Microsoft Windows 8: No Effect On The Smartphone Market

| About: Microsoft Corporation (MSFT)

On October 26, Microsoft (NASDAQ:MSFT) will release its much-anticipated Windows 8 software. As the date nears, Microsoft cheerleaders have hijacked the technology conversation to speak on Revolution. The Microsoft marketing machine is mobilizing to inform us all that Windows 8 will reinvent the entire consumer electronics complex. The playbook is simple: Microsoft will leverage its dominance over the personal computer market as means to package Windows software within the hottest gadgets.

Microsoft executives, of course, covet entry into the smartphone market as a growth opportunity. At present, the Google (NASDAQ:GOOG) - Samsung Android and Apple iOS duopoly headline the smartphone complex. Beneath this duopoly, Nokia (NYSE:NOK), Microsoft, and Research in Motion (RIMM) claw desperately over scraps. The Windows 8 release will have no effect upon this paradigm. Microsoft shareholders, of course, are all too familiar with the routine song and dance of this company. Microsoft stock is a beta investment that tracks the S&P 500 Index and pays out regular dividends.

The Smartphone Duopoly

Apple's (NASDAQ:AAPL) devastating "I'm a Mac. I'm a PC." 2006-2009 advertising campaign highlights the beginning of the end for the smartphone competition. In a series of commercials, Apple personifies itself as a chic, yet functional hipster. Alternatively, Microsoft is a bumbling technocrat in a tweed suit who cannot get out of his own way. Amid this campaign, Apple unleashed the iPhone onto the market in 2007. Today, the iPhone alongside the iPod, iTunes, iMac, and iPad form an integrated loop of artistry, entertainment, and nuts and bolts professionalism that further galvanize Steve Jobs' halo effect.

In its latest quarterly report, for third quarterly period ended June 30, 2012, Apple reported that the iPhone and its related products and services accounted for $16 billion in sales. This figure is roughly half of Apple's $35 billion in 2012 Q3 total revenue. Going forward, this trend is likely to continue as Apple is set to ship out well over 100 million iPhone 5 handsets over the next year. Competitors have taken notice and are making desperate attempts to cultivate share.

Quietly, the Samsung - Google Android platform has emerged as Apple's most formidable rival. Samsung is the world's leading handset maker and its Galaxy SIII phone poses the biggest threat to the iPhone status symbol. The similarities between the iOS and Android operating systems have converged to the point that Apple and Samsung have taken to the courts to wage this smartphone war by lawyer proxy.

According to Research firm IDC, the Google Android (68% share) and Apple iOS (17% share) platforms now account for 85% of all smartphone sales. At the bottom of the heap, Nokia's Symbian, Microsoft's Windows, Research in Motion's Blackberry, and the open-source Linux program are left to battle over the remaining 15% share of this smartphone market. Research in Motion and Nokia, formerly telecommunications leaders, are now struggling merely to survive. Last quarter, the Nokia Symbian operating system bottomed out with a meager 4.4% share of the global smartphone market.

Windows 8 Specifications

On April 6, rapper Nicki Minaj danced the night away at a Times Square unveiling for the Nokia Lumia 900 Windows phone. Around that time, the Internet was also aflame with comments made by Steve Wozniak, Steve 8Jobs' right-hand man and technology guru. According to Wozniak, the Lumia Windows phone has the feel of "a friend, not a tool." Meanwhile, Jeff Bradley and AT&T heralded the Lumia event as "the biggest launch ever," and began hawking these phones for $99 in stores. In response to a technical glitch, of course, Nokia offered a $100 rebate on the Lumia throughout its first month of availability. After effectively giving these phones away for free, Stephen Elop, Nokia CEO, describes Lumia sales performance as "mixed." In other words, the Nokia Lumia 900 release was a total flop.

To add insult to injury, The Wall Street Journal reports that Microsoft refuses to offer the Windows 8 update to Lumia phones already in circulation. Concurrent with this announcement, Microsoft agrees to provide Windows software for Huawei Technologies, a Chinese handset maker. Yet again, Microsoft proves that it will throw its partners under the bus in pursuit of the Almighty Dollar. This dubious move completely destroys whatever brand loyalty remained at the Nokia - Windows complex.

For the smartphone crowd, the October 26 Windows 8 release date will come and go as a relative non-event. According to Don Costa and PC Magazine, Microsoft is taking a "huge gamble" that consumers will clamor for its version of practicality across the personal computer, tablet, and smartphone platforms. Microsoft Windows 8 software will accommodate both touch screen technology for PCs alongside Excel-style number crunching for smartphones and tablets. Most likely, Microsoft will appear out of touch when it discovers that teenage girls refuse to run calculations on smartphones, while button-down professionals scoff at patronizing touch screen gimmicks.

The Microsoft Windows 8 release will be business as usual at Redmond. Microsoft shareholders buy into this lumbering behemoth for quarterly dividend checks, and are not easily deceived by any illusions of prospective growth. Microsoft is effectively a cash cow utility that dominates the PC market, while bungling half-hearted attempts to package its software within the latest hot gadgetry. As a sign of the times, J.T. Wang, Acer CEO, recently blasted Microsoft for the release of its Surface tablet. According to Wang, Microsoft should "think twice," because hardware is "not something [Microsoft] is very good at."

Windows 8 will not change the smartphone game. If anything, original equipment makers (OEMs) have become increasingly reluctant to transact business with Microsoft. Bloomberg reports that Verizon plans to offer a new Nokia Oyj Windows 8 phone prior to this Holiday Season. I must foreshadow that this launch will offer the same spectacle, but lack of real substance of any Nicki Minaj concert. When the smoke clears, Elop will once again describe Windows phone sales as "mixed." Nokia, Research in Motion, and Microsoft will continue to struggle against the effective Samsung - Google - Apple blockade.

The Bottom Line

On July 19, 2012, Nokia released its interim (quarterly) report for Q2 2012. For the quarter, Nokia lost $1 billion on $9.4 billion revenue. On a per share basis, Nokia lost 48 cents per share. Without adjusting for euro to dollar currency conversions, Nokia suffered a 12-percent decline of year-over-year net sales into Q2 2012. Broken down further, Nokia's flagging position within the smartphone market is especially concerning. Last quarter, Nokia sold 10.2 million smartphone units, which is down 39 percent over the prior year. At present, Nokia carries $11.8 billion in total cash on its balance sheet. After paying off interest-bearing liabilities, Nokia would be left with $5.3 billion in net cash and liquid securities.

Nokia's financial position may be described as tenuous, at best. Despite the staggering losses, Nokia stock now trades for $2.88. $2.88, of course, is a sharp move from last month's $1.63 nadir. The volatility is symbolic of the fact that Nokia stock is now effectively a call option. Investors recognize the fact that this position could either collapse towards zero amid bankruptcy, or replace Ford (NYSE:F) as the latest story stock to come back from dead. To mimic the Ford turnaround story, Nokia must abandon Microsoft. Nokia, of course, has four years remaining on its original 5-year / $1 billion agreement to partner up with Microsoft.

At Waterloo, the Research in Motion situation is eerily similar to Nokia. Research in Motion stock trades for $7, although this business continues to bleed cash. Instead of innovate, Research in Motion executives are handing out thousands of pink slips to buy time. Meanwhile, industry players show little interest in RIM's patent portfolio. Google's May $12.5 billion Motorola buyout proves that Google was in the market for patents, but deftly choose to bypass Research in Motion intellectual property. Research in Motion is well on the road to going bust.

Above the fray, Google and Apple are left standing as best of breed stocks that leverage the smartphone Revolution. Google trades for $675 and 20 times earnings, while Apple trades for $665 and 15 times earnings. Apple remains a bargain, considering the fact that this corporation averaged 66% annual profit growth these past four years. For Q3 2012, Apple recently closed out the books with $117.2 billion in cash and marketable securities on its balance sheet. This position easily covers Apple's $51.2 billion in liabilities, which would leave $66 billion in net liquidity. On a per share basis, Apple stock still would offer $71 in cash and investments, in the event that financial officers opt to retire all debt.

Apple is an alpha stock. Microsoft is a beta stock. The looming Windows 8 release changes nothing.

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.

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