Transparency ⭐

I’m fascinated to see others in my industry finally wake up to the lack of transparency in Microsoft’s financial reports. After all, I’ve been complaining about this problem for several years, and while the company’s dealings with OpenAI and its unprecedented AI infrastructure spending are particularly notable, Microsoft’s lack of transparency in these matters is not in any way unique.

Granted, most tech bloggers, reporters, reviewers, and enthusiasts can’t be expected to understand the financial reports generated each quarter by the world’s largest companies. But many years of experience doing so helps, and though I was never formally trained in such matters, I feel like I do pretty well.

What I’ve noticed over the past two decades is a steady decline in transparency, as evidenced by a move away from hard numbers—the units sold by a particular product, say, or the number of corporate licenses—to softer numbers that do little help analysts, investors, shareholders, and onlookers understand where the money is coming from and, on the other side, where it’s going in terms of investments, staffing, or other initiatives.

For example, Microsoft used to report the number of Windows licenses that it sold it each quarter. But the financial finagling began in the Windows 7 era, when those licenses reached such outsized numbers that Microsoft took steps to smooth out its finances by recognizing those sales over longer periods of time. During this era, Windows license sales magically hit 20 million units per quarter over several years, allowing the software giant to avoid big downward spikes in the quarters and years between releases when those sales would normally cool down.

There are many factors that play into this dynamic. But the biggest is tied to enforcement. After all, it doesn’t matter if you break the speed limit while driving if the police never pull you over and give you a ticket.

Similarly, Microsoft’s legal responsibility to disclose its finances never changed, but regulatory oversight clearly fell by the wayside. And so Microsoft and other Big Tech companies started experimenting with how little they could disclose each quarter, quickly discovering that there were no negative ramifications. Today, we learn only how much Windows license sales improved or contracted in a given quarter by some percentage—a soft number—while the literal number of licenses sold—a hard number—has long since disappeared from the financial reports.

(Apple did similarly with its hardware sales in October 2018 as iPhone sales finally leveled off, making it impossible for anyone outside the company—shareholders, investors, analysts, whomever—to accurately determine the average selling price of the devices and the relative health of each business.)

The net result is that Big Tech financial reports have become marketing exercises in which these companies can tout the milestones they achieved even though none impacted revenues yet, cherry-pick the positive news that puts the company and some of its products in the best light, and then utterly ignore the bad news as often as possible by hiding those things that are failing or not profitable. But the purpose of financial reporting is to give existing and potential investors the information they need to make educated decisions. That is not what Microsoft and other Big Tech firms now provide, in my opinion. But objectively, that is what these firms used to provide, and often in great detail.

Today, Microsoft only provides hard numbers for a single business, Microsoft 365, and that’s presumably because those numbers are still good and cast the company in a good light. This past quarter, it provided a hard number (revenues) for Azure for the first time in that product’s 15+ year history, which is why it was notable. But the rest of Microsoft’s products and services got vague soft numbers at best or, like Surface, weren’t even mentioned at all. If you don’t have something good to say, remaining silent is a good policy for people, but it doesn’t help shareholders and investors. And yet here we are.

One might make a rather weak argument that all shareholders and investors need to know is that the company’s stock price is going up, along with its market capitalization. Lack of transparency is not an issue in this scenario because the growth is so strong. Who cares where the money is really made and lost? Shareholders and investors should care, because these businesses are in many ways a house of cards. Older, classic businesses are basically subsidizing new, cool businesses that drive more interest even though they’re often financial black holes.

Speaking of which.

Today, The Wall Street Journal claimed that “Microsoft needs to open up more about its OpenAI dealings.” This is a less than timely report, given that Microsoft has invested over $11 billion in OpenAI since 2019 and has spent well over $20 billion every quarter for the past few years building out the datacenter infrastructure that OpenAI requires to work its non-profitable magic. But the WSJ is simply asking the same questions I’ve been asking all along, if belatedly: How long can Microsoft expect investors to tolerate big losses from OpenAI without getting antsy?

Don’t get me wrong, there is real reporting here, this isn’t Bob’s gadget blog (or The Verge, ever eager to jump on whatever topic is hot today). The publication notes that Microsoft has never disclosed its losses from OpenAI, just that an “other, net” expense line in the July report was $4.7 billion. It has never disclosed its total stake in OpenAI, how the investment is structured, or its fair market value. It has never even disclosed the percentage of OpenAI it owns.

The author of this report expresses the same frustration that I’ve been voicing for years: “Microsoft doesn’t identify OpenAI in its financial reports as a related party, and it doesn’t say anything about its transactions with OpenAI in its related-party disclosures,” even though OpenAI is, by definition, a related party of Microsoft under accounting rules. In other words, Microsoft is required to report this information, but it does not, and no regulator at the SEC has ever raised a complaint, formal or otherwise. This is what a world without regulation looks like to Big Tech: A target-rich environment in which Big Tech makes the rules, breaks them as it sees fit, and the world’s governments stand by, idly doing nothing while the bubble waits to burst.

Microsoft’s opacity regarding OpenAI has begun to draw criticism, the WSJ claims, because the company’s relationship with OpenAI carries a risk for investors that it is not disclosing. But Microsoft is playing a game that I call “Show me the money.” And the money Microsoft is showing investors is difficult for them to resist: A market cap just shy of $4 trillion and a parade of fat and happy investors willing to follow it down whatever rabbit hole it says is relevant today.

Microsoft has a chance to change its ways in its next financial report, which is due this week, the WSJ points out. Sure, but they have had that chance every quarter, and if history teaches us anything in this case, it’s that Microsoft will only tell us those things that make it look good.

I have to think that OpenAI is not one of those things.