Memo To Microsoft: The PC Is Dead

| About: Microsoft Corporation (MSFT)

The personal computer revolution came to an abrupt and final end amid the 2000-2002 dot-com bust. As a sign of the times, old line IBM dumped its PC division on China's Lenovo group for $1.25 billion during 2004. Today, the personal computer is regarded merely as a functional commodity, rather than a transformative machine. According to Intel co-founder Gordon Moore, the number of transistors on integrated circuits doubles every two years. Andrew Grove, in concert with Moore's law, both foreshadow the fusion of smartphones and tablet entertainment alongside personal computer workstation functionality.

For Microsoft (NASDAQ:MSFT), a stagnant PC market does not bode well. In order to remain competitive, the onus remains on this $260 billion business to cultivate growth sectors. To do so, Microsoft brass must lead through alpha ingenuity, rather than shamelessly stumbling behind the likes of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Microsoft's recent forays into the smartphone and tablet markets only serve to indict Redmond as the focal point of a beta culture. Paralleling the commoditized PC market, Microsoft stock is effectively a cash cow utility that tracks the S&P 500 Index and makes regular dividend payments.

The PC Market

In 2012, stories of the personal computer's demise came to the forefront of the technology conversation. Throughout the year, the financial media has saturated the market with stories of massive lay offs, write-downs, and earnings misses at both Hewlett Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). These former industry giants are now shells of their former selves as they battle against Moore's Law and low-cost Asian competitors, such as Acer and the aforementioned Lenovo. Hewlett Packard and Dell have lost more than 60% of shareholder value over the past five years.

Above the fray, Microsoft and Intel (NASDAQ:INTC) operate as near monopolies that supply the personal computer market with software and semiconductors. Despite this dominance, Microsoft and Intel real returns have stalled out at less than zero amid this lost decade. This trading action between Hewlett Packard, Dell, Microsoft, and Intel is indicative of personal computer industry churn, where players compete upon price rather than ingenuity. Over time, it is inevitable for Silicon Valley to cannibalize its own self and render PC production obsolete as a profitable business model.

According to Asymco analyst Horace Dediu, tablet machines will outsell traditional PCs by unit volume as early as Fall 2013. Deidu's research assumes a small uptick in personal computer sales that coincide with the release of Windows 8 alongside a slowdown in the torrid pace of growth for Apple and Google tablets. During Apple's third fiscal quarterly period ended June 30, this corporation sold 17 million iPads, which is a sharp 84% above the year-over-year quarter.

Behind Windows 8, Microsoft attempts to span the chasm separating its image as a dowdy corporate behemoth and Apple's chic appeal that translates into a halo effect on bottom line profits. For Microsoft, failure would set the wheels in motion for an improbable generational deterioration matching that of Hewlett Packard or even General Motors (NYSE:GM). According to Dan Costa and PC Magazine, Microsoft is taking a "huge gamble" with Windows 8. I, however, would argue that market currents have left Microsoft with no other choice but to reengineer its signature software.

Windows 8 Smartphones and Tablets

On October 26, Microsoft will release its much-anticipated Windows 8 software. Microsoft's new platform is a fusion of conventional PC, tablet, and smartphone interfaces. With this Windows 8 technology at the ready, consumers will be able to execute touch screen commands on desktop computers, before toggling through tiles that open up Microsoft Word and Excel on tablets and smartphones.

Microsoft's Surface tablet, Samsung's ATIV S handset, and Nokia's (NYSE:NOK) Lumia 920 are scheduled for Q4 launch as finished Windows 8 products. The ATIV S and Lumia 920 are both likely to start at a $99 price point, if you agree to the terms and conditions of a two-year phone service contract. Today, research company comScore reports that the Windows operating system accounts for a meager 3.6% of all smartphone subscriptions. The Google Android and Apple iOS duopoly control more than 85% of this telecommunications market.

Initial success for the Surface tablet is therefore critical to the long-term growth in Microsoft's bottom line. Weighing in at 903 grams, Microsoft promotes the sleek profile of its 13.5-millimeter thick Surface tablet. As a workstation, this tablet includes a keyboard and kickstand that may be folded together for portability. The Microsoft Surface presents audio-visuals through its 10.6-inch high-definition screen alongside stereo speakers and dual microphones. For conferencing, the Surface converts into two separate cameras. A USB port enhances the versatility of this machine for file sharing and printing. Microsoft's tablet threatens to destroy the necessity of any notebook computer.

According to Forbes, the Microsoft Surface will retail for $200. Most likely, this $200 price is reserved for the entry-level Microsoft RT Surface, while the premium Windows 8 Pro Surface will cost roughly $500. Microsoft can sell these tablets at cost, as part of a bait-and-switch tactic to steal share, hawk applications, and lock customers into Office 365 subscriptions.

The Bottom Line

Despite the hype, this looming Windows 8 release will materialize as business as usual at stodgy Microsoft. On September 5, Nokia unveiled its Lumia 920 Windows 8 phone at a New York demonstration. Nokia shares promptly lost 15% in value to $2.38, as a clear indication that Wall Street was not impressed. Meanwhile, Samsung (OTC:SSNLF) remains embroiled in global litigation concerning its patent war with Apple. Rather than generating interest for the ATIV S Windows phone rollout, billion dollar settlements and contradictory verdicts are likely to confuse consumers and inadvertently uphold the smartphone market pecking order.

Ironically, a blockbuster Surface release would only cannibalize sales and profits at Redmond. First, Microsoft would lose out on prospective Windows licensing deals within the flagging notebook, laptop, and desktop markets. Next, formidable rivals Google and Apple would swing into action with functional keyboard and professional application software upgrades to their own tablet devices.

At $31, Microsoft stock trades for 15 times earnings. Microsoft shares may be described as fairly valued, considering the fact that this corporation's profits have stalled near the $17 billion watermark for the past five years. Rather than performing as a technological growth story, Microsoft is firmly entrenched as an income investment. Between Q4 2007 and Q1 2012, Microsoft doubled its quarterly dividend from 10 to 20 cents per share. At this rate of growth, Microsoft is set to pay out $1.60 per share in annual dividends by 2015. Microsoft stock would then offer a 5.3% dividend yield, after maintaining its maddeningly listless trajectory.

Conservative investors starving for income would be better off buying into Altria (NYSE:MO).

Disclosure: I am long AAPL, MO. 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.