Microsoft Windows 8 Fail: Now What?

| About: Microsoft Corporation (MSFT)

On October 26, 2012, Microsoft (NASDAQ:MSFT) launched its Windows 8 operating system. At the time, the Microsoft marketing machine ran at full throttle to hype the first Windows upgrade to hit shelves in three years. According to Steve Ranger, ZDNet, and a host of overzealous technology writers, the Windows 8 launch event was set to be "revolutionary," and the "biggest reinvention ever" at Microsoft. Microsoft engineers designed the Windows 8 platform to bridge usage gaps separating desktop, tablet, and smart phone interfaces. As the backbone of an entire ecosystem, the Windows 8 event arrived in conjunction with the Surface tablet and Nokia (NYSE:NOK) Lumia line up of smart phone launches.

On July 22, 2013, Matt Baxter-Reynolds and the same ZDNet online magazine opined upon "the death of the PC," as Windows 8 had then failed to energize its core business. This failure, of course, does extend over the Windows phone. At this junction in time, both Microsoft and Nokia shares are strong sells. Going forward, neither company will be able to productively build upon Windows 8 - through updates. The Windows 8 event may serve as proof that Microsoft is effectively a utility serving a declining PC market. Coca Cola (NYSE:KO) and Altria (NYSE:MO) are better options - for investors opting to mine healthy amounts of free cash flow paid out as regular dividends. The Microsoft business model serves little to no purpose as part of a diversified investment portfolio.

Windows 8 Updates

Windows 8 is notable for its touch screen, tile interface that is typically associated with smart phones and tablets. Windows 8 represents the first major attempt to effectively consolidate smart phone, tablet, and desktop computer interfaces beneath one umbrella. As part of this horizontal integration, Microsoft also eliminated its traditional Start menu, in a move that came largely to the dismay of long-time users. This Windows 8 strategy stands in direct contrast to The Apple Way, which calls for specialized software for each major platform. Detractor Kevin Williams blasted Microsoft's recent shift as "arrogant, heavy handed, and out of touch with user needs." In many circles, Windows 8 has been compared to New Coke, which was also a misguided attempt to sweeten a classic brand.

Windows 8 is now taking the fall for the declining PC market. Many corporations are apparently making decisions to maintain old machines, running Windows 7, or even Vista, instead of upgrading to Windows 8. According to research firm New Market Share data, Windows 8 license sales lag far beyond those of Vista - through the first eight months of both product life cycles. Recently, research firm Gartner issued a report highlighting the collapse of PC sales in Western Europe. Western Europe, as a bellwether for the industrialized world, is slogging through a 20% year-over-year decline in PC sales volume, for a total of 10.9 million units sold during Q2 2013. The Western Europe consumer PC market has especially collapsed behind a 26% sales drop throughout the same period. Meike Escherich, Gartner research analyst, rationalizes that sales have declined sharply largely in anticipation of new Intel chips and Windows 8.1. Still, Escherich notes that Windows 8.1 "will not fully compensate for the ongoing PC decline."

Neither Windows 8.1, nor the inevitable Windows 9, for that matter will turn back the slow motion train wreck of the PC market. The consumer is quickly transitioning to tablet and smart phone devices, while Chinese firm Lenovo effectively dumps cheap hardware onto the market. Taken further, The Windows Phone cannot deliver this ecosystem to growth while the PC market deteriorates as a commodity. The Nokia Lumia 1020 and its lauded 41-megapixel camera will change nothing.

I'm a Mac. I'm a PC.

Apple's (NASDAQ:AAPL) timeless "Get a Mac" campaign still defines the consumer electronics market. In a series of commercials, airing between 2006 and 2009, Apple personifies itself as a fashionable, yet eager to please hipster. Alternatively, the John Hodgman character as Microsoft is a technocrat, or office park relic in a tweed suit, who demands help simply to stay out of his own way. Taken together, Nokia and Microsoft are still remnants of 1990's suburban office park culture. On Wall Street, these two companies are losing goodwill. On Main Street, Nokia and Wall Street are far from cool.

On August 7, 2013, research firm comScore released its June 2013 U.S. smart phone subscriber market share report. The report presents averages of statistical data spanning the three-month period between March 2013 and June 2013. A quick review of the comScore tables does reflect the presence of a smartphone duopoly largely controlled by Google Android and Apple iOS. Taken together, this operating system duopoly now powers 92% of U.S. smart phone subscriptions. On the handset side of the ledger, Apple and Samsung are a respective one and two atop this chart, as original equipment makers. Each wing of the Apple iOS - Google Android duopoly expanded market share above the prior quarter. At the bottom of the heap, Windows is barely relevant to this smart market with its meager 3% share. Investors must recognize the Windows 8 failure is the locus of control behind deteriorating PC and smart phone sales in this ecosystem. In terms of real growth, the damage is irreparable.

The Bottom Line

On July 18, 2013, Microsoft released its fourth quarter and annual results for fiscal year 2013 ended June 30, 2013. For the quarter, Microsoft reported $5 billion in net income on $20 billion in revenue. These tallies do include $900 million worth of Surface RT tablet inventory write offs. Wall Street clearly was not impressed, as traders immediately dumped Microsoft stock to $31.40 - for a 13% loss on the following trading session. Windows 8 has now been thoroughly dismissed as a failure.

Microsoft shows no signs of altering its bread and butter playbook. Microsoft is effectively a utility that monopolizes its particular niche. Instead of achieving steady bottom line growth, Microsoft will simply mint robust, yet stable cash flow through software licensing to PC original equipment makers. Investors, of course, are well aware that the PC is now a cheap commodity, where growth is nonexistent. Again, PC sales are likely to continue their sharp decline through the near future.

On June 19, 2013, The Wall Street Journal reported that "people familiar with the matter" claimed that Microsoft was in "advanced talks" to purchase Nokia. The deal making allegedly broke down over Microsoft's refusal to pay a significant premium above Nokia's $15 billion in market capitalization. The Nokia - Microsoft alliance will further erode shareholder value, until these two former 90's growth engines agree to move on and part ways. The possibility of Nokia entertaining Google - Android executives and customers may serve as a catalyst to finally inspire real competition and growth at Microsoft. For now, however, both Microsoft and Nokia are strong sells.

Disclosure: I am long KO, MO. 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.