At Microsoft (MSFT), it's business as usual. In February 2011, Microsoft executives literally boarded a Gulfstream jet for Finland and showed up at Nokia (NOK) headquarters with briefcases full of cash. Several months later, Nokia, Microsoft, and AT&T (T) shoved the Lumia phone into our faces and ordered us to buy. On April 30, 2012, Microsoft brass were on the move again to New York, where they made it rain at Barnes and Noble (BKS), like your wobbly uncle after one too many drinks at some seedy strip club. Microsoft is now the corporate beta that dons its cape proudly to protect flailing enterprises from the menacing Apple (AAPL) juggernaut. We have already seen this movie before; and we know exactly how it will end.
The Microsoft Playbook
In terms of shareholder returns, Microsoft is the poor man's version of Apache. Instead of exploring for and developing its own resources, Microsoft is merely a commodity play that mines for assets on the floor of the New York Stock Exchange and at the U.S. Patent and Trademark Office. After acquiring outside resources, Microsoft will integrate its own technologies alongside its formidable marketing machine to exploit once flagging assets for every last drop of profit available.
Microsoft, obviously, is not in the business of drilling for oil and natural gas. Wall Street has shown its disgust with the company, as Microsoft shares have done nothing over this past "lost" decade. Microsoft is a technology company in name only. In reality, Redmond executives oversee a zero-growth commodity / utility play that mints operating cash that it pays right back out as regular dividends.
Apple shares, however, have taken a helicopter lift from $12 to $585 over the course of the last ten years - on the strength of first-mover iPod, iPhone, iTunes, and iPad technology products. As the 2000's "I'm a Mac / I'm a PC" campaign would indicate, Apple represents the "cool" counterculture, while Microsoft is the spectacled Company Man of yore in a tweed suit, who refuses to get with the times.
Microsoft is a relic.
In its latest deal, Microsoft has put up $300 million for a 17.6-percent stake in a joint venture with Barnes and Noble named Newco. Newco, now valued at $1.7 billion, is a subsidiary of Barnes and Noble that represents its digital media and education businesses. On May 4, 2012, Barnes and Noble closed the trading session at $18 per share - with 57 million shares outstanding on its books. According to Wall Street, Barnes and Noble's entire business is worth $1 billion, while Microsoft and Barnes and Noble apply a $1.7 billion valuation to the digital division of the firm.
Obviously, we know the drill, but we just are not buying it. The Microsoft - Barnes and Noble partnership is merely a shameless tactic for Microsoft to wrap its fat, grubby fingers around the Nook e-book reader. At the moment, the Nook tablet runs on Google's Android 2.3 operating system. I am all but certain that Barnes and Noble's next version of the Nook will run Microsoft software. Interestingly, Microsoft has become quite the dealmaker, in anticipation of its looming Q4 Windows 8 release.
Microsoft, ever the copycat, is hell bent upon showcasing an end-to-end integrated system of applications, web browsing, entertainment, content, and smartphone handsets of its own. Instead of developing these products in-house, Microsoft has opened up its checkbook for bolt-on acquisitions that only expose the fact that progress has left its own engineers befuddled.
Microsoft's latest round of deal making is simply too little, too late. For Microsoft to grow real profits, instead of commoditizing innovation, it must replicate its own version of the Apple / Google (GOOG) / Amazon (AMZN) halo effect. To earn the elusive halo effect, Microsoft must be a first mover and create a product that we never realized was indispensable. Right now, Apple maintains the monopoly on "cool" in the tech arena, and is free to generate obscene 40-percent gross margins on its merchandise. Alternatively, Microsoft hawks commodity goods, and is therefore forced to compete on price for viability.
Right now, Apple sells its 16 GB iPad for $499 and its 64 GB model for $699 (iPad 2 is $399). Alternatively, Amazon practically gives its Kindle e-reader away at prices that range between $79 and $379. The Microsoft - Barnes and Noble Nook will be in direct competition with a corporation, in Amazon, that is happy to sell its product off at a small loss, in order to drive sales of its own content.
With this investment, Microsoft has unwittingly exposed itself to a losing war on multiple fronts. The Microsoft - Barnes and Noble alliance does not command the pricing power of Apple, nor can it compete against Amazon's easy-to-use Kindle interface and extensive catalogue of best-sellers, popular culture magazines, and self-published novels that amateurs hawk online for 99 cents.
The Bottom Line
Microsoft's Barnes and Noble investment looks desperate.
Microsoft, a $250 billion corporation, is investing $300 million into the lone bright spot of a doomed Barnes and Noble book selling business. Basic arithmetic demonstrates that this move will have no affect on Microsoft's bottom line, unless the Nook were to miraculously overtake both the Amazon Kindle and Google Android tablet offerings to challenge the Apple iPad as a solid number two option.
Most likely, the Microsoft - Barnes and Noble alliance will be yet another non-event. Microsoft shareholders should pipe down, take a seat in the corner, and methodically collect dividend payments on their utility stock until the end of time. Similar to Nokia at $3.15, Barnes and Noble is a call option at $18. Both investments could make you a rich man, if their Microsoft partnerships pan out to reintroduce these once-proud firms back to relevance. If the Lumia phone and Nook flop, however, Microsoft will abandon ship, and Nokia and Barnes and Noble share prices will collapse toward zero en route to inevitable bankruptcy filings.
For Apple, the beat still goes on. At $585 a share, Apple trades for fourteen times trailing earnings. Cupertino executives are sitting pretty, as they lord over an empire that carries $120 / share in cash and investments on its balance sheet. In terms of earnings, Steve Jobs' vision is averaging 65-percent annual income growth over the past five years. By all measures, Apple stock is cheap.
Microsoft is no threat.
Disclosure: I am long AAPL.