This Sleeping Giant Is About to Wake Up

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

Microsoft's (NASDAQ: MSFT) near-monopoly position in operating systems for PCs and its Microsoft Office applications have made it the world's largest software maker. The high barriers to entry created by its market dominance are reflected in its high returns on capital.

Deteriorating Market Position

The company has averaged a pre-tax return on tangible invested assets in excess of 57% since 2003. This is near impossible to do without substantial competitive advantages, which is why investors are concerned that Microsoft's profits will soon come crashing down under the weight of changing technology. Cloud computing, tablets, and similar products have lowered switching costs for current Windows OS users.

The Windows operating system has been in decline for some time due to the adoption of alternatives like Apple's (NASDAQ: AAPL) OS X. It used to be that people were afraid to buy Apple's computers because they were unfamiliar with the operating system, but time has allowed ordinary computer users to become comfortable with OS X. As a result, more and more people and businesses are switching to Apple devices.

Microsoft has also lost focus on its core business by investing in things like search engines. Bing has been a financial failure; Microsoft had no business trying to compete with Google (NASDAQ: GOOG). Google's main threat is from Facebook (NASDAQ: FB), which has an information advantage that threatens Google's market position. However, Microsoft has no real advantage in the search business except that it has a lot of money to throw its way. Microsoft is finally starting to de-emphasize non-core projects to focus on Windows and associated devices.

An Ecosystem of Products

One of the keys to Apple's success has been its creation of products that integrate well with other Apple products. For too long, Microsoft has been a one-trick pony, with only its Windows operating system to carry the day. But now, although late to the party, Microsoft is finally rolling out a comprehensive suite of products that will put it back on path to growth.

The increasing adoption of cloud computing has weakened Microsoft's grip on customers, so the company rolled out Office 365. Office 365 is essentially the cloud version of Microsoft Office for Windows. It also offers other services based on a subscription model. As Microsoft puts its applications on the cloud, enterprise users -- who often can't afford to have major technology disruptions -- will be more likely to stick with Microsoft's platform.

In addition, Microsoft rolled out its Surface tablet to compete with other products in the space. The Surface is compatible with most other Microsoft devices and has had a decent showing in stores so far.

Success Is on the Horizon

Microsoft is essentially copying Apple's ecosystem model, but there's no shame in boosting profits. I doubt Microsoft will ever top Apple's products in terms of quality, but introducing a comprehensive suite of integrated products will dissuade customers from leaving for other devices. The company's transition from a PC-only model to a more diverse ecosystem of products is a good start that could wake this sleeping giant.


titans8904 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend 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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