Seeking Alpha
Profile| Send Message|
( followers)

A recent article has stated that Stephen Elop, if elected CEO, would release office on IOS as well as selling off Bing and possibly XBOX; ignoring the last two points is this a good idea?

Profit centre

Microsoft Office is currently the largest driver of revenue for Microsoft (NASDAQ:MSFT), according to Trefis the Office Division accounts for a whopping 37.7% of the stock price.


(Click to enlarge)

In its recent 10K it booked revenue of $24.72 Billion with an operating income of $16.19 Billion from the business division which is comprised of Office, Sharepoint, Exchange and Lync - of these Office provides the largest slice, although Microsoft doesn't break down the revenue any further than this.

With such a large and profitable division it does seem like an obvious decision to widen the number of platforms and increase the revenue.

Defense

Ecosystem is a word casually bandied around and it is an important distinction; each of the different players has their own ecosystem, and differentiation is the name of the game. Apple (NASDAQ:AAPL) can claim its superior App Store, and, in turn, Microsoft requires its own ammunition to lure customers to its offerings. Office provides a valuable distinction on both phones and tablets, Office is the most widely used productivity suite in the world and with the growing popularity of BYOD (bring your own device) policies, being able to access and edit office documents from mobile devices is a big selling point.

Lost Revenue

Office is an important part of the Microsoft ecosystem, but, at the same time, by not offering the software on other platforms it is losing out on potentially significant additional revenue. A Morgan Stanley's analyst estimates that Microsoft is leaving $2.5 Billion on the table by not offering Office on the iPad. This is based on the assumption of a 30% attach rate, something that Office is exceeding with sales on the Mac install base. The actual result may not match up to this estimate but it is clear that significant additional revenue could be booked by this alone - a very tempting easy win for a new CEO wanting to deliver results.

Short Term Gains

While this additional shot of revenue may be hard to resist a sensible CEO should be much more concerned with delivering long term shareholder value rather than focusing on easy short term gains. The Windows 8 strategy is still a work in progress, and it could be premature to take away one of its largest advantages. With the recent release of Windows 8.1 much of the bad press has melted away, and heading into 2014 there should be greater momentum paired with an increase in sales. Having Office work across all its devices: phones, tablets, and desktops becomes a very compelling distinction, and it is hard to see many CTO's signing off on any significant iPad purchases. By releasing Office for Apple's line of products in the long term Microsoft will have lost this important competitive advantage that gives users a reason to choose its mobile products over Apple's.

Change is Coming

One of the unfortunate side effects of a new inbound CEO is the same as a new political party gaining power; in both cases they want to make their mark. There is little point in gaining all that power if you don't use it. Watching Microsoft's stock price this year it looks, to the casual observer, that Wall Street is finally happy with the direction that Microsoft is taking: the vision of an operating system that scales from small 7inch touch devices to powerful PCs is certainly ambitious, and its gains in cloud computing have been equally impressive - the company's Azure cloud service has been enjoying triple digit growth.

All around Microsoft is looking to align and streamline its disparate resources to work together rather than, as has happened in the past, compete against each other. Once this happens Microsoft will further leverage its different services to create a more holistic product, for example Windows Phone has deep integration with Skydrive, Xbox, Office and Skype- an example of many different units coming together to create a seamless experience, something the old Microsoft wasn't so great at doing. The question is will the new CEO work to accelerate the good work that has been done, and stay the course with the vision in place, or instead, look to implement his own ideas and take the company in a different direction?


(Click to enlarge)

Mistake

Releasing Office on the iPad is something the new CEO should consider but ideally he will shelve it on his desk as something to consider for his second year on the job; next year Windows 8 will start to see some serious traction, and with all the hybrid devices being releases plus its own Surface hardware it is possible that it will equal or surpass Apple's quarterly tablet shipments by the end of 2014. Microsoft has a goal to ship 16 Million tablets this holiday season, if this goal is reached the idea of releasing Office on the iPad will, most likely, slip further down the agenda.

Final Thoughts

By not releasing Office to many different devices Microsoft is foregoing the opportunity of significant revenue; something that any newly minted CEO will find difficult to ignore, despite this, in a war of ecosystems Office is a trump card and it should not be given away lightly. The Windows 8 story is still evolving, and its ability to function for both work and play is a great selling point. The stock has performed strongly this year and with a possible change in strategy from a new CEO it could be time to take some money off the table.

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.

Source: Office On The iPad - Short-Term Gain, Long-Term Pain