Microsoft in Transition
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Analysts were surprised by the Redmond, Washington giant’s 3rd quarter 2012 results recently. Microsoft’s (NASDAQ: MSFT) top-line revenue expanded 6% on very strong sales of Windows 7. And, really that comes as no surprise. Win7 is an excellent OS. And Office 2010 is an excellent product even though in both cases the major changes that came with their interfaces were met with resistance. Office 2010’s ribbon bar represented an evolution of the application tool interface that took some getting used to. Windows 7’s interface, as the evolution from the ideas in Vista, also created some culture shock for those moving from Windows XP’s venerable interface which had not changed since Windows 95.
While none of these interfaces changes were are radical as some of the ideas in the various flavors of Linux, such as Ubuntu’s Unity interface or Gnome 3’s changes, the importance of the resistance of the user base to change is very much on everyone’s mind now that Microsoft has unveiled their Metro interface for Windows 8. The early reviews are typically focused on how Metro and the Win7 interface do not mesh. But that observation misses the point.
Building the Platform
Microsoft is playing catch up in the mobile market and Windows 8 is their hope to forge a new path on the tablet, leveraging their dominance in both the desktop and enterprise computing. In the tablet space nearly everyone is now keying off of the brilliance of Amazon’s (NASDAQ: AMZN) Kindle Fire. At $199, the 7” Fire is not perfect but its form and price point is. Amazon has sold 5.6 million Fire’s in 2 quarters, including 1.8 million in the first quarter of 2012. The Fire acts as the mobile portal to all of Amazon’s services: retail store, cloud storage, video streaming library, book library, mp3 player and internet portal. Kindle is a brand that Amazon has built out of practically nothing, revolutionizing publishing.
From that perspective no one in the tablet space other than other Google’s (NASDAQ: GOOG) Android tablet makers has a 7” device. Samsung’s 7” Galaxy 2 and similar ones from the usual suspects like Acer and Asus offer alternatives to the Fire as Google attempts to integrate all of their tools into one ecosystem a la Apple (NASDAQ: AAPL). But Google’s tools are not an ecosystem, and they certainly are not Office, Exchange, SQL, etc. In this way, I think that Apple may be missing something by not having a 7” version of the iPad. Time will tell if I’m right. They have the wonderful and brand loyal ecosystem as well as supply chain dominance, the question becomes will they need the intermediate form factor of the 7” tablet/reader?
Microsoft is in the position with Windows 8 and its recent purchases of Barnes & Noble’s Nook division and its alliance with Movideo to build that same type of ecosystem across Asia building a content creation and distribution system that could be unparalleled in infrastructure. Self-publishing is a business that Amazon has legitimized and if Microsoft is smart they will court self-publishing authors the same way that Amazon did with high royalties and a perfect marriage of Nook with Word to do the desktop publishing. The current process to create a Kindle book is not fool-proof. Frankly, it’s annoying.
Once you throw in Skype, which is probably the biggest factor depressing Windows Phone sales due to mobile carriers being very scared of Skype and Microsoft’s ownership thereof, I would think the strategy becomes clear.
Pulling the Rabbit Out
It all hinges on Windows 8 and its ability to merge HTML 5 with the traditional desktop and not drive people away screaming. The Metro UI, first and foremost, has to be a great mobile UI, one that makes Android users think about switching. At the desktop level integrating Office fully into the cloud with all of your devices is where Microsoft holds an advantage over Android. As I’ve said in other articles, Android is nice but it’s nothing that special, it evokes no strong feelings. If Metro works on phones and tablet to create a feeling even remotely similar to an iPad then this market is a whole lot more interesting. I would ignore the hand-wringing and nerd-rage over Metro in Windows 8. They are reacting to a perception. It may slow down the desktop adoption of Windows 8 but that is a hurdle that Microsoft faces with every new OS.
Their single biggest missed revenue opportunity is piracy in my part of the world, Southeast Asia. Tablets and smartphones give them a way to monetize every installation of Windows 8 and collect their licensing fee for them. Creating revenue streams beyond easily pirated software has been the key to Apple’s success it will have be become Microsoft’s as well.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, 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. If you have questions about this post or the Fool’s blog network, click here for information.