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MSFT and Some Matters Arising
Posted by: Muhammad Bazil (IP Logged)
Date: August 23, 2012 11:23AM

In the month of June, the biggest software maker in the world, Microsoft Corporation (MSFT), unveiled its first tablet, Surface: a Windows 8 and Windows RT-enabled mobile tool. It will compete directly with iPad, Apple’s (AAPL) mobile tablet that is dominating the industry. This will be the first time that the software giant is abandoning its approach of depending on hardware retailers for showcasing its bellwether operating system. And, apart from Apple, this device will also be contending directly with Amazon (AMZN), as well as Google (GOOG) among others.

In the past Microsoft has tried to meet up with Apple, Google and Samsung in the mobile market. Regarding this, smartphone offerings that it has released have been limited due to their developer support and so have had little or no impact in the market, while its Luma handset series, collaboration with Nokia (NOK) hasn’t yielded any significant revenue as yet.

Some of the attempts that the company has made in the past in entering into the hardware market, but in which it has met with failure, include its Zune (an MP3 player) as well as its Kin smartphone. The release of the Zune in 2006, which was meant to compete favorably against the iPod, had to be discontinued, while the Kin smartphone, which was meant to take away some of the market from iPhone and released sometime in 2010. only lasted for three months.

In addition, Microsoft’s acquisition of aQuantive, an online ad agency, has not paid off. Since 2007, when Microsoft made the purchase, its online advertising business has been largely unprofitable. According to the most recent quarterly results from Microsoft, the company’s online services business division has lost almost $500 dollars. Even though Microsoft says that its advertising business has been improving, it nevertheless lowered expectations regarding the ability of this unit to grow and deliver a profit.

So what does this mean for Microsoft? Well, this means that the software giant is nowhere close to the position it envisaged it would be today regarding online advertising when it purchased aQuantive back in 2007 making an 85 percent premium payment for this company’s stock. Even though the aQuantive acquisition did not turn out right, the business struggle Microsoft has experienced is largely due to its inability to meet Google in its control of the search engine turf.

Also, regarding Microsoft’s latest quarterly financial results, the company has had to write down $6.2 billion concerning mainly its acquisition of aQuantive that has failed to yield the expected result. The write down significantly affected the results of the last quarter as the company declared a loss of $492 million, which is a first for the company in the last 20 years at minimum. Consequently, if this write down was not included Microsoft would once again have turned out a profit.

Another highlight from the last quarter's financial results was a 4% revenue increase to see this figure getting to $18.06 billion. This was lower than the expected $18.13 billion from analysts. The total operating expenses for the period in question went up by 60%, while its entertainment-and-devices business arm jumped by 20%. The Xbox and Xbox console is under this business arm.

As expected, Microsoft, just like its technology industry peers such as VMware Inc. and Intel Corp., reported a high business demand. Clients, it was said, were attaching more software plus services to a sale as well as purchasing multi-year licenses. Such deals were partly responsible for a 17 percent increase in revenue (unearned) as compared with that obtained a year earlier.

Finally, even though many will be of the opinion that Microsoft still remains a good buy, it is important for the company not to continue with its failed attempt at entering into the hardware market. This seems to be the direction that the recently released Surface tablet is tasking. Therefore, it seems there is a need for a different strategy. And, for those investors who are forever bullish on Microsoft it is necessary to be reminded that change is the only constant thing in life. Therefore, Microsoft can certainly travel down south.


Stocks Discussed: MSFT, AAPL, AMZN, GOOG, NOK,
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