Competition Causes Microsoft To Cut Windows Price 70% For Makers Of Low-Cost Computers And Tablets

Feb.24.14 | About: Microsoft Corporation (MSFT)

The word is getting out. The movement of the world into tablets and smartphones is really hurting Microsoft Corp. (NASDAQ:MSFT). There has been concern that ever since Microsoft caught up and barely was able to be a full member of the internet that it was lagging in catching onto the "latest thing."

Microsoft has missed the tablet market. Apple, Inc. (NASDAQ:AAPL) and Google, Inc. (NASDAQ:GOOG) dominate the table market. Their operating systems possess 95 percent of the tablet market.

And, this market is estimated to climb by 16 percent a year through 2017.

Global computer shipments dropped by 10 percent last year, a record, and the prediction is that they will continue to decline this year.

The pressure is starting to impact Microsoft pricing. Bloomberg released information on Saturday that Microsoft "is cutting the price of Windows 8.1 by 70 percent for makers of low-cost computers and tablets…."

"Manufacturers will be charged $15 to license Windows 8.1 and preinstall it on devices that retail for less than $250, instead of the usual fee of $50…."

But, inroads have already been made into the $50 fee. "While the regular Windows list price was $50, some of the largest global computer makers paid closer to $30…."

Microsoft may be the predominant force in computer software, but after missing out on some of the innovations that took place in the 2000s, competition is eroding what seemed to be a once invincible force.

Microsoft is definitely not "dead-in-the-water" but it is showing signs of lagging the market something it, once upon a time, took extreme pains to lead the market.

The evidence is in the decline in Microsoft profit margins. Microsoft is having to reduce profit margins in order to play in a market where it was, once, about the only game in town.

But, Microsoft is experiencing this in many other areas as well. For instance the pricing surrounding the Xbox One was fierce…with Microsoft having to give away large chunks of price in order to be competitive in the market and establish itself. As analysts stated, Microsoft may be able to get some of this back at a later time once its position is attained…but, they argued that even this "catch up" was not even certain.

So, this is where Microsoft finds itself. It is still the elephant in the room, but some of the other beasts are running around it and are causing the elephant to turn this way and that way in order not to lose these newer market segments.

This has to hurt profit margins…both now…and, in the near future.

For all the cash that Microsoft generated over its history, it has done very little with it, especially in the last thirteen years.

Microsoft can go ahead as it has in the recent past, living off the historically dominant position it created. The problem is, the technology has changed and computer software delivered in smaller devices has broadened and deepened the market. The elephant faced a bigger room with faster and more agile beasts competing for its space. Historically, we find that when markets change like this it is sometimes awfully hard for the elephant that dominated the old space to ever regain its dominance.

Disclosure: I am long MSFT. 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.