Microsoft: The Change Is Taking Hold

| About: Microsoft Corporation (MSFT)


Nadella is signaling change.

We need to be careful how we interpret his signals.

Nadella still has follow these signals with performance.

Last week, Satya Nadella, Microsoft's new CEO, announced that Microsoft (NASDAQ:MSFT) was releasing a new version of Office, one that was revamped for touch-based computing and one that would be available on Apple's IOS and Google's Android.

The general comment seemed to be "too little, too late."

On the other hand, I am more inclined to go with the thought of Richard Waters in the Financial Times, "Mr. Nadella badly needs to show that, on his watch, the world's biggest software concern can turn itself into a mobile and cloud computing company."

So, a new CEO uses what is most available to him…or her.

Mr. Waters goes on to say, "What better way to do that than by freeing Office-the package of applications familiar to white-collar workers the world over-to prove that it can fight for itself on smartphones and tablets?"

This announcement, however, is primarily of symbolic value. But, Waters continues, "the symbolic value is much greater (than the actual sales or marketing effect)-and symbolic gestures are important for recently appointed bosses who want to persuade their workers and customers that a new era has dawned."

The issue is not whether this move is too little or too late.

The issue is that "Microsoft is finally ready to move beyond the PC."

Windows will still be the platform that is the primary focus of Microsoft's business, and the network that is associated with this platform provides Microsoft annually with vast cash flows…cash flows that will continue on into the future. Windows is the core of the Microsoft valuation.

However, Microsoft needs to move on and this is what has been holding back the price of Microsoft's stock for the past 13 years before Mr. Nadella took over.

To create more value, Microsoft, it seems, must move on to the "mobile" audience. All the other little "tricks" and "games" that Microsoft played with over the past decade or more, in investor's eyes, added little additional value to the Microsoft franchise.

In essence, Microsoft did not use its retained earnings well.

And, moving Windows into a format that can be used on Apple or Google machines is not going to change the game.

First of all, Microsoft is a latecomer to this space. It has to have a combination of usability and applications that will connect with people in this space. It has not yet determined that it can do this…yet.

Furthermore, Microsoft has to get its game back in terms of "time-pacing." In the 1990s, Microsoft was a leader in this part of the information revolution. It prided itself in getting the next version of its OS out on a regular basis. And, this regular basis was short enough that it put extreme pressure on its competitors to keep up with the speed at which Microsoft brought new, updated versions to market.

Waters states that "it took nearly 18 months from the launch of the touch-centric Windows 8 to come up with a version of Office suited to the platform in not an encouraging sign."

In the past, a 12-month cycle was often considered to be too slow!

The point is, Mr. Nadella must meet these challenges if Microsoft is to have a chance to become a leading player in mobile…and in the cloud. And, once it meets these challenges, the next step in regaining its industry stature is to become a leader in these spaces.

What Mr. Nadella is trying to say is that "we are going to do things differently in the future."

So far, the response to the things that Mr. Nadella has done, the "signal" that Microsoft is moving into the mobile world and into the cloud, and the few personnel changes he has made, have been accepted positively by investors.

Microsoft's stock price closed at $41.35 Wednesday.

Mr. Nadella seems to be playing the market correctly up to this point. Behind this surface, however, really hard work must be going on. If it isn't…then there cannot be much hope. Eventually, however, the output of the hard work must catch up with the "signals" now being sent.

In the meantime, all we can do is try and interpret what the signals mean.

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.