which is relentlessly driving out efficiencies and economies of scale?

On the other hand, as Google and others have shown, when your technology scales to 1.4 billion users and counting, and supports a significant percentage of global commerce, then margins aren’t everything.

Perhaps of most relevance is Microsoft’s key incumbent strength in this space: an estimated 5 million to 7 million developers who write software based on Microsoft technology (mainly .NET these days). MS isn’t going away any time soon – however they will need to work out how to monetize Azure differently to the open source / EC2 crowd.