On October 26, 2012, Microsoft (NASDAQ:MSFT) launched its Windows 8 operating system as the first major software update out of Redmond in three years (Windows 7.) As such, the Microsoft marketing machine and technology commentariat immediately mobilized to laud Windows 8 as “revolutionary.” Windows 8 was an aggressive foray into the Metro concept, where Microsoft engineers attempted to shoehorn traditional desktop, tablet, and smartphone features into one universal operating system. In retrospect, however, Windows 8 reviews and reception may be described as tepid at best. The Telegraph even went so far as to blast Windows 8 as a “bust” and “debacle.”
In response, Microsoft brought Windows 8.1 to market on October 17, 2013, to allay the concerns of Wall Street investors. Brad Chacos and PC World referenced the Windows 8.1 movement as “the great compromise” between PC loyalists and Microsoft executives pushing the Metro concept. In any event, Windows 8.1 has failed to counter the commoditization of the personal computer. Going forward, the Windows ecosystem may also remain a distant third wheel to the Android-iOS mobile duopoly.
The Windows 8.1 Compromise
Many technology analysts have ripped Windows 8 as the lynchpin behind the historical collapse in personal computer sales and ultimate resignation of Steve Ballmer from his Microsoft CEO post. Detractors further derided Windows 8 as a misguided attempt to be all things to all people that actually ended up pleasing nobody. The Windows 8 interface was also somewhat infamous for jumbled tiles, awkward touch screen commands, and the lack of the classic Start Menu. In response, Windows 8.1 offered up a boot-to-desktop option alongside the reimagined Start button. The new Start button helped transition users into a modern interface characterized by cloud computing applications. Despite the improvements, Brad Chacos still dismissed Windows 8.1 as “a tablet interface mashed together with a desktop UI.”
Windows 8.1 has had little to no effect upon the evolution of computing. According to Net Market Share, Windows 7 remained the most popular desktop operating system through May 2014, with a 50.6 percent share of the market. Interestingly, Windows XP still captured a 25.3 percent share of the operating system at the time. Microsoft ended support for the 12-year-old XP operating system on April 8, 2014. Meanwhile, Windows 8 and 8.1 claimed respective 5.9 percent and 6.6 percent shares of the desktop operating system market through May 2014. In all, Windows systems recently operated 91.4 percent of desktop computers.
Successive reports out of research firm Gartner may confirm the idea the Microsoft lords over a shrinking PC empire. Gartner reported PC shipment tallies of 76.6 million units through the first calendar quarter of 2014. These results represented a 1.7 percent year-over-year decline between Q1 2013 and Q1 2014. Mikako Kitagawa, Gartner principal analyst, actually highlighted the end of XP support as easing the severity of the secular decline in global PC shipments. The PC market has steadily deteriorated for eight straight quarters and has come off a 2013 that Gartner described as the “worst decline in history.” The failure of Windows 8.1 to reinvigorate the PC market will obviously pose important ramifications for the long-term fortunes of Microsoft investors. Microsoft share prices have literally stalled out as dead money since 1999.
The Bottom Line
In 2014, Microsoft began to group its businesses according to Commercial and Consumer Devices wings. The Microsoft Devices and Consumer grouping was broken down further into Licensing, Hardware, and Other operating segments. Be advised that Microsoft has included “non-volume” Office and Windows sales within the Devices and Consumer Licensing operating segment. Alternatively, Commercial Licensing covered sales of server products alongside the volume licensing of Windows and Office software. Lastly, Surface and Xbox results were made a part of the Devices and Consumer unit.
In many respects, the Microsoft core mission has remained to deliver software to enterprise customers. For Q3 2014, Commercial Licensing generated $9.4 billion in gross margins off $10.3 billion in segment revenue. Meanwhile, Devices and Consumer Hardware posted a relatively insignificant $258 million in gross margins upon $2 billion in revenue. Microsoft did close out its Q3 2014 books having raked in $14.5 billion in gross margins and $20.5 billion in revenue. Last year, Microsoft generated $15.7 billion in Q3 2013 gross margins. Again, Windows 8.1 failed to both turn back the secular decline in the PC market and help Microsoft finally gain traction in mobile.
The stock market, of course, is a pricing mechanism that discounts future growth, instead of simply taking a literal snapshot account of the balance sheet. As such, Microsoft is likely to track the global economy and S&P 500 Index as a beta stock into the near future. As a value play, Microsoft financial managers may return larger portions of capital back to investors through buybacks and dividends. Going forward, fierce rival Apple may continue to outpace Microsoft as a growth stock.