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Microsoft Corp - Adapting to the New Market Trends

April 21, 2014 | About:

Microsoft Corp (MSFT) is one of the largest technology companies in the world. Selling software, hardware and other services, the company reports revenue in two segments: Devices and Consumer segment, which includes Licensing, Hardware and Other divisions, and Commercial segment, which includes licensing and other divisions. Commercial segment represented 58% or total revenue in fiscal 2013. The company sells its products through OEMs, distributors, large account resellers (LARs), value-added resellers (VARs) and online. Most computers operate with Microsoft’s operating systems, establishing the firm in a leading position in the PC market.

Recently, the company was reorganized with the departure of CEO Ballmer, and has reported good results so far, with second quarter 2014 earnings surpassing analysts’ estimations. However, the company is still remodeling its structure and execution has its risks. New CEO Satya Nadella has already made several important decisions. Expecting to make additional strategic updates on the company's core businesses over the coming weeks, analysts are waiting to see how these turn out.

The Company’s News

Microsoft faces some threats in the consumer world, as consumers are moving away from the world of PC and laptops towards mobile devices. Therefore, the changing preferences have left the company with fewer customers, which choose tables and smartphones over PC world and Microsoft’s Windows OS. Nevertheless, Microsoft is an enterprise which continues to build up, providing software, servers, datacenters and cloud platforms, with solutions that keep appealing to customers.

Indeed Microsoft is dominant within the PC market; however, its latest OS hasn’t been that popular as its platform is more suited to touch interfaces and tablets, being harder to adopt on desktops. Nevertheless, it is natural for Microsoft to develop more mobile device focused products, like new Windows 8, as the PC market has been slowing down over the last two years. Microsoft has released Office of the iPad, allowing users to use this product through a year subscription to Office 365. Bundling other benefits, such as Office 365 for students for a full four-year period, the company seeks to surge its adoption. This new release has been followed by a new Enterprise Mobility Suit, a service that enables enterprises to manage mobile devices, apps, services and access an identity control, shifting from the firm's previous "Windows first" strategy. Seeking to create a more cohesive structure, Microsoft is trying to unite different product lines and develop new services that run with Windows software, such as tablets and smartphones, strengthening the links between users and the Windows OS productivity software, and ecosystem.

Another latest release of the company is Windows Phone 8, or Windows Phone Apollo. Samsung Electronics Co. Ltd., Huawei Technologies Co Ltd., HTC and Nokia have teamed up with Microsoft to introduce OS based devices. Windows Phone OS is expected to grow fast in the next few years. These partnerships are likely to produce some positive results in the near term, especially with Nokia in the team, and its dominance within emerging markets such as the Asian and Latin American.

Gaming World

As one of the three largest providers of gaming hardware, the firm has recently introduced the Xbox Live online gaming service, enabling users to play online Xbox games with other subscribers and download new games straight from the device. This platform is fast-growing and has reached a base of 40 million subscribers. However, Microsoft’s Xbox One competes strongly with Sony Corp. (SNE)’s PlayStation 4. According to a statement recently release by Sony, approximately 7 million PlayStation 4s have been sold worldwide as of April 6, while Microsoft's sales have been around 5 million since the product launched in November 2013.

The company is still creating innovations within the gaming area and has released two universal apps: Halo: Spartan Assault and Skulls of the Shogun, two game apps made for Windows Phones and PCs, priced $4.99. These Apps are not new, but the innovation lies in its usage, labeled as for both Microsoft Phone and PC, and being only paid for once across all devises. Of course universal apps haven’t been invented by Microsoft. Both Apple Inc. (AAPL), and Google Inc. (GOOG) have apps from the App Store and Google Play apps that can similarly be downloaded across various devices.

Competitive Environment

Indeed competition is strong, and Microsoft has seen some challenges recently particularly from Google Inc. (GOOG). They emphasize their businesses on different markets, as Google focuses on search and online advertising mostly, while Microsoft’s focus is selling software. Nevertheless, both companies have been increasingly pitted against each other because of the market’s general conditions: Google is selling Android as to ensure the predominance of Google search, and Microsoft is targeting online advertising to compensate the drop on sales.

Moreover, Apple’s Mac computers increase pressure, as they compete with a loyal customer base. Windows-based PC shipments have slowly eroded from approximately 95% market share a decade ago to 90% today owing to shifting consumer preferences and the rise of OS X and Android-based tablet computers and smartphones. In this context, Microsoft will have to work out a way to transport its dominance within the PC market to the mobile device world. The release of Windows 8 with its touch screen surface platform and the soon-to-be released Nokia Windows phone, are expected to increase Microsoft’s presence within the market, and reverse market share declines.

Bottom Line

The company has been working to improve its performance, and operating structure has been changed at the beginning of fiscal 2014, rearranging its segments. This business reorganization has allowed the company to evaluate organic growth more effectively and increase productivity. Overall, Microsoft reported solid results for fiscal second-quarter, with shares surging 3.5% in extended trading. As of revenue, it was up 14.3% year over year, reaching $24.52 billion. Indeed the consumer side of the business is in decay, but a growth on tablets has been reported. Analysts think the strong growth in the last quarter points to that Microsoft is on the right track, and expect the already strong Commercial software business to continue gaining share in a growing market. Nevertheless, analysts are also regarding the decline of Windows OS business as a complicated element for the company’s long-term future, and the push into devices will weigh on Microsoft's margins.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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