Microsoft To Stay More Focused On Software Than Hardware

Apr.12.13 | About: Microsoft Corporation (MSFT)

A good way to study a company's near-term plans is to look at who the company is looking to hire. Griffin Securities examined more than 2,000 job openings Microsoft (NASDAQ:MSFT) currently has in order to discover any trends in the company's future goals. The findings were contrary to what Microsoft has been saying for the last year or so. The company is currently looking for 1,620 software engineers and 199 hardware engineers. A significant portion of the hardware jobs were linked to the company's existing products such as Xbox and Surface tablet.

Earlier on, Microsoft's CEO Steve Ballmer announced that Microsoft became a "devices and services" company, which means it would focus on building hardware as well as designing software and offering services. As a result of this announcement, many people started to speculate about Microsoft's next line of devices. More specifically, a lot of people were expecting Microsoft to design, build and sell its own phones and compete against Apple (NASDAQ:AAPL) and Samsung directly. Even Nokia's (NYSE:NOK) latest 20-F mentioned a possibility of a Microsoft smartphone as a threat to Nokia's turnaround plan. Microsoft's current hiring trends represent very little to no interest of designing a smartphone. Griffin Securities was able to locate only 90 job postings with a reference to Windows Phone and every one of those job postings were looking for software engineers.

Contrary to what a lot of investors think, Microsoft has very little to gain from building a smartphone. If we exclude Nokia's Lumia phones, Windows Phone enjoys a market share below one percent, and Microsoft can't really improve the situation by building its own smartphone. The company has already tried its chance with a tablet, and the results have been less than impressive. With the exception of Xbox, the consumers see Microsoft as an office/workplace company, and that isn't likely to change anytime soon, unless the company spins off its consumer business as a separate company.

Of course, there is always another possibility or opportunity for Microsoft. The company could acquire one of the well-known phone companies, let it keep its brand name and build its phones under that brand. At this point, the brands that come to mind are Nokia, BlackBerry and HTC. The acquisition would be similar to the way Google acquired Motorola and the way Sony acquired Ericsson. Out of the many companies that are currently in the business of building smartphones, Nokia seems like the best possibility. Not only Nokia is already integrated with the Windows Phone ecosystem, but Nokia also enjoys a patent portfolio and distribution network not many companies in the world can say they have.

Furthermore, as of April 3, Nokia can do whatever it wants with its stake at Nokia Siemens Networks. Even though this is currently the most profitable business unit of Nokia, if Microsoft wanted to acquire the company, it would have to sell its shares in the joint venture, because Microsoft isn't really interested in acquiring a company as large as NSN (which happens to employ more than 60,000 people and would increase Microsoft's existing workforce by 60% if it were to be acquired).

I still see this as nothing but a back-up plan in case everything else fails. Microsoft will surely give Nokia a chance to succeed, and this might take a few years. I don't think Microsoft will extend its hand to Nokia unless Nokia is in the brink of bankruptcy. This is because Microsoft has the time and patience to wait as well as the money to make the save if it is needed.

Through most of its history, Microsoft stayed away from hardware and focused on software and services to remain highly profitable. Obviously, software will have much better margins than hardware because software doesn't need supply chains or rare materials to build. Besides, each hardware item can be sold only once, whereas the same item of software can be licensed out year after year. Microsoft doesn't have to try to become an Apple in order to be a major player, and it should stick to what it does best and what it is known to do best.

In the short term and perhaps in the middle term, Microsoft is very likely to suffer from a soft PC industry. As the world is transforming from laptops to smartphones and tablets, Microsoft can't convert its customers fast enough. For example, if Microsoft's PC license sales drop by 20 million units, the company has to increase its smartphone and tablet license sales by 30-40 million units to make up for the drop. Currently we are not seeing this.

Regardless, I wouldn't rate Microsoft as a "sell" because the company is still solid and it still has a lot of opportunities to grow in the future. Just because the company hasn't gained a significant market share in the smartphone market doesn't mean it will not. The company will have to rely on its partners like Nokia for growth in this area, but the growth will eventually come. Furthermore, Microsoft's enterprise division is still strong and it will continue to be strong for the foreseeable future.

If you are planning to hold it for at least 3-5 years, Microsoft can be a good bet right now.

Disclosure: I am long MSFT, NOK, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.