Microsoft (NASDAQ:MSFT) is sometimes seen as dead money. The stock has sat relatively flat for awhile now, and many investors seem to shy away from the company. Microsoft is making moves and becoming innovative again, and if they can pull it off, they may end up becoming the owner of the best ecosystem available on the market. This will boost sales as customers gravitate back to Microsoft items that they know will be tightly synced within an unified ecosystem.
Microsoft Office is still the industry standard-and has now been adapted for cloud computing with Microsoft Office 365. This is a big deal, as now spreadsheets and word documents can be stored in the cloud and conveniently shared amongst devices. Users with Windows 8 phones, tablets, PCs, or laptops now have a unified platform for the popular software.
Windows 8 needs to come out swinging and grab the attention of consumers. It also needs to run reasonably smoothly, and if Microsoft can score a win with their new operating system, success can build off of it. This new OS will also sync more closely on Windows 8, and one way Microsoft is gluing together their products and devices is with music.
The company recently announced that they will be launching Xbox Music alongside the October 26th release of Windows 8. The service will be available on Xbox, Windows phone, and Windows 8. The ad-supported tier will be free, just like the popular free streaming app Spotify, and according to sources, Microsoft "plans to offer Xbox Music apps on third-party platforms, including iOS and Android, as well as SkyDrive integration for users to store their music collection on the cloud and play them on any connected device."
This new music app will likely catch on with most Xbox users. How many existing users are we talking here? According to Xbox Group PR manager David Dennis:
We've got 67 million consoles out there, and 40 million of those are connected to Xbox Live, so they can rent and purchase movies, and use our existing music service, which we're also re-launching this Holiday as Xbox Music. You can have all your content unified under one entertainment brand -- Xbox Music, Xbox movies, Xbox TV -- and accessible from multiple devices. Part of SmartGlass is unifying content in the cloud with Xbox Live and delivering that to your phone, PC, or your Xbox, and letting you control it in an intelligent and rich way on your tablet, or your phone or just with your controller, if you find that's most convenient.
From this we can conclude that the Xbox will play a vital role in the Windows 8 ecosystem, and already contains an established base of users. This also brings up another new innovation Microsoft is bringing to the table-Smartglass.
Smartglass is essentially the application that allows Xbox content to be unified, and Dennis elaborated on it further, stating:
The real magic of SmartGlass is that when you're using those companion scenarios, your devices are intelligently talking to each other, and knowing what you're doing. It's one thing to be watching a movie on your tablet, and throw it to your TV, and start off right where you stopped. But the magic is when your tablet or your phone gets transformed, not only as a control mechanism, but also as a rich display medium, bringing you addition metadata and content. An example is the movie "School of Rock." As you watch, SmartGlass shows you what characters are on the screen. They pop up on your tablet as they come in and out of scenes in the movie.
As Windows devices become closer and closer linked, they are dragging the Xbox and Windows operating system closer and closer together. The possibilities that can spawn from this are endless, and Microsoft has many tools at their disposal to make a succinct ecosystem that would become enormously popular and profitable, and hard to duplicate. Microsoft now owns Skype. They also have their footing in the cloud computing market with Azure and their servers.
As Microsoft strings together its various components, they will have a tighter and stronger ecosystem, which will also let developers know that the Microsoft ecosystem is here to stay and worth developing for. For Microsoft to maintain a thriving ecosystem, they will need developers on board to create apps. Microsoft seems to realize this and is holding their next conference to promote developers on October 30th. A tightly integrated, successful ecosystem could cause massive gains in market share for Microsoft.
Fundamentally, Microsoft is great company. They have a superior balance sheet loaded with cash, and even though the price of the stock has been flat for years, the 3% yield pays investors to wait. If Windows 8 flops, the price may suffer slightly, but if Microsoft has a success-there could be a potential for huge gains.
No matter what, the fact remains that the undervalued Microsoft is a juggernaut. The company generates massive amounts of free cash flow- around $20 billion per year. I see Microsoft as a good long-term holding, and as a cash-loaded company that will continue to raise its dividend until capital appreciation finally comes knocking. One of the only things that concerns me about Microsoft is their massive $50 billion cash hoard being held overseas, but I am confident that they will find a way to unlock and deliver value to shareholders for many years to come. I think starting, or adding to, a position in Microsoft now would be a good idea.
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.