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Can Microsoft Rise Above the Gang of Four?

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

With all the media attention currently being showered on the technology sector's favored sons-Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB), and Amazon (NASDAQ: AMZN)-(AKA-The Gang of Four), former goliath Microsoft (NASDAQ: MSFT) finds itself in the uneasy position of underdog. Each company has its own area of expertise. Google has clinched the search market. Facebook dominates social networking. Amazon is the master of online commerce. Apple is a leader in electronic devices. It seems as if there is still room for a fifth element that controls software. Unfortunately, the shark tank world of information technology is not that simple.  The future of Microsoft depends on four major factors:  customer shift to mobile devices, online retail, social media and cloud services.

Shift to Mobile is a Game Changer

As information makes the shift to mobile platforms, the risk for Microsoft is the possibility of getting squeezed out of the operating systems game in the very near future. Apple and Google both have dominated the mobile world with their respective OS and Android products. Microsoft has delivered on its long anticipated Windows Phone 7, but it looks a bit dated and has not excited buyers. The jury is still out on Microsoft's entrant into the tablet arena. Although the advertising campaign seems first-rate, some worry that the Surface may have been brought to market tardy, (a recurring case of too little too late), in a market that already has the Amazon Kindle, Apple's iPad and Mini and others.  Although some features seem innovative, the version that includes Windows ARM operating system (a more mobile but somewhat scaled back version of Windows 8 Pro) does not allow the download of third-party software unless it is developed using Windows Runtime (WinRT) (these can be purchased from the Windows Store).  In addition, there is pressure from the non-mobile side from Google as they release (with Samsung) their super light and affordable Chromebook (which uses the Chrome operating system).  In addition, Google may release what has been tentatively named the X Phone this year.  It is being developed by Motorola (recently purchased by Google) and may include new image and gesture recognition functions.  Rumors abound regarding a possible X Tablet coming to market soon after.  Google's Project Glass, an augmented reality head-mounted display (think high-tech eyeglasses) hit the runways in fashion shows this year.  Facebook is currently struggling to make money through its ads on mobile devices.  Unfortunately for Microsoft, I don't see ground-breaking mobile innovation coming out of their hardware stables right now. 

Online Retail is Booming

If anyone wonders about the future of online retail, this year's Christmas sales should settle the matter.  Black Friday e-commerce sales increased 26% this year to produce a record-breaking $1 billion in sales.  Amazon benefitted the most directly from this with its impressive share of the online retail market (around 30%).  Google has benefited through its search engine and Google AdWords program.

A bright spot for Microsoft on the hardware side of the game (which could lead to growth in online sales) is the Xbox and Xbox Live product line. The Entertainment and Devices division which controls Xbox sales reported annual operating income (YTD) thru June 30, 2010, of $679 million. With the promotion of its Kinect system and the new XBox 720, the company thinks that number can get much bigger. At the very least, Xbox Live gives Microsoft a window into middle-America's living room that is the envy of the tech world. It is up to them to monetize it to its maximum potential.

Another potential source of online revenue (this time, in the search engine category) is Bing which has not been well-received and has cost the company a significant chunk of its treasure. Marketed as the newer, better alternative to google.com, the product failed to entice internet users to change over and has commanded only 15% of online searches. Hopefully, they will abandon or fix this fool's errand before it goes the way of Zune music player and destroys more shareholder value and further embarrasses the company.

Is Social Media Worth the Price?

Facebook has a commanding share of social media but November 2012 data shows a loss of 100 million visits. Google+ lost half of its meager 1.29% share in November, as well.  This could indicate that consumers are suffering from social media fatigue.  Microsoft has also released its version of a social media network called Socl but has not spent much on promoting it.  In this case, bringing up the rear may benefit Microsoft.  The entire social media genre seems to rely on the promises of "clicks to cash" which were so prevalent just prior to the dot.com bust of the 1990s.  Facebook's product, unlike Apple's iPhone or Google's search engine or Microsoft's Windows 8 (for that matter) is not a must-use-on-a-daily basis kind of product.  Until, they break down that wall, I am skeptical.  Facebook's stock seems to have caveat emptor written all over it.

Cloud Services Are a Growing Business

Estimates place Amazon's Web Services Division's cloud services revenue at around $1 billion.  No wonder both Google and Microsoft have entered the market.  It is too soon to tell how Microsoft's Windows Azure will compete against new and established competitors in the field.  But, again, Microsoft brings up the rear on innovation.

As a kid, my friends and I would try to figure out the thrust of bottle rockets by tying fishing sinkers to them. When I think of Microsoft, with all its positives and negatives, those gunpowder missiles trying to hoist various weights against the force of gravity comes to mind. Can its intellectual horsepower overcome its sluggish innovation and lethargic execution to once again become a rising force in technology?

Apple suffers from innovation expectancy, whereby they are only as good as their next world-changing product (which of course is unsustainable).  The question is whether that expectation is baked into the current stock price.  Will Apple TV be their jumping of the shark?  Facebook has many of the same symptoms of companies in the 90s tech boom (translating eyeballs to dollars).  And with dubious purchases such as the $1 billion Instagram purchase, I wonder about their leadership's decision-making ability.  Amazon and Google have their fingers in enough of the right things to maintain a strong presence.

Apple, Amazon, and Google are not going away anytime soon but I think there is enough wind in Microsoft's "sales" to unseat Facebook as number four.

The future depends on Windows 8.




lukey911 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Facebook, and Google. The Motley Fool owns shares of Amazon.com, Apple, Facebook, 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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