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Microsoft - Thinking about Mobile

April 06, 2012 | About:
The Science of Hitting

The Science of Hitting

234 followers
I have a confession to make: I love the companies that I own. While that may cause me to hold a stock for a bit longer than I should when the valuation gets too frothy, I accept it as one detriment of getting enamored by the story of a company’s evolution over time. I like listening to all the conference calls and analyst events, and anxiously await the launch of new products like a kid on Christmas.

Recently, this anticipation has been for Microsoft (MSFT) and Nokia (NOK)'s Lumia 900, which will be released in the U.S. on April 8. As anybody who has been following the press around this launch knows, the views on the potential success of this product line have been polarized (as expected), with some continuing to shout of impending doom for these old tech giants while others proclaim that they have turned a corner. While I think it’s clear that no one knows how this will play out, I think we can narrow our focus down to a couple key areas that will potentially determine the success of the Lumia 900; the particular areas that I would like to briefly discuss are product cost, marketing, app store development and product differentiation.

Cost – The Lumia 900 will cost $99.99 at AT&T (subsidized price with two-year contract), which is half the price of the HTC Titan II (running Android; will also be released in early April) and the latest iPhone (16GB). I’ve thought about this for a long time, and still haven’t come to a conclusion (maybe readers can share their opinions): How important is upfront cost to the average smartphone consumer? With many plans running at a price at or even above the cost of the Lumia 900, I’ve wondered whether or not this is even a concern for many consumers; ironically, the shortening of the product life cycle that has been perpetrated (in large part) by Apple’s annual launches and upgrades could cause upfront phone pricing to be a more pertinent factor than it would be with a three to four-year device life…

Marketing – This is where the phone can get off the ground in a big way; Nokia has made it clear that the budget for this launch is multiples in size of what is generally spent on marketing a new product, and AT&T has made their commitment clear as well: Jeff Bradley, senior vice president of devices, noted last week that this is “a notch above anything we’ve ever done,” specifically noting that this includes the original iPhone launch.

App Store Development – This has caught a good amount of press and is fundamentally important to the success of the ecosystem; if the app offerings are not comparable to that of the competition, then Microsoft and Nokia might as well pack it in (at this point, Microsoft has roughly 70,000 apps in its app store, compared to 400,000 for Android and 600,000 for Apple).

Yet, many authors seem to simply stop at that statement; the reality is that this offering will need to be developed in tandem with growing demand for the products, which is current being undertaken. As of writing, Microsoft has taken a step to fuel this growth by committing to finance the development of Windows Phone versions of well-known apps in order to build up their offering. The head of business development at Foursquare (mobile social network) had this to say about the program:

"We have very limited resources, and we have to put them toward the platforms with the biggest bang for our buck… but we are a social network and it is incredibly important for us to be available on every platform."

By my estimation, this is all comes back to financial commitment; the app store is a key part of the ecosystem, and must be invested in as an integral part of the product offering.

Product Differentiation – When I say this, I’m not talking about the specs of the device; while that’s important to a specific group of consumers, your average buyer doesn’t know anything about the processor or the phone's capacity. My personal opinion is that for many people, this means simplicity of use, to the extent that it makes their life easier (think Siri); but as the smartphone continues to become a device that simply houses apps (which are roughly identical across all ecosystems), differentiation comes in two ways – the use/look of the operating system, and the ease/connectivity of those applications to other devices.

For the use/look of the OS, Windows has clearly stepped away from the iOS/Android layout; whether or not this will attract users is beyond me. More importantly (in my opinion) is the ease and connectivity of applications, particularly Xbox Live and Office. As devices continue to become different mediums for accessing content (like power point presentations, word documents, gaming, etc.), the key becomes interoperability; my hope would be that Microsoft has seen the writing on the wall for some time now and has a clear strategy for bridging the divide between smartphones, traditional PCs, and ultra books/tablets (I mean beyond the Windows 8 OS; I'm talking Office & XBL).

With all that having been said, I know that in the vast majority of instances like these, what I read about and eventually conclude is just a small piece of the equation, or little more than noise; in the case of Microsoft, I never was interested in the company because of what I thought they might potentially do in the mobile arena, and I don’t believe (at least in the near future, which explains why I rarely invest in this industry) that a failure to quickly grab share will impact the company in a material way.

When reading the comments on many financial articles, you often find polarized statements suggesting that a product or business development will either cause a company to fail or cause their stock to double in the next 12 months; but in reality, the impact is rarely as important as the initial reaction might suggest. Peter Lynch talked about this in “One Up on Wall Street”:

“The first thing to find out is: What effect will the success of a product have on the company’s bottom line? Back in February of 1988, I recall, investors got very enthused about Retin-A, a skin cream made by Johnson & Johnson… So what happens? Johnson & Johnson stocks jumps $8 per share in two days (January 21-22, 1988), which adds $1.4 billion in extra market value to the company. In all this hoopla the buyers must have forgot to notice that the previous year’s sales of Retin-A brought in only $30 million a year to Johnson & Johnson, and the company still faced further FDA review on the new claims.”

Microsoft is a $265 billion company, and generated more than $23 billion in net income last year; despite the polarized opinions about the Lumia 900 and its potential success or impending failure, there is one thing that’s clear: This launch will not make or break MSFT. It gets people to read articles and sells newspapers – but it’s not true. At some point in the coming months, a news article will break that either marks the early success or struggles of the Lumia 900 in the fight to grab share from the iPhone and Android devices; just remember that the reaction that follows on the street is little more than noise to the intelligent investor.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.4/5 (25 votes)

Comments

energywonk
Energywonk - 2 years ago
lumia may not break microsoft but its death by a thousand cuts. MSFT lost its paradigm hold the moment ipod was released, they were doomed when iphone was released. it doesnt matter what they do in mobile now they will only ever be a bit player. android and apple will rule. as mobile converges and cannibalises desktop they will lose their last stronghold. i dont understand why its so hard for people to see this. oh wait, yes i do, its called denial. get out now while the company still has some value. i give it 5 years before microsft is pushed well and truly out of the way.
energywonk
Energywonk - 2 years ago
just one of the many paper cuts that will doom microsoft. the problem with value investors (and buffet has taught us this) is they dont understand/nor should they try to understand technology. paradigms are short and losses are long.

http://www.portfolio.com/views/blogs/the-tech-observer/2012/04/11/bluestacks-software-lets-android-apps-run-on-pcs
The Science of Hitting
The Science of Hitting premium member - 2 years ago
"It's called denial."

Point to one piece of DATA that suggests what you've said is true; I've yet to see a single firm (Gartner, etc) predict that PC sales would decline over the next 5 years - yet I continue to hear that the PC is dead (btw, PC shipments were up 1.9% globally in Q1 of this year); would you mind circling that square?

By the way, those are some pretty long comments; did you type them on you iPhone/Android device, or on a computer? If you don't mind me asking...
energywonk
Energywonk - 2 years ago
depends which research you choose to read. i look around and i dont see too many windows devices in peoples pockets in fact cant remember the last time i saw one or RIM for that matter. in fact hardly any. probably need to be cautious on recent quarterly figures considering they were hammered last year. i do find it bizarre this is a value site with buffett obsession and yet people keep pushing msft as some kind of bargain. its a value trap no question. heres last years numbers. so in real terms pc sales are still down for 2012. dont get confused by low bases.

http://www.winrumors.com/fears-for-microsofts-quarterly-earnings-as-global-pc-sales-decline/

enterprise will continue to use PCs for a few more years but that is also changing i work in large national utility (in the trading division where high end pcs etc are required) and our staff is now switching from RIM and MSFT to Apple and android. the consumer market will increasingly favour tablets and low end netbooks that get the job done.

i would argue intel has much better moat and is still losing some share to ARM etc.

and as for gartner predicting pc sales will grow for next five years. who cares. of course gross numbers may increase due to developing world. but margins will shrink (look at lenovo making big inroads). besides if you are taking positions based on gartner research i really dont need to go on.

tech paradigms are a bad bet. you can point to all kinds of stats, did you even click that little link on apps that are emerging. stats are lagging indicators, take a look around? everyone is buying apple in consumer markets, everyone is buying android in handhelds. its not that hard................
The Science of Hitting
The Science of Hitting premium member - 2 years ago
Energywonk,

You talk about reading data, but then you simply point to stories from your personal experience; the article you linked to discussed one quarter of last year, and specifically mentioned the earthquake in Japan as a major factor that impacted Q2 sales.

You say it depends on what data you choose to read; I choose to read the 10-K's of the company's in the industry and the industry statistics - and both say that PC's are not dying.

If we're pointing to personal stories, here's mine - I've yet to meet a person who ditched their computer and only has a tablet. What I've believed from the start is that they are COMPLIMENTARY devices, and that anybody who can shell out $500 for a tablet will likely spend the $500 for a good PC/laptop as well; the strength in tablet sales mixed with stable PC sales suggests that this is likely true.

To be clear, I'm not only seeking out people who agree with me - if I found that to be otherwise, I would be concerned and rethink my position. Back to my earlier question - have you been using a PC for this discussion? And do you think that you will replace your PC with a tablet (if you still have one), or supplement its use?

"Everyone is buying Apple in the consumer markets" - is this referring to PC's? There's no doubt they've been doing better than historically when Windows had 90%+ market share; in 2011, Apple grabbed about 12% of all shipments. Of course, to say that EVERYONE is buying Apple isn't even close to true.

The great thing about investing is that people can take different sides of the trade; I'll keep my long position because I believe that PC sales will not implode in the coming years and that the company will continue to innovate in other areas like E&D (can't wait until Apple gets a real competitor in tablets like Win8, not "me too" Android); if any material changes happen, I'll reassess that position.

energywonk
Energywonk - 2 years ago
this whole article is qualitative!! tech paradigms emerging are hard to see until its in the rearview mirror. sony ruled walkmans until the didnt. VHS ruled until it didnt. the amount of cannibalism and cloning/integration that goes on in tech boggles my mind. what is microsofts competitive advantage? i see nothing that they do better on the cheap (labour etc cost side) and i see zero on the innovation/usability side. in otherwords they have zero moat. we still use windows xp in enterprise. most do as the more recent versions are rubbish and uptake unnessary. this is a key learning. you should look at more recent versions of MS software compared to XP and then compare to newer/leaner/clone OS's in regard to marketshare. browser also. and you will see uptake of new MS is not good. i am bored now. go long microsoft all you want but get a clue about tech works and who is using what.
energywonk
Energywonk - 2 years ago
ps. this company is living off legacy, they print money until they dont. i reiterate my first point. if buffett understood this company he would bleed it and put into better future prospects as he did with berkshire.
The Science of Hitting
The Science of Hitting premium member - 2 years ago
"you should look at more recent versions of MS software compared to XP and then compare to newer/leaner/clone OS's in regard to marketshare. "

You probably mean like Windows 7, right? At last count (this is dated because I haven't kept up), the company had sold more than 350 million licenses - and more people are running it than XP...

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