Microsoft's Windows 8 Has Failed, Now What?

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The rise of tablets and smartphones has shaken up the once dominant “Wintel” PC paradigm. In an attempt to re-establish its supremacy, Microsoft (NASDAQ: MSFT) designed Windows 8 to be a hybrid operating system, useful on a variety of platforms.

But Windows 8 adoption has been poor -- consumers seem baffled by the changes. Meanwhile, Windows tablets are selling poorly, and Windows Phone remains in fourth place. Can Microsoft turn things around, or should the company cut and run?

Windows 8 has failed

Microsoft released Windows 8 last October. The new version of Windows was the biggest redesign of the operating system since Windows 95. Unfortunately, consumers seem baffled by the changes, and Microsoft’s hardware partners have been public in their disappointment.

It’s hard to quantify consumer dissatisfaction with Windows 8, but a quick perusal of the comments section of nearly any article dedicated to the operating system reveals widespread dissatisfaction.

“I found a wonderful fix for Windows 8,” Robert McAdams commented on one of my previous blogs. “I deleted it and downloaded Windows 7.”

Browsing user reviews of laptops on Amazon reveals much the same. The top review on this budget Toshiba laptop states clearly, “I highly recommend if a person can go with another windows [operating system] installed on your computer.” Another reviewer offers a backhanded rebuttal: “Windows 8 is not as bad as they say.”

Meanwhile, Windows 8 has failed to generate the kind of PC sales Microsoft’s hardware partners were expecting. Acer’s president remarked that Windows 8 was “not successful” and Samsung blamed the struggles of its Ultrabooks on the “less-competitive Windows platform.”

Windows Phone is falling further behind

As Windows 8 struggles on PCs, Windows Phone 8 isn’t doing much better. According to comScore, Windows Phone represents just 3.1% of the total smartphone market in the US, behind BlackBerry, Google’s Android and Apple’s iOS.

This data was for the quarter ending Jan. 31, and thus doesn’t take into account BlackBerry’s new lineup of BB10 devices. The Z10 and Q10, along with Samsung’s Android-powered Galaxy S4 and a likely updated iPhone, should keep Windows Phone in fourth place in 2013.

No one is buying Windows tablets

Likewise, Windows tablet adoption has been tepid, to say the least. Back on March 15, Bloomberg reported that, until that point, Microsoft had only sold about 400,000 Surface Pros, and just over a million Surface RT tablets.

Other hardware makers haven't had much success either. In fact, Samsung told CNET it planned to avoid making Windows RT tablets for the foreseeable future.

Hope for Microsoft

That said, there’s still hope for Microsoft. I wrote back in December that I wouldn’t short the Windows maker then, and I still wouldn’t now.

Despite its failings with Windows, the company has Office, a software suite that Microsoft is turning into more and more of a cloud product every year. In 2010, Microsoft rolled out Office Web Apps -- a dumbed-down, cloud version of Office. The 2013 version of Office -- Office 365 -- has become as web-friendly as ever, and has embraced a subscription model.

At some point, it seems inevitable that Office will become a full-fledged cloud program paid for with a subscription. When that day comes, Microsoft should find plenty of eager customers on a variety of operating systems.

Then there’s Xbox. Microsoft looks to be slowly turning its video game console into a dedicated entertainment hub. All eyes seem to be focused on Apple for TV’s next step forward -- in reality, Microsoft’s Xbox could prove to be the future of smart TV.

Lastly, Microsoft is currently the second-best positioned tech company when it comes to web services. In addition to a cloud-based Office, the company also has SkyDrive, Bing and Outlook. So far, Microsoft has done little with Skype, but the popular messaging and call service could be a potent tool. As cloud computing continues to become dominant, Microsoft’s web services give it an edge for the future.

Put money to work?

But while I wouldn’t short Microsoft, I wouldn’t put money to work either. As it continues to update Windows 8, Microsoft seems committed to keeping the dream alive. Ultimately, the danger is that Microsoft will waste money on Windows in an attempt to keep the operating system relevant. That could mean an underperforming stock.

Rather, if traders want to play to play the decline of Windows, it would be best to do so through Microsoft’s partners Nokia (NYSE: NOK) and AMD (NYSE: AMD).

Nokia has basically gone all-in on Windows Phone. Nokia has released 12 different Lumia phones at various price points, all of which run on Microsoft’s smartphone operating system. While Microsoft reportedly has plans to release its own phone should Nokia fail, Nokia appears unhedged.

Shares of Nokia are up nearly 27% in the last six months, while short interest is less than 9%. If Android, iOS, and BB10 can cement their hold of the smartphone market, Nokia shares should underperform.

Meanwhile, AMD is perhaps the one company most exposed to the decline of the traditional PC. While rival chip makers like Intel and Nvidia have branched out into mobile chips, the company has largely stayed focus on its traditional bread and butter: CPUs and GPUs for desktop and laptop PCs.

While AMD is working on getting into mobile chips, the company is running out of time. As Leo Sun notes, dwindling cash reserves could force the company into bankruptcy sometime in 2013.

Trading the death of Windows

With the changes going on in the world of computing, Microsoft couldn’t afford to sit by and let Windows slowly become irrelevant. Yet, the gamble it took with Windows 8 seems to have failed.

But because Microsoft is so heavily diversified, the death of Windows doesn’t mean the death of Microsoft. Other companies however, like AMD and Nokia, might not be so lucky.


Joe Kurtz has no position in any stocks mentioned. The Motley Fool owns shares of 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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