Microsoft's (NASDAQ:MSFT) long-term success was formed on a platform leader advantage established in the 1980s, with its Windows operating system and Office productivity suite accepted as the industry standard. Now with software compatibility across multiple operating systems and growing usage of smartphones and tablets, competitors such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are pushing Microsoft off its edge. Microsoft's core business is tied heavily to PC usage and licensing of Windows operating systems and servers. Their reluctance in releasing an iOS version of Microsoft Office Suite is costing the company lost market share in addition to lost revenue. With the company's small 3% stake in the smartphone market, slow entry into the tablet market, and dissatisfaction with Windows 8, Microsoft could be facing the tipping point of having once dominated the industry.
Microsoft's Tablet Sales Only Skim the Surface
Microsoft's Surface tablets are marketed at bridging the gap between content creation and content consumption. Its key selling feature is providing Windows 8 and the full Microsoft Office productivity suite that is not available on any other tablet, giving it a competitive advantage over other similar products. However, Surface sales have been below target, selling only 1.5 million devices in its debut, which is dwarfed by the 22.9 million iPads sold in the quarter ending December. The sluggish adoption of the Surface is partially due to the pricing and lackluster specifications of the device among stiff competition with Apple's iPad, and Google, Samsung (OTC:SSNLF) and Asus tablets. The slow Surface sales also stem from poor branding and marketing of the product, the confusion between the Windows 8 and Windows RT operating systems, and the dissatisfaction of the Windows 8 operating system.
Lost Opportunities From Withholding Office for iOS
Ever since the first generation iPad was introduced to the market in April 2010, Microsoft has been reluctant to release an iOS version of the Microsoft Office Suite. Microsoft is missing out on a large and growing consumer base. Even with the general frustration that Apple product users have with Microsoft products, the 30-40% attach rate of Microsoft Office on Macs is surprisingly higher than the 10-15% attach rate on Windows machines. However, Microsoft Office 2011 for Mac isn't even seamlessly configured to function with the Apple multitouch trackpad nor the Retina display. For reasons of a poor quality Mac version and lack of an iOS Office app, Apple users are investing both their money and time in adopting the iWork productivity suite as well as other third party applications. As popularity and dependence on other office applications grow (see growth in Google Apps), Microsoft Office will become less relevant and will lose its footing as the industry standard productivity suite.
Analysts estimate that Microsoft is leaving $2.5 billion per year in revenue on the table by withholding an iPad Office application. This potential revenue is a significant lost opportunity for a company that strives on Office licensing - 33% of Microsoft's revenues are in the business division, of which 90% are from Office solutions. It is clear that the reluctance to launch an iOS Office software is fueled by maintaining the Surface's competitive advantage, which it probably won't succeed without. Although there are plenty of myths floating around of an upcoming iOS Office app through Windows Gemini to be launched in fall of 2013, they are only rumors at best. The reality is that Microsoft is not only losing potential revenue every day they delay launching an iOS application, but is more importantly losing market share.
Losing Their Platform Leader Advantage
Microsoft is riding the wave of past success of its Windows PC system, and expecting the same success in the smartphone and tablet market. However, numerous software titles that were previously only compatible on Windows machines are now functional on the Apple operating system, and Microsoft is losing its PC platform leader advantage over Apple.
The problem is that consumers are entrenched in their Apple, Google and Samsung mobile computing devices, and Microsoft is entering an already established market that has managed so far without Windows and Microsoft Office compatibility. Consider that in developed markets, smartphone and tablet devices are relatively new purchases to complement existing computer usage. In emerging markets however, consumers will likely begin with smartphones and tablets as their initial computing device, rendering Microsoft's PC dominance useless. In the upcoming years, industry leaders of the mobile computing revolution will shape and define the new standards.
Recall how the computing platform war played out in the 1980s. Although Apple's Macintosh computer was the leading product at the time, Microsoft became the dominant personal computer platform because its architecture and software was more "open" than that of Apple's. Microsoft is now pursuing a product strategy by not providing Microsoft Office on other tablet systems, and putting their established platform advantage at risk.
Takeaways for Microsoft
A desire for seamless compatibility is growing, as usage between smartphones, tablets and laptops/desktop computers is more intertwined than ever. The only company that currently offers seamless integration of both hardware and software across all three device types is Apple.
As Microsoft's business is not extremely diverse and is heavily dependent on the PC industry, Microsoft needs to step in the following three directions to stay relevant in the fast changing industry:
- Microsoft should focus on maintaining the Office productivity suite as the industry standard by providing high quality applications on Apple products and mobile computing devices.
- Microsoft needs to improve their hardware and devices segment such that their Surface prices and products are competitive with the current market offerings.
- Microsoft should enter the smartphone hardware market with their Windows 8 phones, to be less susceptible to the successes and failures of device manufacturers such as Nokia (NYSE:NOK) and HTC. This is particularly true in producing low-end phones and entering emerging markets.
Without these strategic moves, Microsoft's dominance in the technology industry may soon become a thing of the past.
Disclosure: I am long AAPL. 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.