Can Microsoft Outperform Apple In 2014?

| About: Microsoft Corporation (MSFT)


MSFT has outperformed AAPL so far this year.

MSFT has made progress in eroding AAPL's edge in personal computing.

Upcoming MSFT products may be increasingly competitive with AAPL and AAPL's new products in 2014 may not meet expectations.

So far in 2014, MSFT is up about 7% and AAPL has lost 4%. Is this just a fluke or will MSFT continue to outperform its long time rival?

Microsoft has in recent years been making strides to establish a larger footprint as a software and devices company. In a July 2013 email to all employees, then CEO Steve Ballmer detailed his vision of realigning the company as "One Microsoft":

"Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most."

"Creating a family of devices and services" is a nod to Apple's strategy. Much of Apple's success can be attributed to its ability to build incredibly well thought out devices that work together as a family. This was part of Steve Jobs's vision for personal computing.

Until recent years, Microsoft was mostly in charge of the services side with its Windows platform, but had little control over the hardware element. The Windows machines weren't captivating the way Apple products were, and fell drastically out of favor with discerning consumers.

If you can't beat 'em, join 'em

Microsoft has been emulating Apple's recipe for success a lot lately. It has built on its own family of devices (Nokia phones, Surface, XBOX), opened hands-on retail stores and added some Apple-inspired style to its website. While a lot of it looks like copycating, doing so is an improvement and will help lure some customers away from Apple and other competitors in the consumer market.

Microsoft's Surface tablet is one of the most underappreciated tech innovations in the last year or two. Surface Pro is a hybrid laptop/tablet, a product with a unique build and dual OS unlike anything in the Apple or Google product family. It can be an entertainment center like most tablets, but also plays to Microsoft's strengths for getting down to business with Office and other desktop software suites. This makes it a compelling alternative to both an iPad and a Macbook Air. At least one developer, a Mac and iPad user, was impressed with the Surface's ability to function as neither Apple device functions on its own. That was the first iteration of the device.

Microsoft has split the Surface concept into two fundamentally different products, the Pro model, which runs dedicated "desktop" software like Autocad or Photoshop in addition to "apps," and a cheaper consumer model that only runs apps. The Pro model is powerful and versatile enough for most professionals to take care of all their daily workflow. This tech writer for Forbes really likes the fact that it can do nearly anything in spite of its tablet form. The non-pro model (formerly "RT"), is affordable yet practical enough for casual users and college students. There was a time when every college student had to have a Dell. Then it was Apple. Is anyone foolish enough to think that the object of the fickle college student's desire will never change again?

With Surface, Microsoft has shown its hardware developers what it wants the modern Windows machine device to look like. With MS Office now available on iPad, Microsoft stands to benefit from strong iPad sales even if Surface or similar machines don't sell that well. On the other hand, if Surface continues its momentum from last quarter, in which sales more than doubled over the previous quarter, there's virtually no benefit for Apple. It's this type of diversification that makes Microsoft a better play in an increasingly competitive smartphone and tablet market. Incidentally, in a nod to Microsoft Surface, Apple is said to be making a keyboard cover for the iPad.

With support for Windows XP ending next month, a large number of XP users (by some accounts nearly 30% of the desktop OS market share) will be forced to upgrade if they want support from Microsoft. Without updated security patches, XP users will face increased danger from cyber attacks - as good an incentive as any to finally upgrade those creaky old machines.

New Devices in 2014

While the media's speculation regarding new products focuses primarily on Apple, there have been some quieter whispers that Microsoft has been developing a dedicated media streaming device. If Microsoft wants to get into devices in a meaningful way, this seems like one category it sorely needs in order to round out its family. While it has been rumored to be in development for at least a year, perhaps the company has waited until after the XBOX One was released in order to avoid cannibalizing its premium living room product. The set-top box should be a stripped down version of XBOX that is compatible with the Kinect technology. Microsoft has said it is working on a lot of TV content for XBOX. It hasn't set any dates yet, but it would make sense to coincide any official announcements with the release of a streaming device.

The Microsoft Build 2014 developer conference is April 2-4 so there's a chance we see something new then. There has been some speculation that a mini Surface may be coming this year. Other possibilities include some new Nokia handsets, which will help further round out its diverse array of offerings. In his press conference on March 27, CEO Satya Nadella said that the company will discuss new innovations in its software and devices at the Build event. From watching the presentation, you get the sense that Mr. Nadella, who has been with the company for most of his career, is a brilliant guy and has a grand vision of what he wants the new Microsoft to be.

Much of the Apple hype seems to be centered around a smartwatch. Another author has projected that an Apple iWatch would sell as many as 42M units in its first year. I can't imagine it coming anywhere even remotely close to that figure. Samsung, which creamed Apple in 2013 smartphone sales, sold only 800,000 Galaxy Gear units in its first two months, despite heavy marketing and incentives. With Samsung outselling Apple 2 to 1 in smartphones, it seems the iWatch would need to be something truly spectacular and be priced very aggressively for Apple to outsell Samsung's Gear by a factor of 8 or 9. While I have little doubt Apple's watch will be better than Samsung's, there are too many drawbacks to this technology and it's hard to see Apple overcoming them all.

Pricing (likely in $250-$350 range) seems to be the biggest setback. Unless it packs an astounding amount of functionality, which is unlikely due to the limitations of tiny batteries and processors, it may be more fashion accessory for geeky-high-disposable-income-types than must have powerhouse gadget for the masses. The Motley Fool's Rick Munarriz makes the point that it will likely be more iPod than iPhone, and iPod sales, in spite of their small price tag, have been on the decline. Even if the iWatch adds fitness functionality, this is nothing groundbreaking and competes with fairly inexpensive devices such as Nike's successful Fuelband. I like the notion that an improved Siri will bolster its abilities sans display, and this could be one of its winning attributes, but I think Google's (NASDAQ:GOOG) approach to wearable computing does it better because so much of the information people are craving - maps, photos, video, etc. - needs to be displayed visually. The other most talked about possibilities for Apple this year - "phablet" iPhones and upgrades to Apple TV, could be much more important than a smartwatch.

Challenges for Microsoft

While Microsoft has recently seen impressive growth in adoption of its mobile platform, it still lags far behind Apple and Google in market share. It will be tough to gain ground on these competitors going forward, as the user base is fairly entrenched in major established markets and without significant market share, it is difficult to attract app developers. But emerging markets like India, where smartphone growth is exploding (faster than China), offer respite from Apple. Android phones remain dominant by a large margin in these markets, with Apple and Microsoft almost appearing non-existent. Microsoft is attempting to boost its market share in India by offering its mobile OS for free to some Indian handset vendors. It's a risky and unprecedented move for Microsoft. And India may just be the start. In order to better compete with Android, the company may need to abandon its licensing fee software model in the rest of the world. And it may need to make that move not just with Windows Phone, but eventually with the Windows 8 platform as well.

Why do you think Microsoft is outperforming Apple so far this year?

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.