neutrino23

Microsoft: Whistling in the Dark

MSFT has a long term problem in that the PC manufacturers mostly compete on lower prices. It gets harder and harder to justify hundreds of dollars for the OS and Office when the underlying hardware cost is only a two or three hundred dollars.

Yes, MSFT's worldwide unit share is high but I'll suggest that outside the US and Europe a high number of those units are illegal copies that provide little or no revenue to MS.

In China MSFT has cut its prices to the bone to try to compete with piracy. No revenue growth there.

Now MSFT is coming out with free, web versions of Office. Where is the future revenue stream in that? Will they try to support it with ads? How annoying will that be?

This is the danger for MSFT. They have a history of leveraging Windows to force people to use their formats. For example, they forced the use of IE in windows which forced web developers to code for IE instead of open standards. In business you have to have Office because everyone else uses it. If the world decides to change directions and switch to web based/cloud type apps that are almost free, or if they decide to go in the direction of the iPhone/BB/Android, then MSFT is starting from a position of being an also ran and outsider. They'll have a hard time using windows to force people to buy into their proprietary formats if the world decides they don't need windows. If MSFT is not forcing standards then they cannot force people to give them money.

It doesn't mean MSFT will disappear. They have a lot of momentum and there may be a core business in MSFT at much less than their current size. But if they enter a long period of slow revenue decline that will kill the stock. How do you value the stock if you expect revenue to decrease 1% or 2% or 3% a year for the foreseeable future? How do you attract bright people when their stock options are worthless?

Disclosure: Long AAPL, not an analyst, just a guy.