What Microsoft Must Do to Survive

 | Feb 22, 2012 | 1:30 PM EST
  • Comment
  • Print Print
  • Print
Stock quotes in this article:








Microsoft (MSFT) is doomed.

OK, it's not doomed in the classic sense, but I see serious threats to its franchise that cause me to question the recent run (up 20% in 2012 so far), as well as the general value case for the stock. No question, the company is a cash machine at the moment, but the threat to its corporate franchise is real, and surprisingly, it is being driven by the little old smartphone.

The first element to understand is that Microsoft does not seem to understand the new paradigm in computing: hardware-software integration. Apple (AAPL) created astounding success with the iPhone by completely controlling the user experience. Apple controls the hardware and the software and gets them to work seamlessly for a pleasant user experience. The same is true of the Macintosh computer experience.

Contrast this with the Windows experience, in which Microsoft controls only the software, which must run on dozens of different hardware platforms. Furthermore, Microsoft has enabled additional functionality with all sorts of add-ins and plug-ins that generally crash the system or create performance issues. The Windows experience is one of frustration.

The second element to understand is that the smartphone is the new wedge to break the Microsoft monopoly on the corporate market. The evidence is only anecdotal, but I hear it over and over: Companies want to be perceived as "cool" for recruiting purposes, so they are allowing employees to use their beloved iPhones rather than Research In Motion (RIMM) BlackBerries for corporate use. Once the iPhone is in, now corporations are considering, and switching to, Macs for corporate use. The trend is still early, but if Apple gets a real toehold in the corporate market, Microsoft's bread and butter is under a real attack.

To respond, I believe Microsoft needs to emulate Apple and pursue hardware-software integration. It needs to improve the lousy user experience. The first move needs to be to have a credible smartphone offering. Google (GOOG) figured out the need for hardware integration and bought Motorola Mobility, so the Android experience will remain competitive with the iPhone. Since Microsoft can't buy Google, the natural remaining acquisition is Research In Motion. The price is right, and more importantly, Research In Motion still has a franchise (albeit declining) in the corporate market that Microsoft needs to protect. Should Microsoft buy Research In Motion, it could offer a credible user smartphone experience with the integration into corporate IT infrastructure that companies crave.

Second, but further out, Microsoft needs to buy a PC manufacturer. Like Google and Android, it can still license Windows to all comers but also offer a Mac-like, user-friendly integrated hardware-software product. Microsoft would still have a corporate advantage in that it could offer better integration into the back-end servers, since Microsoft has a strong franchise there with the server OS, Sequel server database, etc.

The present is amazing for Microsoft, considering the monopoly it holds and the cash it generates. But all good things must come to an end, as Kodak showed us. The future for Microsoft is filled with peril, and the current management seems to be living in the past, embracing the dis-integrated "stack" model that worked in the 1980s and '90s, but is failing today. If Microsoft embraces the new integrated world, I see a future for it, and the stock becomes a buy.

Columnist Conversations

Spent a good amount of time with PayPal CEO Dan Schulman this week...and came away fully understanding why thi...
Has quietly taken a mini beating over the past few weeks. Might be worth a look on Monday given everything tha...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.