Ballmer: Microsoft Not Giving An Inch To Apple
Maxwell 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) is a very large and diverse business. While the company is still primarily driven by its PC and software businesses, it has bankrolled itself into a variety of other businesses. These businesses include the online service business, the entertainment and device business, the new and growing Windows smartphone business and its Skype online communications business.
While some analysts might say that Microsoft already has plenty on its table, the company's CEO Steve Ballmer is not satisfied. In a recent interview he promised that Microsoft would challenge tech giant Apple (NASDAQ: AAPL). Mr. Ballmer said "We are trying to make absolutely clear we are not going to leave any space uncovered to Apple. We have our advantages in productivity. We have our advantages in terms of enterprise management, manageability. We have got our advantages in terms of when you plug into server infrastructure in the enterprise. But we are not going to let any piece of this go uncontested to Apple. We are just not going to -- what's the expression people like to use? -- leave any stone unturned." My interpretation of this statement is that Mr. Ballmer considers challenging Apple to be a high priority.
One area that Microsoft has begun to challenge Apple in is the smartphone business arena. In 2011, Microsoft began the challenge by forming a partnership with Nokia (NYSE: NOK) to produce and sell smartphones. The partnership obligated Microsoft to provide its Windows 7 phone operating system, while Nokia would provide the phone hardware. Microsoft made a big investment in Nokia, in the hope that it could enter into the smartphone market, and eventually challenge Apple and big smartphone manufacturers like Samsung, LG Electronics and HTC, which use the Google (NASDAQ: GOOG) Android operating system. The Nokia Lumia 900 smartphone, with the Windows 7 operating system, was launched in the United States in April, but has not been very successful. Windows Phones accounted for just 1.7% of U.S. smartphone sales.
In June, Microsoft announced that it would be releasing its Windows 8 operating system later this year. Microsoft bragged that the new system would be unique, and would be able to share information seamlessly with its Window 8 tablet and its Windows 8 PC operating systems. Unfortunately for Nokia, Microsoft warned that the Window phone 7 operating system won't be upgradeable to Windows Phone 8. As a result of the Microsoft announcement Nokia's smartphone sales dropped dramatically. With the announcement of the Windows 8 rollout, it is obvious that Microsoft is very serious about challenging the Apple/Google duopoly. However, it opened up serious questions about the future of the Microsoft/Nokia partnership. What we know for sure is that "the first Windows Phone 8 operating system phones will come from Nokia, Huawei, Samsung, and HTC, and will be built with chips from Qualcomm (QCOM)." Gaining market share in the smartphone market is critical for Microsoft, because in 2011 the smartphone market grew by 60% and had sales totaling more than $200 billion.
Tablet
Microsoft also has plans to challenge Apple's industry dominating tablet computer, the iPad. On June 18th Microsoft presented its tablet computer to reporters. The computer was named the "Surface tablet - a computer that had all its software and hardware made by Microsoft." The Surface will not be "just a competitor to Apple but also a rival to such longtime PC manufacturing partners as Hewlett-Packard (HPQ), Dell (DELL), and Acer." Microsoft plans to make the Surface available to the public in time to take advantage of late year holiday sales. The company will release two versions of the Surface. One will be powered by the Intel (INTC) X86 chips, and the second will be based on ARM Holdings Plc's technology and, powered by Nvidia's (NVDA) Tegra processor.
The release of a tablet computer with hardware that is made by Microsoft is highly unusual. It is because Microsoft would generally license out its software to other computer hardware manufacturers. That is why there is little doubt that Microsoft's release of the "Surface" will cause friction with other computer manufacturers, "many of which have been investing to develop their own Windows 8 tablets and may not want to compete directly with Microsoft." Michael Gartenberg, an analyst at Gartner, said "they're taking their destiny into their own hands. It's a bold move, but it's a very risky one. This could turn into Microsoft's next Zune or its next Xbox."
Conclusion
While most people would consider Microsoft to be an extremely successful company, I believe that its top executives are not satisfied with the company's direction. The company's primary business, the sale of Windows software, grew by only 4% in the first quarter, because worldwide PC growth is slow. The company's second largest business, the Entertainment and Device business, saw sales decrease by 16% in the first quarter due to slowing Xbox sales. The company's Skype division is "interesting and intriguing," but it has not yet been able to convince investors that it will be worth the $8.5 billion that Microsoft paid for it. Finally, Microsoft is still smarting from the $6.2 billion write-down it took as a result of the aQuantive purchase. For all of the reasons that are listed above, I believe that Microsoft's CEO Steve Ballmer is desperate for the company to succeed in other business areas. It seems that he believes that the mobile communications business, is a lucrative and promising area that Microsoft can succeed in. The big challenge of the mobile communications business comes from competitors Apple and Google.
There are still a lot of questions regarding Microsoft's entrance into the mobile communications business. Questions like who Microsoft will partner with, or whether it will buy a manufacturer, or maybe even manufacture its own devices, have not been answered. It is still too early to determine whether or not Microsoft can be successful in the mobile communication business. However, if the company is able to succeed, the payoff could be gigantic. In the meantime, Microsoft is still a pretty good long-term investment. Over the last year, the company's earnings per share increased by 89%, and its stock price increased by 10.5%.
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