I have been using Windows 8 for a while a now and I am thrilled with it. I don't miss the start button one bit and I think that the operating system is perfectly positioned to take advantage of the new generation of touch PCs that will eventually flood the market by next year.
The reason why Microsoft (MSFT) has sold less copies of Windows 8 than many analysts hoped for has nothing to do with the operating system itself. As Gartner reported recently, worldwide PC shipments dropped to 76 million units in Q2 of 2013, a 10.9 percent decrease from the same period last year. This marks the fifth consecutive quarter of declining shipments, which is the longest duration of decline in PC history.
And why is this happening? One of the reasons is the sudden popularity of the tablet, especially in the developing world. As Gartner also noted:
We are seeing the PC market reduction directly tied to the shrinking installed base of PCs, as inexpensive tablets displace the low-end machines used primarily for consumption in mature and developed markets. In emerging markets, inexpensive tablets have become the first computing device for many people, who at best are deferring the purchase of a PC. This is also accounting for the collapse of the mini notebook market.
So not only have tablets displaced PCs in developing markets, more and more people are using the tablet as their primary computational device in mature and developed markets. That's bad news for the PC industry across the board, but especially if you don't have a tablet offering of your own worth mentioning.
Unfortunately for Microsoft, their Surface RT tablet initiative proved a flop and the company took a $900 million inventory adjustment write-off. For a company that has been in the forefront of the PC revolution from the very beginning, this is quite embarrassing. Because besides the fact that Microsoft didn't catch the tablet wave from the very start -- thinking tablets would never become popular -- when it did decide to get its feet wet, it did everything wrong. Unfortunately, Microsoft now is going to have to do a lot to catch up. Will it be able to catch up and compete in the space? The verdict so far is negative.
Another evolutionary problem for Microsoft is its Office Suite. More and more individuals, corporations and municipalities are using open-source solutions such as LibreOffice. I have been using LibreOffice for a long time myself and I have no idea what Microsoft can offer me to become a paying customer.
Another reason to be worried is Google (GOOG) itself. Google's online suite of tools, known as Google Apps, is just fantastic. The writer is great and offers a multilingual spell checker on the fly. Years ago, the only reason I used Microsoft Word was because it was the only solution if you wanted to write in many languages. Today that is not an issue anymore.
Microsoft's Office Suite generated $1.5 billion in revenue for the latest quarter, but that included $782 million deferred revenue from last year's 2013 upgrade offer. Without that, sales would have been $782 million, or about 27% less than last year's Q2 of $995 million. The only bright spot is that business sales are offsetting consumer sales and accounted for 88% of sales, up by about 7% y-o-y. But an increase of 7% is nothing to cheer about.
Also, the fact that less and less individuals are using Microsoft Office products might also mean Microsoft Office might be a dying bread. I admit Microsoft is fighting back with Office 365, but in a world where all these products are free, how long can Microsoft expect to see growth?
Microsoft also has lost (so far) the devices revolution. While BlackBerry (BBRY) was the original smartphone company, Apple (AAPL) with the iPhone took the world by storm, and then Google with the Android platform took the world by storm even further. Today Google's ecosystem accounts for the lion's share of smartphones and tablets sold worldwide.
Microsoft has been trying without much success to become a device company. Its alliance with Nokia (NOK) so far has not established Microsoft in the devices space. Microsoft had a chance to buy Nokia in full a while ago, but it was too stingy to pay a premium. Now that Nokia announced it will be buying the other 50% of NSN that it does own from Siemens (SI), it's probably too late.
In fact Microsoft had many chances to establish itself in the devices space, but it has been making one mistake after another. Microsoft had the world's premier ecosystem, only to see Google becoming number one in a very short time. If Gartner has it right, by 2017 there will be about 1.5 billion devices running Google's Android platform, and only a third as such (about 570 million) running Windows. Not only that, but the amount of devices that will be running under Apple's iOS will be about equal to Microsoft's (504 million). Now that's really embarrassing, because Apple does not make any popular software and does not command the lion's share of the software that runs the world's PCs. Apple is a devices company (the best there is) and nothing else. And Apple will have in circulation as many devices as Microsoft!!
Microsoft's problem is not Windows 8, and making a new version with a start button will not ignite sales. Sales of Windows 8 will increase and do just fine next year, when the new chapter in PC history begins, the touch-screen PC revolution.
Microsoft's problem is an issue of evolution. So far Microsoft has been behind the curve in just about every innovation one can think of. Maybe it has simply become content, once being the number one technology company in the world. Maybe management is simply old and doesn't want to experiment too much. Whatever it is, it seems that Google and Apple are always several steps ahead of it around every corner.
And while Microsoft is a very attractive stock -- I would recommend buying it anywhere below the $30 level -- in the end it is the willingness to experiment and to innovate that will bring new products to market. For some reason, Microsoft just doesn't seem to have this innovative spirit at this point in time. And in the end, that might be the reason why Microsoft is trading at a low multiple of 12 and Google at a multiple of 27.