After Steve Ballmer, Where Is Microsoft Headed?

| About: Microsoft Corporation (MSFT)

The constant decline of PCs is no stranger to us thanks to the infinite discussions on the topic in the last few years. The rise of tablets and smartphones has badly eroded the PC market, compelling leading PC makers to branch out into new territories. Microsoft's (MSFT) attempt to revive interest in PCs with its so-called "revolutionary product" Windows 8 failed to capture the attention of its users as they felt that Microsoft had focused a lot on design and compromised on functionality.

Not getting it right the first time

Microsoft has not been getting things right for awhile; it is the fact that Microsoft is not getting things right the first time that is leading to a decline in confidence of users. For instance, the company was forced to reverse some of the restrictive policies with Xbox, one after reasonable criticism. A similar action is underway with the Windows 8 operating system as the company has announced the release of Windows 8.1, an improved version of Windows 8. As the OS will be launched for general customer use in mid-October, it is tough to predict if it can be the product that can provide a much needed breather to Microsoft.

After 13 long years

Last week, the shares of the company rallied an impressive 7% after the news of Steve Ballmer's decision to quit the company hit the markets. During his 13 year long reign as the boss of Microsoft, Ballmer saw a paradigm shift in the fundamentals of IT industry and took a number of decisions, most of which have been held responsible for the downfall of Microsoft. While, Ballmer spearheaded some of the greatest mistakes made by Microsoft (Find the list here), he also made some significant contribution to the company.

It is not quite possible for Microsoft to make big amends for follies made in the past, but it is certainly feasible to work on growth areas going ahead. One of Ballmer's major contributions to the company is the enterprise and cloud group, which has in fact been a savior amidst the declining PC market and fierce competition in the mobile and tablet sphere. For the fourth quarter of 2013, Microsoft's Servers and Tools business posted a 9% growth on a y-o-y basis driven by increased adoption of premium versions of Windows and SQL servers.

The rivalry: Microsoft Vs Google Vs Apple

In the last quarter, Microsoft took a massive charge of $900 million on the Surface RT, an aptly designed tablet device, but priced a bit too high. A reason for this relates to the fact that Microsoft misjudged competition from Google's (GOOG) Android and Apple's iOS and launched an unprepared attack with Windows RT i.e Windows 8 for mobile device

The success of Google's Android is riding on a couple of things (1) It is a free-source software, which makes it convenient for hardware manufacturers to adopt the system and (2) It has a huge collection of apps, which is of utmost importance to engage and retain customers. As per reports, Android' share of the smartphone market rose to a whopping 79.3% in the recent months as it has eaten into Apple's and Blackberry's share. In comparison, Windows-based phones lag far behind with a tiny 3.7% of the mammoth market.

It can be safely said that Android is going to lead the market for a good time and it will take a robust offering from Apple or Microsoft to change the tide. Apple (AAPL), which is famed to be a hugely innovative company, has disappointed its investors as well as customers with no new product/idea coming from its stable for around a year now, the longest such spell in its history. While there is no official word on the release of iPhone 5S or iOS 7, rumors around these products have already picked up pace.

If the reports around a low-priced iPhone are to be believed and Apple does launch a iPhone with a low price tag, then it my fear is that it could work to its disadvantage. Though no details are available around the speculations of a low-priced iPhone, if Apple decides to power it with iOS 7 and includes all the key features, then it would definitely eat into the sales of its high-end phones. While it will reach out to a larger customer base, it would lose out on hefty margins on the high-priced phones.

Microsoft can turn it around

As I mentioned above, there is little doubt that Steve Ballmer made some major mistakes as the CEO of Microsoft, but again, there is no point discussing his vision or strategies. Moving ahead, Microsoft has to focus less on battling its way into the smartphone market. Also, I am hopeful about the launch of Windows 8.1 as the company has worked hard on feedback taken from its customers. In my opinion, Microsoft is still the leader in PC industry, but since the industry itself is on a gradual decline, it will not be prudent for Microsoft to invest more than required resources into the product.

Currently, the top priority for Microsoft should be expansion of its enterprise group and cloud services. Windows Azure and Office 365 have the potential of firmly establishing Microsoft's brand in this industry. Microsoft has pumped huge amount of money into Azure cloud platform, which recorded $1 billion in revenue over just 12 months in April. Also, Office 365 is working strongly for Microsoft as it has already achieved a run rate of $1.5 billion annually.

In conclusion, I would like to point out the fact that the core of Microsoft's business is undergoing a big change with focus shifting towards B2B solutions. I strongly believe in Microsoft's huge potential to turn things around and with Ballmer's exit, we can see the plans in action.

Disclosure: I am long GOOG. 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.