Microsoft Headwinds: Apple, Google And Open Source Software

Feb.24.14 | About: Microsoft Corporation (MSFT)

Several months ago I asked a question: Will Apple (NASDAQ:AAPL) Increase Its PC Market Share With Free OS Updates? My answer was yes.

Yesterday Bloomberg reported:

Microsoft Corp. (NASDAQ:MSFT) is cutting the price of Windows 8.1 by 70 percent for makers of low-cost computers and tablets as they try to fend off cheaper rivals like Google Inc. (NASDAQ:GOOG)'s Chromebooks, people familiar with the program said.

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, said the people, who asked not to be named because the details aren't public. The discount will apply to any products that meet the price limit, with no restrictions on the size or type of device, the people said.

It seems that free software and open source licensing is finally catching up to Microsoft. And while Google Chromebooks are definitely disturbing the PC space, I think it is that Microsoft has to be worrying about.

Ever since its last major upgrade, Apple has stopped charging for the software that runs Macs. Anyone with a Mac from now on, will never again pay for an OS upgrade in the future. Like I said on my last take, over the long term, this is a compelling reason to pay more for a computer up front.

And while PC sales had their worst year on record in the U.S., Apple's market share has been going up in the U.S.. In fact Apple's market share gained 28% in one year alone:

(click to enlarge)Click to enlargeGartner's U.S. PC Unit Shipment Estimates for 4Q13

But the problem is not only that Microsoft has to lower the price it charges for OS software -- to fend off competitors like Google and Apple -- the problem is that it might also be forced to do the same in the future (the spillover effect) on other products, such as Microsoft's flagship Office suite.

See with Google apps and other free software alternatives such as LibreOffice, Microsoft has to really come up with a very compelling offer in order for people to pay for a word processor from now on, especially outside the U.S..

And while Microsoft's Office suite revenue is still intact, one can never be sure what the future holds, if all of a sudden Microsoft suddenly lowers the price for office as well. I mean, this sudden change of policy to lower the amount Microsoft charges vendors for its OS, is not something that anyone really expected.

As such, and while I still view Microsoft as a very stable and inexpensive stock, the truth of the matter is that Apple is gaining market share in the U.S. and at the same time, Microsoft is also admitting some sort of defeat in the OS licensing arena.

Furthermore and perhaps most important, at some point in time in the future, Microsoft might be forced to lower the price of other products such as Office, as a result of both Apple's free OS policy as well as the pressure from Google and open source alternatives. And that for me, this is Microsoft's common stock biggest headwind.

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.