Microsoft is planting the seeds for growth in the new internet

Jan. 05, 2012 4:42 PM ETMSFT
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chriff's Blog
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Contributor Since 2010


Much has been written about Microsoft, a company that embodies both a cash- and profit-generating machine thanks to its Windows and Office products but has been slow to respond to new trends in technology.  This would seem to be reflected in its stock price, which has gone nowhere in the past decade.  I have already invested in Microsoft based on the following observations:
1. they keep making more money, year after year
2. the stock passes all my 'value' criteria
3. the dividend is very healthy and likely to be increased

However, these three points don't really address the main complaint that most people seem to have about Microsoft - that it's not creating, or even adapting to, the latest technology craze.  They point out that Microsoft doesn't have much sway in the smartphone and tablet industry, that it's internet division keeps losing money, and that even on its hometurf - Windows and Office - it is starting to lose steam.  However, yesterday I randomly came across something that makes me think people are not seeing the full picture of the future that Microsoft is getting ready for.

Before I go any further, a little about myself.  I'm part of the first generation that more-or-less grew up with the internet.  I can vividly remember what the world was like without the email and websites, but I can also intuitively find my way around a computer, am pretty up-to-date as far as new technologies go, and spend a majority of my time on the internet in some form.  So I like to think that when people are looking for the next hot tech fad, what they are generally talking about is what will interest me and my peers.  And so far, there hasn't been much in the way of exciting coming from the old entertainment companies (broadly defined as both entertainment producers like music and movie companies and entertainment delivery companies such as cable providers).  Instead of coming up with new business models for a new world, they keep trying to impose their old ways of thinking on everyone.  The real reason why online piracy is so rampant is not that everyone wants to steal, it's just that the companies haven't offered a better approach to creating and delivering entertainment through the internet that consumers would be willing to pay for.  And no amount of lawsuits and flawed legislation is going to get around that fact.

On this note, I recently stopped subscribing to cable service, and choosing to go with internet-only.  The reason for this is that with the traditional cable provider, I am forced to pay for over 100 channels when all I watch is a few regular shows and some sporting events.  My last bill for just the cable TV portion ran over $70 - without choosing any of the special options except HD.  In the age of the internet, it should be possible - easy even - to get just the channels (or shows even) that you want.  Even if every channel is then charged at a slight premium from what it would get as part of the cable TV package, the overall cost is lower to the consumer - who is also happier because they are only getting the programs that they want. 

Now, finally, to what I discovered yesterday: you can watch ESPN (ESPN 3 technically) over the Xbox 360 with an Xbox Live subscription.  You can also watch Hulu Plus (separate subscription, but same idea) pretty seamlessly over the Xbox 360.  There are rumours about Microsoft also trying to get more content, or even hook up with cable providers to make the next Xbox able to function as a cable/DVR box as well.  And the Kinect addon for the Xbox will apparently also become a more powerful tool for controlling the Xbox.  This tells me two things about Microsoft: 
1. they have a clear and, in my view, accurate idea of what the future of TV and movie home entertainment looks like
2. they have the hardware/followers in place to execute this vision perfectly

Point 1 I have already talked about - consumers choosing the content they want to watch, paying a slight premium for it, and the cable company being relegated to providing the necessary bandwith.  Regarding point 2: Microsoft's two biggest rivals - Apple and Google - are also thinking this exact idea and trying to piece together the technology needed to implement it.  However, most consumers will then have to make the decision:  do I buy a Google TV, or a TV plus an AppleTV box?  But for at least 60 million people worldwide, the obvious answer would be: neither, I already have an Xbox! 

So at this point, Microsoft already has at least 60 million people on board for this new vision of TV.  And remember that up to this point, most people have actually bought the Xbox for playing games - rebranding it as a gaming, TV, and movie console for every TV could by itself boost sales much like the Wii did by branching out beyond the traditional video gamers.  And then, they have the perfect vehicle for delivering content to those people - with the ability to basically displace the traditional cable TV providers. 

There are obviously many kinks to be worked out in this idea, but Microsoft is currently the only company that has the technology, the consumers, and the idea to completely reinvent people purchase content to play on their TVs. 

Realizing this makes me a very happy investor, and I would argue that anyone who is only caught up in the lack of a Windows smartphone right now is not really looking to the future, but only looking at the present as if it was the future already.  Smartphone trends can and do change quickly, as do whatever happens to be the cool thing on the internet at any given time, but the traditional way everyone has watched TV has been around for decades and is in serious need of a game-changer - which is just what Microsoft is working on.

Disclosure: I am long MSFT.

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