Microsoft: You Must Beat These 3 Risks

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

Where is Microsoft (NASDAQ: MSFT) headed?  In my recent post “Audacious Goals Will Thrust Microsoft Higher,” I uncovered businesses that could point Microsoft towards gains in 2013.  This post, in contrast, covers Microsoft’s risks.

Below are three competitive risks that Microsoft must address in the coming year.

1. Potentially Low Windows 8 Market Share

The success of Microsoft’s new mobile Windows 8 operating system rests on the shaky shoulders of an unlikely candidate – Nokia (NYSE: NOK).  Once the leader in handset-making, Nokia’s business took a major hit.  Users relegated Nokia’s Symbian operating system to technical obsolescence, and rising costs plagued the international company, leading to layoffs.

Luckily for Microsoft, Nokia has been busy inking deals and hyping its new Lumia phones.  For example, Nokia signed an exclusive deal with Verizon (NYSE: VZ) to carry its Lumia 822 phone.  I wrote about this in “Say Your Prayers, Nokia.”

The deal is a good one for Microsoft’s mobile software, because it gives Nokia a partnership with the carrier that added 1.5 million net new subscribers last quarter.  AT&T, in contrast, added just one-tenth as many net new customers as Verizon.  While Nokia already has phones for carriers like AT&T and T-Mobile, Nokia’s deal with Verizon puts its sleek $99 phone (with a two-year contract) in front of a host of new subscribers. 

Microsoft needs Nokia as badly as Nokia needs Microsoft.  I am expecting their partnership to lift the mobile aspirations of both companies.  But a Nokia failure would likely dash Microsoft’s mobile dreams.

2. Server-Side Problems

IBM (NYSE: IBM) and Oracle (NYSE: ORCL) are undisputed leaders in server-side products and services.  IBM and Oracle are vertically integrated and offer customers unique hardware that comes pre-installed with their own varieties of the UNIX operating system.  According to Microsoft’s Annual Report:

The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers.

In short, by not catering to the specific Linux products that many customers demand, Microsoft could lose from the get-go.

Also, as the commercial world continues to move to the cloud, Microsoft faces fierce competition from a host of other companies, in addition to IBM and Oracle.  Companies like Amazon, VMWare, and Salesforce.com offer compelling products, and Microsoft’s SQL Azure also faces competition from open-source (free but not customized) products.

To succeed in the highly competitive cloud and server spaces, Microsoft will have to cross-sell its IT products and create compelling offers for the many niche businesses that need them.

3. Continued Innovation

According to Microsoft’s 2012 Annual Report:

Our model for growth is based on our ability to initiate and embrace disruptive technology trends, to enter new markets, both in terms of geographies and product areas, and to drive broad adoption of the products and services we develop and market.

Microsoft is adept at launching products and services across the globe.  The last risk is one that investors cannot forecast: when disruptive technology forces Microsoft to pivot its strategies, will executives steer the company with agility?

For example, Microsoft missed the tablet market by a couple of years.  However, one must ask if the company missed an opportunity to grab market share early, or if it was smart to wait and compete with the new entrants instead of trying to take on Apple head-to-head. 

This final question of Microsoft’s ability to spot future business models and tech shifts is one that investors must ask themselves before committing to Microsoft over the long-term.  Can Microsoft executives spot upcoming tech trends and capitalize early?  No one can tell for sure.  But as it looks now, Microsoft’s broad array of tech businesses, despite their risks, are deeply entrenched and are here to stay.

 


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Microsoft, and Oracle. Motley Fool newsletter services recommend International Business Machines 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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