Monday, April 29, 2013

Microsoft Office: Better to Switch than Fight?

The Wall Street Journal notes that Microsoft hopes its Office suite will provide leverage to attract buyers to Windows tablets, but asks whether it would be better off providing Office for the iPad and Android tablets.

In making the decision, Microsoft has conflicting goals between the Windows and Office divisions — the two major pillars of the company’s cash flow. According to the WSJ, Windows provides "about a quarter of revenue and about a third of operating income. The MS division that includes Office has “30% of sales and nearly half of operating income.”

However, PC sales are falling precipitously, and with that, the profit stream from Microsoft’s share of the Wintel duoopoly. The fortunes of Office are heavily tied to those of Windows, but as the Journal notes, Microsoft now has an important choice to make.

One option is to continue to tie Office to Windows in hopes of establishing Microsoft’s platform in tablets. Tablets (not smartphones) are the apparent replacement for PCs, and Microsoft has only 7% share of Q1 global tablet sales, vs. 48% for the Apple and 43% for the Google platforms. If Microsoft doesn’t fight tooth-and-nail for tablet market share, it will be a much smaller and weaker company five years from now.

By way of analogy, a decade ago Microsoft was encouraged to offer Office for Linux, but never did. One concern was that providing Office would legitimate Linux; in this case, the rival tablets are already more legitimate that Microsoft’s offerings. As it turns out, I think MS made the correct decision then, because desktop Linux is a boomlet that never happened.

However, the general principle is correct. With the PC market in free fall, I believe Office needs to generate its own revenues, wherever it can find them, without regard to synergy. MS has enjoyed a high-margin business selling Macintosh business applications for 29 years, and the WSJ estimates that Office has a 30-40% share among Mac users. Similarly, Apple’s tablet buyers are an attractive growth market:

Analyst Brian Marshall of ISI Group expects Apple to sell 88 million of them this year. If 35% of those iPad buyers also purchased Office, and Microsoft received about $40 per copy of the software, that would translate to about $1.2 billion in additional sales. Add potential customers from the existing pool of iPad owners, plus all of those with Android tablets, and the figure could well be higher.
Otherwise, the Office group risks accelerating a more serious problem: the risk of irrelevance. My daughter’s (former) high school adopted OpenOffice as the standard tool for the entire school, and it worked well. The Achilles heel of OO is the imperfect compatibility with MSO, but if everyone’s using OpenOffice, it’s a non-issue. I wonder how many of those students will ever buy Microsoft Office later in life.

WSJ also notes Microsoft’s need to challenge its incipient cloud rivals:
an added benefit would be to nip in the bud those mobile rivals training a new generation of device users to rely on Office alternatives such as Google's Google Docs, applications from Evernote, and Apple's iWork apps.
In the Gates era, I don’t think such a strategy would be seriously considered, as Chairman Bill would doggedly (and optimistically) wait for Windows tablets to turn the corner — just as he’s waited more than a decade for Windows to become a viable smartphone platform.

I have no idea what Steve Ballmer will do, given he has escaped accountability for an abysmal record as CEO. But I know what he should do.

Disclosure: I own 100 shares of Microsoft, as part of a Dogs of the Dow dividend-seeking investment strategy. I own several Macs, but no Windows or iOS devices.

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