Microsoft And The Windows 8 Conundrum

| About: Microsoft Corporation (MSFT)

There is no question that sales of PCs are finally hitting the proverbial wall. When I look around the web, I see a miasma of agendas passing for analysis, self-serving sell (and buy) side analysts and poor information being passed around and repeated without thought. In a former life, I was a classic Microsoft (NASDAQ:MSFT) hater. If it weren't for my gaming habit, I probably would have bolted to Linux for real years ago.

As a content producer, now I firmly see my computers as tools that just need to work. I'm not afraid of change nor am I unwilling to learn how to do things better or differently. So, in the end I don't really understand the need to beat up on Windows 8. Is the Start Screen a little odd? Yes. Do I still work much the same way as I did under Windows 7? Yes.

That said, the latest report from IDC, along with the spate of downgrades led by Goldman Sachs' (NYSE:GS) sell rating, tell me that the situation is as much about controlling the narrative -- for whatever reason -- than it is about the market situation. And after a quick perusal of the Internet today, you will see exactly what I'm talking about and, frankly, what plagues a lot of this industry -- the endless parroting of sound-bites for page hits.

There is no doubt at this point that sales of Microsoft's Surface RT and Pro tablets have been underwhelming. But I would also say that the Surface Pro is a PC. Anything running a 17W Intel (NASDAQ:INTC) Core i5 is a PC, folks -- just because it has a touchscreen and a detachable keyboard doesn't not make it a PC. Frankly, I wasn't at all tempted by the first generation Windows 8 hardware simply from a technology perspective. Most of the criticisms leveled at Windows 8 have been heard with every major release of Windows, including the introduction of the "start button" in Windows 95. Color me unimpressed by it.

So, what's the conundrum? Simple -- it's that Microsoft was exposed in these past 3 years as being woefully unprepared for the rise of mobile computing and have had to take drastic steps to rectify the situation, including doing something very un-Microsoft -- not making nice with everyone in its OEM and developer network. The truth is that Windows 8, just like Windows Phone OS 7, is a transitional product for a transitional period in technology put out by a company in transition.

And with behemoths like Microsoft transitions are never smooth.

Literally everything we'd become used to in computing is undergoing rapid change. Not all of that change is good or high quality. Some of it is simply pulling a first mover with slightly better stuff -- Google's (NASDAQ:GOOG) Android filling the void left by Windows Mobile and Symbian, for example, to become the anti-Apple (NASDAQ:AAPL). A lot of it is junk.

PC sales continuing to drop is a bigger issue for Intel and AMD (NYSE:AMD) than it is for Microsoft due to having revenue streams not tied to Windows. Intel is about to launch an architecture -- Haswell -- whose primary purpose is to run machines rapidly slowing in sales, which its predecessors helped to occur. Let's not mince words, if Windows 8 is a problem, then so are Intel's chips, as all of its offerings last fall were wholly inadequate to power a proper Windows tablet. This next batch will be better, but will they be good enough to not continue sabotaging the conversion of Windows to a smaller form factor? The Intel bulls say yes, emphatically. I remain circumspect.

The saving grace is that the majority of game development for the foreseeable future will be done on x86 CPUs, not ARM, thanks to the upcoming round of consoles being powered by AMD's Jaguar cores. ARM is not going to take over the world in the next 12 months unless literally no one buys a PS/4 or Xbox next. Even though Wii-U sales have been disappointing, there is still a console market in 2013-5. This may not translate into Windows sales, but it will translate into Microsoft sales.

In short, software is getting cheaper by the day.

And that's where I see things going. Microsoft is taking a lot of heat for trying to wring as much revenue out of a dying model for its OS as it can before we finally enter the low-cost/free operating systems world where development costs are offset by application sales. They are being pulled kicking and screaming into it. Evolve or die. The early upgrade price for Windows 8 is an example of Microsoft getting a clue. A better example is Office 2013.

I love the software-as-a-service (SaaS) model. Nothing screams sales like a low barrier to entry for a great tool. And like it or not, Office is a great tool that is literally a steal at $99 per year or $9.99 per month for 5 licenses. It also de-incentivizes piracy for a large swath of users. Adobe's (NASDAQ:ADBE) subscription revenues, as a comparison, jumped 53% in Q1 with 479,000 people signed up. SaaS is the future and Microsoft embracing the cloud with Office is necessary for its survival.

The problems with pricing for Windows RT and Office will have to change as well. How will any OEM build a 7" tablet to compete at the $199-$299 price point while having to pay $100 for Windows and Office? The answer is, they can't. If Microsoft is serious about tablets going forward, ditching the Office license and letting users migrate to the SaaS model for Office on an as-needed basis is what they will have to face up to. At that point, the conundrum surrounding Windows 8 should be behind us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: I pay Microsoft $10 per month for Office 2013.