Expanding into new territories has its ups and downs, but can usually help a company improve its bottom line, create jobs, and increase brand awareness. By investing in Latin American countries such as Brazil, Microsoft (MSFT) hopes to take advantage of the growing need for cloud computing and other online products and services, along with increased interest in mobile phone technology. Recently, the company spent $100 million to build a technology center in Rio De Janeiro, Brazil. With an additional $5 million invested in its Sao Paulo center, Microsoft has definitely made an impression on the country.
How Microsoft plans to use these new technology centers remains unclear. Some have speculated the company plans to train new employees or use the center for research and development projects. Not knowing Microsoft's intent for these centers may cause some investors to question the reason for expansion in the first place.
Benefits of Expanding in Brazil
In a very short time, Brazil has turned into a technology hub - both for tech companies and aspiring entrepreneurs with plans to create innovative products and services geared towards e-commerce. With an estimated population of 193 million, the Brazilian government continues to work to develop its Internet and mobile phone networks. Help from companies like Microsoft and Intel (INTC), which plans to open its own technology center in Brazil, should provide new jobs and help Brazilian startups promote goods and services online. Amazon (AMZN), for example, has expanded AWS to help businesses create an online presence and solve big data storage issues through cloud computing.
Since most analysts believe cloud computing will continue to change the way companies conduct business online, startups and small, established businesses in Brazil (and around the world) need to find cost-effective, secure ways to communicate online. Cloud computing reduces IT costs by providing hosting capabilities without the need to rent or buy in-house computer servers (or maintain them). Oracle (ORCL) and EMC (EMC) both provide cloud computing and data storage services to Latin America.
Mobile More Popular than PC
However, understanding what people in Brazil and other countries want and need from the Internet and other technology could pose problems for companies in the future. While businesses require better IT systems to conduct business, regular consumers rely more on mobile phones than PCs for communication and to browse the Internet. In Brazil, people rely more on mobile phones than personal computers - an estimated 260 million mobile phones vs. 70 million PCs exist in the country. For Microsoft, this may be an excellent opportunity to expand its Windows Phone line. Recently, Apple (AAPL) opened a retail store in Rio De Janeiro to showcase its iOS devices.
For companies like Microsoft that want to expand Windows Phone in this region, determining consumer demand and then overtaking the competition may prove more difficult - as demand for smartphone devices may not grow as fast as the number of companies that offer these devices.
Online payment service PayPal, owned by eBay (EBAY), has also seen growth in Brazil after partnering with local telecom company Vivo to provide online payment services. Paypal experienced some problems early on in building a customer base as many people use mobile phone apps rather than logging onto a PC to pay bills and conduct other online monetary transactions. The mobile app platform is one PayPal has not yet perfected, but will improve over time.
The mobile phone market continues to grow throughout this region. With increased demand for online services via mobile device, companies like Microsoft could see huge returns on investment in a short period of time.
Impact on Microsoft Stock
With a disappointing year that included lackluster sales of its new Surface tablet, the company's first reported quarterly loss, and the sudden departure of Stephen Sinofsky, who had been with the company for over 20 years, sinking millions in an emerging market that's seen a rapid increase in competition may not sit well with investors right now.
Sales and revenue for 2011 totaled $69.94 billion. Currently, the company has $10.71 billion in long-term debt and $22.94 billion in free cash flow. The upcoming holiday season may prove disastrous if the company fails to out ship or at least break even with competitors. Unfortunately, news of expansion and investment in Brazil may not have much effect on stock value for now as this type of expansion may take years before the company sees a return.
In the meantime, investors should take a close look at how management deals with sluggish sales and new faces. Investors should also consider future investments when it comes to expansion - particularly in the Asia-Pacific region. Even though there's money to be made in both the Latin American and APAC regions, Microsoft needs to maintain a balance between investing in the future and generating continuous revenue today.