The Odds Are Increasing That Microsoft’s Business Will Collapse
As scary as this may sound, I kind of have the same opinion. Microsoft is simply trying hard to cash in on their successes. I do not see major innovation coming from them. They may have a huge research & development, but most of the new technologies are coming from Apple and Google. Apple is hardware and Google is software. It is only a matter of time before Apple and Google will take over Microsoft's cash cow and it will be too late for Microsoft to realize this.
The Odds Are Increasing That Microsoft's Business Will Collapse A few weeks ago, the market delivered its verdict on the relative future prospects of Apple and Microsoft. Apple's prospects are better, the market said. And in the past few weeks, that vote has only become more decisive. The market still thinks Microsoft's long-term prospects are pretty good, though. The stock is trading at a respectable 14X P/E. The company has cash flow gushing out of its ears. The consensus is that Microsoft will keep growing, just more slowly. But the odds are increasing that even this will prove to be wishful thinking. Before we begin, a quick review of where Microsoft's revenue and profits come from. Microsoft has a lot of different businesses, but as you can see from the chart below, the vast majority of its profits come from Windows and Office. Microsoft Operating Profit And now on to Microsoft's predicament... The world has changed radically in the past few years. The Internet has continued to free app-makers from dependency on Windows or any other desktop platform (and, thus, from dependency on Microsoft). Apple's iPhone has revolutionized the mobile business, unleashing a whole new wave of personal computing devices. Apple's iPad seems on its way to supplanting the low-end PC business. Importantly, none of these trends depend in any way on Microsoft's original monopoly and cash cow, Windows. None of these trends generate so much as a dollar of revenue or profit for Microsoft. (Microsoft is nowhere in mobile. Or tablets. And it is reasonable to think that, in these two huge growth businesses, nowhere is where Microsoft will always be). Google, meanwhile, is trying to do the same thing to Apple that Microsoft did to Apple 15 years ago: Separate software and hardware and create a ubiquitous software platform for the world's developers to build on. This is a smart strategy, and it's resonating in the developer and consumer communities: Google's Android and Chrome started slow, but they're gaining momentum rapidly. What's more, Google is not just undercutting the alternatives on price--it's giving away its products for free. Once again, the Chrome/Android momentum has nothing to do with Windows. Once again, it doesn't benefit Microsoft in any way. Now take a look at what Microsoft's biggest Windows customers--Dell, HP, and the other big PC manufacturers--are up to. Dell is in talks with Google to begin developing devices designed to run Chrome (and who can blame it--if it doesn't do this, it will be left behind in the next wave of consumer devices). And HP just bought the wreckage of Palm so that it would have a better mobile operating system with which to compete against Apple. From Microsoft's perspective, these last two developments are disasters. The Future Will Be PC-Centric? Only In Microsoft's Dreams As recently as a few years ago, Microsoft was still arguing that the future would be Windows-centric. Sure, there would be millions of connected devices, the company said, but they would all orbit around the desktop PC, which would remain the center of the personal tech universe (and, thus, remain an ongoing source of immense "platform" profits). The explosive uptake of iPhones, iPads, and Android-based devices is increasingly making this view seem preposterous. The desktop PC isn't the center of anyone's universe anymore. The Internet is. And the Internet doesn't require Windows. In fact, it's not hard to envision a future in which the "desktop PC," as Microsoft currently defines it, becomes an oddity--a strange throwback to a world in which a single local hard drive (or a box of floppy disks) constituted the center of someone's work life. (Consider the absurdity in today's world of syncing a mobile device with a single desktop PC. What about all your other devices? What about the inconvenient location and single-point-of-failure of that single PC? Why not just sync that PC--and every other device you own--with the cloud! You don't need a fancy operating system to do that). In short, the monopoly platform characteristics that have protected Windows all these years are breaking down. The PC's relative importance in the world of personal technology is dwindling, and Microsoft has not been able to transfer Windows to other platforms. Google will soon be offering a free alternative for remaining PC-like devices, which, at the very least, will put pressure on Microsoft's margins. Add all that together, and there's little good to say about the future of the Windows platform. And Now On To Office And then there's Office, the other huge source of Microsoft's profits. Google has launched an Internet-centric version of Office: Google Apps. For now, Google Apps is inferior to Office for everything except collaboration. But it has all the hallmarks of a classic disruptive technology. Specifically, Google Apps is cheaper, easier, and more convenient to use than Microsoft Office. How do we know this? Because Google Apps is taking over the low-end of the market. Google Apps is also steadily improving its features and migrating toward the middle of the market, which is what disruptive technologies do. And it is already causing Microsoft to have to offer its own free Internet-based version of Office and cut the price of its latest version of desktop one to remain competitive. (Pause for a moment and consider that: The only way Microsoft can compete with the free version of Google Apps is to offer a free version of Microsoft Office to match it. Even if Microsoft Office were indisputably superior to Google Apps, which not one review we've read has suggested, how is that going to help Microsoft preserve its massive Office profits?) Big companies are starting to ditch Microsoft Office for Google Apps. If this becomes a trend, Microsoft's second huge cash cow will be under immediate threat. When will that happen? Maybe not this year or next year. But in all likelihood soon. So, Remind Us Again What There Is To Be Excited About In Microsoft's Future? Microsoft Operating Profit Take another look at the chart of Microsoft's operating profit. The vast, vast majority of that profit comes from two businesses that are under aggressive attack. What's more, Microsoft has no obvious way to parry that attack. One of its two huge competitors, Apple, is miles ahead of it in the growth of the most exciting and fastest-growing segment of the market, mobile devices. The other--Google--is giving away its competitive products for free. Microsoft will NEVER be able to do that. (Analysts are applauding and stomping their feet for the 4 percentage points of search market share Microsoft has clawed back in the past year. What they're overlooking is how much Microsoft has PAID to gain those share points. The odds are that Microsoft will never be able to build a large, profitable search business of any kind, let alone one that could fund a complete transformation of its business model into giving away Windows and Office for free.) Right now, the investors are concluding that Microsoft will gradually become the equivalent of a technology utility--a boring but necessary provider of the software that runs the world's business community. A smaller, more optimistic crowd is still arguing that, one day, Microsoft will be able to turn its fortunes around, and fight its way back into an industry leadership position. What almost no one is talking about is a third possibility, one that becomes more likely by the day: The possibility that, a couple of years down the road, Microsoft's business may just completely collapse.
Amit Jindal Aquevix