It is n
o secret in the market that Microsoft (MSFT) stock is underperforming. From a peak of 37 USD in 2007, the stock has passed the 25 USD floor and nobody is bullish about the stock. What is happening to the once most valued company of the world?
While Microsoft did a pretty good job in conserving and improving their established business, in new business they adopted a simple strategy: A day late, a dollar short. They first missed the Internet Search boom, allowing Google to emerge in a dominant position, then they missed the MP3 player bandwagon, then Smartphones and last, but not least, they missed the tablet wave. While MS has a lot of cows to milk, they failed to develop new high growth high margins business in the last few years and now their position may be jeopardised because of the new trends emerging in the market.
Until tablets things were not that bad for Microsoft. While they had no presence in other businesses, the market trends did not immediately threaten Microsoft’s market. The market was growing but Microsoft was out of this growth. It switched from being the dominant power in the software market to being the dominant power in the PC market, a big but relatively slow growth market. They were losing relevance but were far from being irrelevant.
Tablets changed this. With performance of ARM chips increasing and power consumption of PC chips going down, it is clear that they will soon clash in a market segment. Intel heartily wanted that this to be in top smartphones but their Atom bullet misfired and they could not field a single Atom phone as of this writing. This meeting now is expected to be in an upper market segment: Netbooks.
With tablets becoming more powerful, they are now approaching the performance range of netbooks and this threatens Windows and Office, Microsoft’s biggest cash cows. They needed to react. Fast.
Microsoft’s reaction was manifold. First they are aggressively marketing Windows Phone 7 as a mobile platform and made a partnership with Nokia, which may give Windows Phone 7 the critical mass they need to become relevant in the Smartphone Market. Second, they are porting Windows 8 for the ARM platform, thus entering the tablet market ahead of Intel and clashing directly with Google and Apple.
Android woes with Honeycomb were a boon for Microsoft, because if they get Windows 8 right they will not be too late for the party. But they still face an uphill battle. They must put a strong position in smartphones and fight for netbooks/tablets in the next two years. They must do it right and very right. If they succeed they will make Windows fortress stronger to Google and Apple penetrations. If they fail, they will soon see their windows share being eaten by the bottom market.
The market is punishing Microsoft because it sees the risks to Windows and Office and those two ventures undertaken now will not be cheap and will not be won in a month or two. Until Microsoft comes with something meaningful with tablets and smartphones the stock will not go up.S|A
Marcelo Tavares
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