Microsoft Can Afford Long-Term Support for Tablets, Phones

 
 
By Wayne Rash  |  Posted 2012-07-22
 
 
 

Microsoft Report Points to Significant Future Growth Despite Quarterly Loss


Much has been made regarding Microsoft€™s fourth quarter results because on paper, the company reported a $492 million loss. But this is really a situation in which a loss isn€™t really a loss. It€™s just a convenient means of balancing the books.  

If you take out a $6.2 billion non-cash €œgoodwill impairment€ charge related to its ill-fated acquisition of aQuantive and deferred revenue from Windows upgrade offers. In effect, Microsoft chose this quarter to write off the aQuantive acquisition that actually happened in 2007. 

Others have noted that Windows sales are off $600 million, including those deferred revenues, when compared to FY2011. According to a number of analysts, this sales slump is really in anticipation of the release of Windows 8 this coming October. For Microsoft, this is very good news. 

So how can these losses be good news? If you take out the aQuantive loss and the deferred revenues, Microsoft would have reported a profit for the quarter. In other words, it€™s a paper loss. Microsoft is still making plenty of money. The even more important factor is that people are waiting for Windows 8 and analysts are expecting a strong demand when the OS ships in October.  

This is not particularly good news for Microsoft€™s competitors. The company is essentially clearing its decks for action and is in a very strong position to use its strength when it releases Windows 8, the Surface tablet and Microsoft Office in October. And the company remains financially strong. Microsoft has just under $60 billion in the bank. 

By having all that cash under its mattress, Microsoft can hang in there and spend money to make sure that Office, Windows 8 and the Surface tablet are given the time and resources to be successful. Unlike most companies with smaller resources that have to bail out of a product line if it isn€™t a near-term success, Microsoft is in its product business for the long term. It€™s prepared to continue supporting products for a very long time€“perhaps years€“until they can dominate their respective markets. 

This has happened before. Microsoft continued to pour money into the PlayStation, and continued to lose money on it, until the competition was eventually worn down through sheer persistence. The same thing happened with Microsoft Office, which spent the best part of its first 10 years in existence toppling competing office productivity suites. Office continues to dramatically outsell its competition, some of which is free, to the point that it completely dominates the office productivity market. 

Now Microsoft has taken a very big step and it€™s clearly planning to take the necessary action to support the Surface tablet and the Windows 8 operating system that defines its mobile strategy. Competitors can expect that Microsoft won€™t let price stand in the way of sales. Just as it€™s offering upgrades to Windows for $40, it can afford to sell upgrades to Office at prices that will cause market share to explode. 

Microsoft Can Afford Long-Term Support for Tablets, Phones


 

It can also afford to sell Surface tablets at prices much lower than what Apple is getting for iPads. Right now, as was the case with the PlayStation, Microsoft needs to get the devices into as many hands as possible so that there€™s demand for software. Once there€™s plenty of software for the Windows tablet, there will be more demand for hardware. Microsoft is giving Surface and Windows 8 the kick-start that it needs. 

There are, of course, a number of questions that remain. The most obvious is whether Microsoft€™s products will be good enough that people will want to buy them in large numbers. The second question is whether Microsoft€™s competitors will be willing to stand by and let Microsoft carry out its market plans unimpeded. Chances are Google will do just that. With Apple, it€™s hard to tell. 

Google is at somewhat of a disadvantage compared with Microsoft. It€™s not exactly in the same business, Google doesn€™t make money off operating systems and software in the same way as Microsoft, and it doesn€™t yet have as much cash on hand. So while Google does indeed have a tablet, it€™s more of a reference platform than a product intended to dominate the industry. Microsoft clearly plans to sell a lot of tablets and a lot of copies of Microsoft Office 2013 and Windows 8. 

Apple is another matter. The company has about twice as much cash on hand as does Microsoft, and all things being equal, could hold out longer in a war of attrition than Microsoft. But can and will are two different things. 

This means that you have to ask questions about Apple as well. Will Apple be willing to reduce the price and margins of its signature iPad and iPhone devices to match Microsoft? Will it be able to sell enough Macintosh computers to continue its push into the enterprise against Microsoft decades-long domination? 

The answer is probably not. If Apple were interested in competing on price, it would have done so already. Instead, Apple appears to be more interested in keeping profit margins up and to keep accumulating cash, at least until stockholders start demanding a greater cut of the dividend pie. This means that if Microsoft can make the Surface tablet appear to be as good or better in value when compared with the iPad and encourage the building of Windows Phones that are as good as or better than the iPhone, Microsoft can start to accumulate market share. 

Ultimately this means that Microsoft will need to hang in there and lose money for years until the perceived value of its products convinces enough people to buy them and causes the market share to make a decided swing in Microsoft€™s direction. With patience and care, Microsoft can do this, and in the process change the market. Apple could stop them, but probably won€™t. To paraphrase an old saying€“money is thicker than water, and Apple wants money. 

Rocket Fuel