Like a father trying to impress his children with his coolness, Microsoft wants to reinvent itself into something it's not. Microsoft (NASDAQ:MSFT) has, for the past decade, tried and failed to become a consumer products company. What does this failure say about the leadership and the future of the company? This guide aims to give you a general understanding of the challenges Microsoft faces with consumer products, potential paths and what that means as an investor.
Microsoft's had some big failures (i.e the Zune, the SUR 40 touch table) but never was that failure more evident than over the past year, where it wasted billions trying to be "the cool kids." It's increasingly been trying to market its consumer products to customers of companies like Apple (AAPL), and Google (NASDAQ:GOOG). The company has been focusing its efforts on mobile devices like the Surface and Windows Phone 8 instead of focusing on maintaining its lucrative IT business. The decisions made over the next few years will be critical to the fate of this profitable technology company that is struggling to completely re imagine its brand.
By bringing up its strategic failure, I'm not implying Microsoft has no place in the consumer market. Its Windows operating system is the most popular operating system in the world by a dramatic margin, and its Xbox gaming system is also one of the most popular, and has made them billions of dollars. Its new Xbox One device has generated a lot of buzz on social media, and in the tech press, and is expected to sell very well. What Microsoft needs to do is focus its efforts correctly and improve strategy.
Where Microsoft is Failing: The Data
Its biggest issue is in strategic decision-making and marketing, which have recently been challenging because of Microsoft's new effort to balance corporate IT business with consumer products. The Surface, Microsoft's flagship tablet, has struggled, selling 1 million in more than triple the time that Apple's iPad took to originally do so (it took over 140 days). Much of the issue that prevented the surface from selling was related to that same duality. Microsoft couldn't decide whether to brand it as a business tool, or a consumer device, so it did both.
It faces that same issue with its Windows 8 OS, which attempts to balance tablet computing (typically focused on content consumption) with traditional business tools and standard keyboard-and-mouse computing. Microsoft's bifurcated Windows 8 has received very mixed reviews. Lockergnome's Chris Pirillo, a tech blogger who has at times even consulted with Microsoft, penned, "For me, Windows 8 has been a bit more of a frustrating series of events. I have very little patience for the schizophrenic user interface and half-baked experience. It's like a child wearing a motley combo of two different superhero costumes, unsure of what he wants to be. You want to believe that Windows 8 has everything in place to take on its competition, but it just isn't the right experience for everyone." A survey of 100 readers by Appstorechronicle.com found that less than 40% of readers liked Windows 8, and ⅔ of those who didn't like the OS extremely disliked it.
Microsoft's struggles exemplify the challenge of pleasing business customers and meeting consumer demand with the same product, the very challenge that tech companies have tried to conquer for the past two decades. One focus area where Microsoft has spent billions of dollars, is in advertising the aforementioned consumer products, and advertising them has proved just as challenging as selling them. Microsoft's marketing budget has skyrocketed as it tried to rebrand Windows, Outlook and Internet Explorer, and launch the Surface, and Windows Phone 8. A 2012 article in Ad Age, an advertising trade paper, reported that Microsoft planned to spend more than $1.5 billion marketing its Windows 8 operating system, which will soon be outmoded anyway by its latest OS, Windows Blue, which is in the late stages of development, and is expected for initial release by this summer.
Microsoft has gone so far as to hire politico Mark Penn to revamp its reputation. Penn, who was behind the negative ads for politicians like Bill Clinton and Tony Blair, launched several campaigns aimed at Google, all under the common theme "Scroogled." The ads read like political ads, but don't have nearly the same effect on consumers. Unlike an attack Ad, Microsoft doesn't hide its ads under all kinds of super PACs. At the end of the ad, Microsoft mentions its products, trying to offer the consumer an alternative, but in the end it just seems childish. The accompanying petition for "Scroogle" flopped, receiving few signatures despite the multimillion-dollar campaign, and the campaigns have been berated by the media and consumers. A new campaign, taking aim at Google's Docs editor, released May 10th, had 157 likes and 389 dislikes on YouTube by that Sunday. One wise commenter acknowledged "Desperate times, call for desperate videos".
Some ad campaigns have paid off, but sales numbers show that most of them haven't, and use metrics validate the data further. After nearly two and a half years on the market, Microsoft's Windows Phone has gained only a 2.9% market-share for smartphones, according to a report by Gartner. Facing a market dominated by Apple's IOS, and Google's Android, (which occupy a combined 92.6% of the market according to the same report), Microsoft was confident in its abilities to take a chunk of the market. In September of 2011, CEO Steve Ballmer said, "We haven't sold quite as many as I would have liked in the first year. ... I'm not saying I love where we are, but I am very optimistic on where we can be."
Even its bread-and-butter PC business seems to be struggling. According to data by Netmarketshare.com, Windows 8 has reached just a 3.82% market-share in the PC market since its release in June of 2012, nearly a year ago. The previous release of Windows, Windows 7, has a 44.72% market-share, and doesn't look to be relinquishing its users to Windows 8. Another issue Microsoft faces is that some users are forgoing a PC altogether, choosing to buy full tablets based on Android and iOS.
So, what paths should Microsoft take?
IBM faced the same struggles until it made the difficult decision to leave the consumer market, selling its PC division to Lenovo in 2005 and focusing on business and IT, and it took off from there. Since 2009, its market cap has nearly doubled, and its share price has long been on the rise. Apple also faced similar struggles in the '90s, ironically losing to Microsoft, with dozens of failed products and no clear focus. Once back at the helm, Apple's CEO, Steve Jobs, fired most of the company, cut most of the company's product lines (like its Newton PDA line, and camera line), and refocused and revived the dying company through consolidation. In August of 2012, Apple become the most valuable company in history.
Microsoft's circumstances are nowhere near as dire as Apple's were, but it does need to decide on a direction, whether it be the path of IBM (NYSE:IBM), Apple or a new one. It needs to focus, and really consider what's working, and what isn't, if it wants to maintain its success and its share price.
What does this mean for Microsoft as an investment?
Microsoft continually misses its projections on consumer products, but thus far investors have given them a pass, because projects had still been in the works. It desperately needs to see success in Windows, or in the new Xbox One, or else it will have to answer for the billions in expended resources on consumer products.
Considering that Microsoft has already seen tremendous growth, and success, it may be time to sell Microsoft, because with its next earnings report, it certainly risks a shake like that experienced by Apple when its earnings underperformed. Microsoft has the advantage of stability, in that it's expected to be profitable, not revolutionary, but it has some serious expectations to manage if it wants to maintain its success.
Have you bought or sold Microsoft lately? What's your position?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.