MSFT
Microsoft has been known since the start for its software, its operating system Windows changed how we were able to use pc’s while software like Office ended up being used by nearly every pc user around the world. You might argue that things are changing and that it’s far from clear how those will be able to compete in this new cloud based era. I would agree. Certainly, the domination that Windows has enjoyed will probably never be the same. That being said, I don’t expect a crumble anywhere near what Internet Explorer ended up suffering. Building an operating system is complex on so many levels and even powerhouses such as Google and Facebook are facing many challenges in coming up with a viable alternative.
Are Windows/Office and others slowing down? Not significantly. But the booming years of Microsoft certainly look way behind. Just take a look at this MSFT chart from the past 5 years, you will see what I mean.
A New Era?
I do think Microsoft is doing great things though with all of the cash that its software business continues to generates. After paying a reasonable and growing dividend, Steve Ballmer and others have been able to develop promising businesses.
Online/Social
Argue as much as you want, I think this still has to be seen as a success, even though it is proving a very expensive one. Microsoft is putting up billions of dollars into its online business, trying to compete with Google and others through Bing and its other properties. It has proven to be an incredibly difficult challenge which is no surprise. Almost everyone has given up on competing with Google in search but Bing continues to challenge. A remarkable success has also been the early stake in Facebook which not only was a good move financially but it has also helped Microsoft develop a great relationship with what is without question, the new dominant internet player. Facebook, which will become the biggest IPO in a long time to hit the markets in 2012 will be an important partner for Microsoft’s online division. How soon will it be profitable? It’s unclear of course but I personally think that the main priority should continue to be improving the product and the audience, everything else will come.
Gaming
No doubt, many thought Microsoft was crazy to get involved in an industry dominated by Sony’s Playstation franchise. Where are the doubters now? The company has been incredibly successful and continues to be an extremely strong player in the fast growing gaming market with its Xbox 360.
Microsoft Taking Over The Living Room?
Slowly but surely, Microsoft is becoming a huge player in a space where Apple and others are fighting very hard: The control of our living rooms. As Xbox continues to gain market share, it has proven to be a premium place for all entertainment. There were games, links to providers such as Netflix but there is also a growing offering of tv shows, movies and all kinds of other entertainment options. On Black Friday, Microsoft sold 960,000 Xbox consoles in the US alone. A large portion of those users will start using Xbox to access entertainment.
Major Battle Coming Up
Of course, 2012 will be a big year for Microsoft as the Xbox is likely to compete with some type of offering from Apple when Apple comes up with a new product for our living rooms (some type of Apple TV). In the end, it comes down to valuations though and I personally think that Microsoft might turn out to be a very good play for 2012. Will it explode? Probably not. But there is much more upside than downside.
Disclosure: No positions on Microsoft (MSFT)
Despite common knowledge..Raising taxes on the “rich” is not always the answer
For or against them?
My argument is that those debating both sides either do not know enough about the issue or they simply prefer to stay on the safer side of the argument. Yes, yes, I will explain myself. There are complex relationships involved in raising or diminishing taxes. If you increase taxes on the corporations, the government WILL NOT receive 10% more taxes. It will likely be slightly less than 10% but could be less and in some situations, the government might even end up receiving less money. Why? Let me go to an example that I read about last week. I must say, I am not putting Google or Bombardier on the spot here because all multinationals have these decisions to make. No matter if you are building airplanes or selling intangible assets, there are ways to change the tax burden of a corporation.
Example A – Bombardier: This is a fairly simple exam. Let’s imagine that Bombardier, a Canadian company that has entities in Mexico, Canada and the United States builds an airplane to be sold in the US. Let’s imagine a scenario where the tax rate is the same in all 3 of the countries.
Major pieces of the plane are built by Bombardier Mexico
Plane is assembled in by Bombardier Canada
Plane is sold by Bombardier USA sales team
If the costs involved for each part are the following
Bombardier Mexico $10M
Bombardier Canada $5M
Bombardier USA $5M
Now, let’s imagine a scenario where the plane is sold for $30M. You can imagine that each entity would gain 50% of profits which means:
Bombardier Mexico $5M
Bombardier Canada $2,5M
Bombardier USA $2,5M
Total = $10M
If the level of corporate taxes is the same, at 25%, this translates into:
Mexican Government $1.25M
Canadian Government $625,000
US Government $625,000
Total = $2,5M
Now, let’s imagine a scenario where the US government raised taxes to 35% (on rich corporations). For Bombardier, this would translate into $250,000 of additional taxes on that plane. You might say that they can afford it. You might be right…
There is another way…
Instead of paying $250,000 of additional taxes for each plane sold, Bombardier would likely switch for a more tax efficient structure. A lot of words but it’s actually very simple…. Basically, Bombardier Canada would sell the plane at a higher price to Bombardier USA. That would result in higher profits for Bombardier Canada and lower profits for Bombardier USA. Instead of selling the plane for $22.5M, let’s imagine that it sells the plane for $24.5M. In this scenario, the profits for Bombardier are the same:
Bombardier Mexico $5M
Bombardier Canada $4,5M
Bombardier USA $0,5M
Total = $10M
That results into these taxes =
Mexican Government $1.25M
Canadian Government $1,125,000
US Government $175,000
Total = $2,55M
End result = Bombardier loses $50,000 (compared to the pre-tax scenario), the Canadian Government receives $500,000 more and the US Government receives $450,000 less. This is much more common than you could imagine and it becomes much more difficult to regulate when you have 20 or 30 countries involved instead of 3. Increasing the taxation level in this specific case results in less income for the US government.
Google
Basically, any company that did business with Google’s advertising likely did business without knowing with Google’s Ireland operations as 88% of the $12.5B from the sales of advertising were “made” by Google’s Ireland operations which then funnel the money to Bermuda through complex but legal steps.
Who should be blamed?
It would be easy to blame Google or Bombardier but that would be too easy:
-They are acting legally
-They are in direct competition with other similar structures
-Their duty is to maximize returns for their shareholders within the rules
What to do?
I personally think this is the more interesting question. Next time you hear someone talking about taxing the rich as the miracle solution, please remind them that it’s much more complex than that. Raising the taxes might be a good idea but it should be decided after considering all of the direct and indirect impacts.
Ask French citizens how much more they are making on taxes from their wealthiest citizens. The answer will get you a sad face as a large proportion of the richest French have moved to neighbor countries to avoid the tax increases.
There are no easy solutions and these problems should be treated as what they are: Complex Global Problems.
I’d love to hear your thoughts on this. Am I the only one who is tired of these simplified arguments?