Will This Company Rule the OS Space?

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Microsoft (NASDAQ: MSFT), the world’s largest software maker, reported that the company’s revenue in the three months ended in December, 2012 rose to $21.46 billion, yielding EPS of 76 cents. Microsoft gave no details in the report about the sales of its Surface tablet. The company marked its debut in the hardware industry last year when it unexpectedly announced plans to start selling the Surface.

Microsoft’s hardware venture was a smart move to popularize Windows 8, an ecosystem designed to run on PCs, tablets and mobile phones. With the launch of Windows 8, the company made the best decision for its future. This article will focus on how the company can emerge as a leader in operating systems.

The Future of PCs and Mobile Computing

Computer makers and Microsoft are facing a prolonged slump as PC shipments are forecast to drop for the second year in a row in 2013. They fell 4% in 2012 and will slide another 1.5% this year, according to estimates by JP Morgan Chase. Tablet sales rose 72% last year and will surge 54% this year, JP Morgan forecast.

The entire PC ecosystem is witnessing a phase of negative growth right now, and it’s uncertain whether the PC market will return to a growth market.  While I’m concerned with a shrinking PC market, I don’t think it’s an alarming situation for Microsoft.

I believe that PCs will have a stable market going forward. Given that PCs are necessary for industrial use and to a large extent for official and home use, I'm not really concerned with the survival of PCs. PCs are not dying -- and they will not anytime soon.

Windows 8: Microsoft’s Trump Card

Microsoft’s venture into hardware business was a tactical decision to defend its decreasing market share in mobile OS. Surface has gotten off to a disappointing start, and it’s not yet clear how formidable a competitor Microsoft will be. As far as smartphones are concerned, Microsoft is primarily depending on Nokia (NYSE: NOK) in capturing OS market share. The company said it would introduce its own smartphone if Nokia fails.

Microsoft is forging partnerships with Android heavyweights Samsung and HTC in an effort to popularize Windows 8. Meanwhile, Research In Motion (NASDAQ: BBRY) is set to launch BlackBerry 10, a new upgrade of its flagship BlackBerry operating system. It remains a favorite of enterprise customers due to its more robust security protocols in comparison to Google’s (NASDAQ: GOOG) Android or Apple’s (NASDAQ: AAPL) iOS.

In the smartphone hardware market, Samsung held the leading position in Q4, according to a report by Strategy Analytics.

Samsung sold nearly 63 million smartphones in Q4, giving it 29% market share compared to the 22% share Apple captured in Q4 with sales of 47.8 million iPhones, as Apple reported. Nokia sold 6.6 million smartphones in Q4, Nokia confirmed, including its Lumia smartphone running Microsoft‘s Windows Phone 8 operating system, for 3% share of total Q4 sales. Nokia actually trailed several other manufacturers in Q4, including Sony in third place, China’s Huawei and ZTE in fourth and fifth place, and Research In Motion in sixth place.

Windows 8 will primarily compete with Android, iOS and BlackBerry 10. From the above report it’s clear that Microsoft is lagging far behind Google and Apple in the mobile OS race with only Research In Motion trailing Microsoft.

Microsoft is relying on Windows 8 to carve out a position for its operating system in the mobile computing market, which is fast picking up. Mobile devices like smartphones or tablets aren’t usually used in computing for industrial purposes. But that scenario is bound to change with the advent of the Internet of Things.

The Internet of Things

It’s the idea that at some point billions of electronic devices and sensors will be connected to the Internet in parallel to the hundreds of millions of people who have access to the Internet.

It will entail everything from smart meters in your home to sensors on your brake pads and more. All of the information from those sensors feeds into big data analytics engines, producing useful results. These solutions can tell us when we need new brake pads, how much power we’ll use in the future, and even the best time to breed our cattle!

Opportunity for Microsoft

With the Internet of Things on the verge of becoming reality, Microsoft’s software business will see tremendous growth going forward. Its “Windows and Windows Live” division, which reported a 24% year-over-year increase in revenue in the most recent quarter, will grow by leaps and bounds, because no other operating system will have the ability to integrate hundreds of millions of devices apart from Windows. With the pervasive nature of Windows, which has become even stronger with Windows 8, Microsoft will be in a commanding position.

The “Server & Tools” business should also register impressive growth, with networking being the backbone of the Internet of Things. SQL Server and System Center sales will contribute more to Microsoft’s overall revenue growth.

The Bottom Line

Windows 8 will succeed, and I feel it will help Microsoft regain its market share in the overall OS business, from desktop computing to mobile computing. Once that is done, Microsoft will be firing all cylinders in software. 

Anindya7 has a long position in Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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