In-depth analysis on Credit Writedowns Pro.

On Microsoft’s mobile strategy

An investment in Microsoft has been dead money for quite a while now. The stock has yo-yo’ed within a fairly narrow range between $22 and $32 except in late 2007 and 2008 during the financial crisis when it spiked and then plunged. The stock does sport a dividend of 92 cents a share, which is about a 3.3% yield. If you figure that Microsoft is dead money for the next few years still, then that certainly beats Treasurys. But given the increased risk, it’s nothing to right home about. So what about Microsoft’s strategy makes it more than dead money. Let me offer a few suggestions here.

I was in one of Microsoft’s new Apple Store-like retail locations in the mega mall in Tyson’s Corner, Virginia this weekend. And on the whole I was impressed with what I saw. Microsoft had a huge soup to nuts display of computing devices that included mobile phones, tablets, gaming consoles, ultrabooks, laptops, and desktops. All of these were running Microsoft’s latest operating system Windows 8. In my view, the way forward for Microsoft is in recognizing that it can muscle into different spaces by embracing platform convergence and running its single operating system across the panoply of form factors now out there. But to do that, Microsoft needs to migrate its massive installed base away from the PC and onto these other devices. The tablet will play a critical role in this.

[private_gold]

Now that I am writing this, I wish  had taken pictures to give you a better feel for what Microsoft had on offer because there were two other technology retail stores in that Mall that offered a contrast, one from Apple and one from Sony. To give you a sense of what Microsoft got right and got wrong let me compare the setup in all three and I will rpovide some generic photos I got from an Internet search.

First, the Sony store was terrible. It felt like traditional retail – cramped, dark, and with a low ceiling height that gave it a sort of claustrophobic feel. Honestly, it was so uninviting despite the whizz bang products that I simply couldn’t go in and check them out. I just watched and looked from afar without touching any of the new Sony SLR cameras that I have heard so much about recently or any of the other tech gadgets. Even Best Buy has a better layout than this. Sony is using ‘old retail’ that focuses on minimizing floor space in order to keep costs down even though that makes the store less inviting. In my view, this retail presence is emblematic of everything that’s wrong with Sony and the reason it is not doing well. If you look at the photos below, the dark and cramped ones more represent this store in Tyson’s Corner. But, notice the hodge-podge nature of Sony’s retail presence. Some of these are great-looking stores. Others are awful.

Sony store

On the other hand, Apple was open and airy. The place was pretty solidly trafficked with customers too. I have been in an Apple Store, hundreds of times and I have seen, played with or used all of Apple’s latest products as well. So I didn’t feel like there was anything compelling me to go in. Still, the store itself was much more inviting than the Sony store – where I also got the impression that some sales person would be hovering over me in a annoying way. By the way, this Apple Store happens to be one of the first. ANd Steve Jobs himself was on site to help open it when it opened up in May 2001. See the video below.

Then, there was the Microsoft store. It opened here in November of 2011, ten years AFTER Apple. Basically, it’s a ripoff of the Apple store, with the guys in blue shirts, the open, airy look and the general layout and overall feel. But, here’s the thing: They do it well. What I noticed first is a huge crowd of people outside in the mall area watching kids in a dance contest, dancing to Gangnam Style on some Xbox game. The Xbox games in the mall were a great feeder into the store. And the store was pretty well trafficked, though not as well as the Apple Store. 

Microsoft store

In terms of the setup, there were phones first right at the entrance. Ultrabooks and the Surface Pro were next on alternate sides of the aisles. Then came the notebooks and desktop setups, with a station set up for kids to play on the computer. And in the back was the Xbox area. Microsoft did not feature its own products except in the tablet arena with the Surface Pro, because they aren’t a hardware company.

While I don’t have a game console and never have, I was impressed at how Microsoft integrated the Xbox stuff into the overall flow and I certainly saw the Xbox as a key draw here. Moreover, the feel inside the store was more lively and hi-tech because of the flat screen wrap-arounds, most with Xbox gaming features running on them. Overall, I slightly preferred the Microsoft store because it had a more soup to nuts flavour to it while the Apple store seems less expansive for some reason – and it’s probably the Xbox.

I played around with the phones and Surface Pro the most and came away liking the Surface Pro a lot. First, the operating system look and feel seemed very similar across all the different form factors – mobile, tablet, notebook and desktop. That’s a huge benefit for migrating customers. Second, the Surface Pro felt like a laptop to me a lot more than my own Android and Amazon tablets or my wife’s iPad. I cannot go anywhere for extended periods without my laptop because Apple and Android tablets simply don’t have enough computer-like functionality built in. I am writing this post on a laptop, for example. I would never try to write it on a tablet. And I would never do spreadsheets on a tablet either. Third, the laptops/ultrabooks that I saw were all touch screen, making them a lot more like tablets. One from Asus had two monitors so you could use it like a laptop or tablet. The machine would actually switch display to the screen on the outside of the notebook if you closed the lid and instantly it was a tablet, with touchscreen capability.

Although I believe the tablet/laptop nexus is the key one for Microsoft, I also believe that the Xbox is a critical one as well. Device convergence could make the Xbox into any other device Microsoft wishes it to be. The devices that have the most overlap are tablets and set top boxes because gaming is done on a TV and the game console is portable. To the degree Microsoft can leverage its Xbox platform into set top boxes and tablets and tie the software to the Windows platform at the same time, Microsoft could develop some stickiness around the Xbox that carries over into the tablet space.

[/private_gold]

The whole experience left me understanding that Microsoft’s only advantage is its installed base of PC users. It also left me believing more than ever that the PC is toast, that tablets will steal a lot of their customers because of overlapping functionality, my own comments about my needing a laptop notwithstanding. Clearly then, Microsoft has to migrate its customers from the PC to the tablet as quickly as possible, building out enough price points in the process to have the Microsoft tablets act like either full notebook or traditional tablet depending on the price. Doing this will minimize cannibalization and extend the PC lock-in that is now starting to erode. The point here is to keep customers familiar with the operating system who have bought a gazillion dollars of PC software locked in to the Windows platform. And the only way for this to happen is via migration to mobile using tablets.

Recently, Microsoft Chairman Bill Gates criticized the company’s mobile strategy, saying it had been too slow to develop. I think the pieces are in place now. However, everyone seems to be focused on the smartphone because it is ubiquitous when in fact, for Microsoft, its competitive advantage in mobile lies in retaining the Windows platform while moving PC users over to tablets.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.