Remember when Microsoft (MSFT) was a software company? Before it started selling Xboxes? Before it started selling PC accessories? Before it started selling smartphone devices? Before it started selling MP3 Zunes? And before it started selling actual Microsoft-built/designed/marketed/distributed laptops?
When I first started studying technology businesses back in the late 1990s, Microsoft was mostly a software-centric company. The benefits to being a software company were huge. Software gross margins for its Windows and applications businesses were close to 99%. The company could charge hundreds of dollars for software programs that had no reproduction costs, so every incremental sale was essentially pure profit.
Back in the day there were dozens of major and thousands of smaller PC manufacturers from Dell to Gateway to Compaq to IBM (IBM) to Hewlett-Packard (HPQ) to AlienWare to you name it. And all the costs of building and distributing those PCs fell to the manufacturers, allowing Microsoft to keep those margins aloft. All those manufacturers could compete on designs and prices while spending billions on research and development for Windows-based machines.
Nowadays if you want a Windows machine for the future, you have to go with the Microsoft-built Surface tablet. The good news for Microsoft shareholders is that the geeks and media reviews for the new tablet/laptop/PC are glowing:
The Microsoft Surface Pro 4 has satisfied one expectation: It's taken the proven success of the Surface Pro 3 and gone even further...
The Wall Street Journal:
The bad news is that Microsoft's margins on selling tablets aren't going to be like they were when "Softee" was a software company. Should we call Microsoft "Hardee" now that it's a hardware-centric company?
Softee's already lost tens of billions of dollars in hardware -- the Nokia (NOK) transaction alone, when Microsoft bought Nokia's handset business, was a $7.2 billion write-down disaster.
Analysts and Microsoft apologists will tout Xbox as a success for Microsoft but imagine the innovation that video gaming would have seen if Microsoft had been focusing all these years on just making great software and operating systems that work across all handsets, set-top boxes, devices, tablets, TVs and so on?
It was Microsoft's fumbling and stumbling around hardware that enabled Alphabet (GOOGL, GOOG) and its Android operating system to squeeze Windows Mobile out of the picture. Microsoft and former CEO Steve Ballmer got envious of Apple's (AAPL) success as a software/operating system and hardware vending company. But Apple's got a unique history and decades of expertise in selling hardware, unlike Microsoft which has overpaid and sunk billions into its hardware business development.
I sometimes wonder if Alphabet's doing the right thing with its Android business by competing with other Android vendors with the Google Nexus phones. Making Android the de facto standard amongst all (non-Apple) wearables, Internet of Things, and other future hardware, no matter who's making that hardware, would seem to be the ideal model. Microsoft and Windows has no chance of catching Android in the wearables/IoT/connected future already, but if Alphabet's not careful, there could end up being another operating system competing for de facto standards 10 years from now.
Here's a chart from 2012 that underscores how doomed Windows has become and how Android has replaced it starting a few years ago. With billions of smartphones and tablet devices now out there in the world and hundreds of millions of PCs not being replaced every year, Apple and Alphabet have killed Microsoft's market share critical mass.
Years ago I wrote a series of articles and got short BlackBerry (BBRY) when it was still called RIM because BlackBerry had lost critical mass and it was doomed as I put it at the time. Is Microsoft the next BlackBerry?
PCs are ever less important in a world where people use their smartphones and tablets to do most of their computing needs and Apple's taking market share in PCs anyway. Even IBM, which used to be eponymous with IBM-compatible PCs, now says Apple Macs are better than Windows machines.
How will Microsoft maintain relevance? I have no idea and I am starting to think Softee might be a good short candidate to pair with my long-held Apple and Alphabet longs.