Just like the Millennial generation that jump from company to company, so to are the industry leaders that are dislodging competitors, only to see themselves dislodge as market leaders several years later. Disruptive technologies are becoming more widespread within industries, that companies that do not retain innovation and an eye on their future, may quickly not only lose their place as a market leader, but may even risk closing their doors. This was the case with Blockbuster that filed bankruptcy within eight years of it's competitor, Netflix (NASDAQ:NFLX) filling its IPO in 2002. Blockbuster didn't even see it coming, a disruptive innovation such as DVD by mail, and no late fees. By the time Blockbusters' revenue began to feel the effects, it was too late to change their business model and they along with Movie Gallery, the second largest video rental industry leader, filed for bankruptcy.
Now how does the video rental industry relate to Microsoft, a company that has retained a monopoly on PC operating software for over 30 years? They may soon be feeling the effects of a substantial decrease in revenue due to the latest disruptive technology taking fold. The only difference is that Microsoft (NASDAQ:MSFT) has seen it coming for a couple years now. This disruptive technology is none other than laptops and smart phones; devices that one may currently categorize as primitive personal computers, ones that use simple apps instead of programs. Now I am not saying that Microsoft is in jeopardy of going under in several years, however, with the drop in share price Research in Motion (NASDAQ:BBRY) has seen over the last two years, it is not unfathomable that Microsoft's long standing share price in the high twenties could see a negative readjustment.
Tablets and smart phones are moving into, what Andy Grove identified as Segment Zero, the lower end segment of the PC market. Tablets and smart phones are in a nutshell, rudimentary personal computers, however they are beginning to eat into the lower end PC market share such as ultrabooks and laptops, as customers begin to rely more and more on mobile devices rather than the traditional PCs. More so, as the technology in mobile devices increases, so do the functions of these devices to the point that they will replace what PC currently do. When explaining this in previous discussions, I have been told by computer and software experts alike, that there would be no possible way that the work performed on PCs in offices today would ever be achieved on a smart phone or tablet. It is the same criticism that was given to computer enthusiasts over 50 years ago when it was envisioned that a personal computer for hobbyists be introduced into the mass markets. At the time, computers, extremely large in volume, requiring large rooms to be housed, and large amounts of capital to purchase, were thought of as only useful, (and affordable) by governments and large corporations. However, the Personal Computer market sure dispelled any criticism that it was not the future of computers, as computers soon found their way into every household in America, utilizing some version of Microsoft's Windows operating system. Now with the introduction of the tablet, the future of PC's has been cemented into a much more mobile device.
Readers, lend me your imaginations for just a moment. Imagine walking into work, or your home office, placing your smart phone or tablet down onto your desk. The device automatically connects to your stationary monitor and keyboard thru Bluetooth. With wireless internet connection, all programs (or apps in this case) are cloud based, allowing the user to operate programs that typically require large processing power. Many argue that the programs necessary for the day to day operations of offices and companies could not be accomplished on a smart phone or tablet, and I agree, today they cannot, but the smart phones of tomorrow will. And, tomorrow is not looking too far off. Now the kicker is that two companies own the majority of the market share of tablets and smart phone operating systems, Apple (NASDAQ:AAPL) with iOS, and Google (NASDAQ:GOOG) with Android. Microsoft has attempted to gain market share with W8, a system that integrates PCs with their mobile counterparts, even having to design their own tablet, the Surface, to get into the game. Unfortunately, it may be too little too late as consumers seem to have begun to move towards the market leaders, with nearly 23 million iPads sold compared to a paltry 1 million Surface tablets last quarter. Yes, Microsoft is looking to counteract with a new type of operating system with continual updates, codenamed Blue, similar to what iOS and Android already do, however, this is a reactionary measure by the company, and also one that will cannibalize their current business plan, of consumers paying for new operating software upgrades.
With PC sales dropping nearly 14% in all of 2012, and now showing a matching drop of 14% in the first quarter of 2013 alone, Microsoft is starting to tread in deeper waters. The fact that iPhone revenue alone, is greater than all of Microsoft's revenue together, exemplifies the magnitude of this potential vulnerability. With PC manufacturers feeling the pinch, moves to mobile platforms such as tablets and smart phones will become the focus, and this may leave Microsoft on the outside looking in. Microsoft has nearly $60 billion of cash on hand to begin developing and researching new business plans and strategy to make up for the loss in their Windows revenue, nearly 30% of this last quarter's revenue. Though their Windows division has seen recent increases in revenue, one must understand that many PC users are only just moving to Windows 7 from XP, and so there is quite a lag in user licensing fees, and operating system exposure. By the time business and users moved to a competitive, mobile system, the drop in revenue would be immediate and quick. And all the indicators tell us that this is on the horizon, it's just a matter of what does Microsoft does to make up for that 30%. It has a lot of cash on hand, it just does not have the market share, and so there may come a day, when Microsoft will be selling the Surface Tablet, powered by Android.
Disclosure: I am short 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.
Additional disclosure: I believe that that MSFT is no longer the safe blue chip it once was. If conservative investors are looking to hold it as a safe dividend paying stock, it may be be coming on some harder times as PC sales continue to drop, and could see a significant readjustment in its traditional stock price.