Microsoft: Why You Still Can’t Afford to Rest Easy

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

Once again, Redmond-based Microsoft (NASDAQ: MSFT) has successfully demonstrated how to ruin a great product and an otherwise stable source of revenue by broader plans that are not in sync with the real world. And that gives a fresh start to Sony (NYSE: SNE), a company that’s been down in the dumps for quite some time now and has actually been the target of an activist investor in recent weeks.

At the recent E3 in Los Angeles, the hallowed destination of hard core gamers, who themselves are a fast-disappearing species by the way, Microsoft and Sony made back-to-back rival game console offerings in the forms of the Xbox One and the Playstation 4, respectively. But while the latest avatar of Microsoft’s popular game console was clearly aimed at a more holistic family entertainment scenario, the Sony Playstation 4 highlighted just the fact that such a device was meant for – gaming. And the latter strategy paid off handsomely, at least in the initial phase.

The puzzling decisions

That apart, Microsoft also seemed to have committed marketing hara-kiri by announcing restrictions on playing used games on the device, not to mention pricing it a good $100 more than its rival console. And the fancy Kinect motion sensor accessory does little to justify the enhanced price tag, in the opinion of some gaming enthusiasts. The Sony Playstation 4 also does not require periodic Internet connectivity, another fact that has helped it to go one up on Microsoft’s gaming device.

The broad scenario

The crux of the matter, however, still lies in Microsoft’s ambitions of transforming what is otherwise a great purely gaming device into a jack-of-all-trades, with features such as Skype and live television representing different aspects of all-round home entertainment. That again is part of its larger policy to arrest the increasing trend of gamers shifting their loyalties to smartphones and tablets, as people prefer to multitask in an increasingly mobile world. But, what Microsoft has perhaps failed to realize is that this approach may in the process lead to the steady alienation of its loyal group of hardcore gamers, painstakingly built up over a span of 7 years with devices such as the hugely popular Xbox 360.

The way Microsoft has projected the Xbox One makes it evident that they are probably banking a lot on the recent trend of Xbox Live subscribers to increasingly stream content through their devices. At the same time, it cannot be denied that the overwhelming presence of mobile devices such as smartphones and tablets in the lives of people today is likely to mar the potential popularity of a nearly $500 all-in-one device. On the other hand, Sony is sure to carry on with its gaming-plus entertainment options such as Netflix, Amazon Instant Video and Hulu LLC in the relatively less expensive Playstation 4 as well. And last but not the least, with Microsoft delaying the launch of the Xbox One in emerging Asian markets until the end of next year, as opposed to Sony’s simultaneous Christmas release of the Playstation 4, the audience’s decision seems to be a foregone conclusion as of now.

The ‘dissatisfied others’

And it’s not only gamers we are talking about here. Microsoft’s seemingly ‘excessive’ restrictions on the Xbox One usage are sure to alienate retailers such as GameStop (NYSE: GME) as well. This is because a large part of their sales volume can be attributed to the market for used video games, which Microsoft seems hell bent on shutting out of its ecosystem. With GameStop already facing headwinds due to the dwindling market for console video games, such moves will surely not go down well with them. At the same time, companies such as GameStop will now be grateful to console manufacturers like Sony that have placed zero restrictions on used games.

Look who’s calling

Having said all that, all is not lost for potential believers in the stock. Microsoft’s Windows 8-powered Lumia range of smartphones that are manufactured by Finnish handset maker Nokia, is witnessing a steady rise in market share in the crucial US region. Although the competition in the form of Google’s Android and Apple’s iOS operating systems continue to be way ahead, a recent survey has found Microsoft’s Windows phone platform record a healthy 5.6% rise in sales as compared to an increase of 3.8% last year. What’s more, that places the Windows phone operating system at third place, bypassing nearest contender BlackBerry. And going ahead, sales are bound to rise given the wide range of prices of Windows-based smartphones.

A walk in the clouds

That brings us to the last part of the trilogy – namely Microsoft’s famed Office software suite. Or should we say Office 365, to be more specific, referring to the cloud-based version of the software suite? With Microsoft Office continuing to be the corporate customer’s favorite set of office applications, Office 365 is making strong inroads into a market that comprises many companies that need to comply with regulatory obligations such as HIPAA, thereby placing it several notches ahead of its most serious contender in this area – Google Apps.

The fact that Android has a perceived high susceptibility to malware has exactly not helped Google forge far ahead in the enterprise space as of now, leaving open several opportunities for Microsoft. That apart, Microsoft has already earned brownie points with proven advantages over Google Apps such as better offline access and onsite flexibility with Office 365. At the same time, the real success of Office 365 will obviously be a part of Microsoft’s overall Windows 8 experience, which has till now been a letdown, to say the least. One can only hope Windows Blue comes to the rescue at the nick of time, before the Windows 8 launch resembles a potential Vista-like situation.

Some final thoughts

As usual, Redmond continues to emit mixed signals as of now, but the bright spots are slowly becoming bigger and brighter. At the same time, things like a better array of apps for the Windows 8 phone marketplace will really help Microsoft build up on its strong competitive advantages. However, numerous instances such as missing out on the smartphone revolution at the time when it happened or the ill-conceived launch of Windows 8 have comprehensively proved that the company may have a serious problem in gauging the pulse of the people. And that’s something which simply paves the way for disaster in the long run. While I do not recommend selling the company’s shares as of now, this is definitely not the time to acquire any new ones.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool owns shares of GameStop 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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