Microsoft Corporation (NASDAQ:MSFT) has recently released a version of Microsoft Office for iOS.
This decision has been in the works for some time and is partially a defensive response to Apple Inc. (NASDAQ:AAPL)’s iWork announcement. Offering the Office Mobile app for the iPhone through an Office 365 subscription is an important strategic move for Microsoft Corporation (NASDAQ:MSFT). The application is available for free on the Apple Inc. (NASDAQ:AAPL) App Store, allowing Microsoft to neatly sidestep the royalty payment question. Office Mobile app is optimized for the iPhone, and while this means it can also be used on an iOS tablet, the implication is that Microsoft still believes in the eventual success of Windows-powered tablets.
I don’t think this offering will move the valuation needle for Microsoft Corporation (NASDAQ:MSFT), but it finally allows iOS users limited access to the Office productivity suite, it increases the usability factor and adds an incentive for Office 365 subscriptions, it gives the Office suite an entry into mobile devices, and it will likely blunt the impact both of iWork and Google Docs.
Although the conventional wisdom regards Microsoft Corporation (NASDAQ:MSFT) as a technology giant in decline, I see glimmers of a more cohesive strategy through new Windows. Microsoft’s new multi-pronged strategy to compete in the world of cloud computing and mobile devices should help rejuvenate its Windows Operating System (OS) and software franchise by creating a more cohesive user experience among multiple devices, which should strengthen the links among the users, the OS, and the application software.
The rise of cloud computing has weakened links among users, the Windows OS, and its integrated application software suites, while also reducing network effects as consumers discover acceptable OS and software substitutes. The rise of alternative computing devices further weakened the links between consumers and the Windows ecosystem by replacing the traditional desktop PC and changing usage patterns. Although Microsoft Corporation (NASDAQ:MSFT) is playing catch-up, Office 365 is its response to competing cloud-based productivity tools, offering subscription-based services for Office, Exchange, Lync, and Sharepoint.
Compatibility and continuity concerns will drive professional users to Office 365, helping to maintain the size of the installed base, which should reinforce the network effects of the Windows franchise. Given the substantial capital investment required to build and maintain such a robust cloud offering, there are significant barriers to entry for this business that will limit entrants, allowing Microsoft to generate high returns on its investment over the long term.
The new Windows OS will be used across many devices, providing a smooth, more cohesive user experience from PC to tablet to smartphone. The Surface and other Windows-based tablets are Microsoft’s first foray into tablet computers; A tablet that runs the Office productivity suite is more appealing to many consumer and business users relative to competing devices.
The final piece of the strategy is the Windows Store, a digital distribution platform for Windows 8 where users can purchase and download apps, meant to create a community and marketplace for developers and consumers.
Many of these products are “me too” ideas, but the combination of these products and services will build customer stickiness across multiple devices, which should help slow, stop, or possibly reverse the decline of the Windows franchise. I do not expect all facets of this strategy to be successful in the near term, but Microsoft has a record of investing significant resources over long periods in pursuit of its objectives.
Credit perspective of Microsoft
Microsoft enjoys a solid competitive position that enables it to generate prodigious cash flow. The firm’s balance sheet is very lightly leveraged, and it will have no trouble meeting its contractual obligations for the foreseeable future.
The firm is sitting on around $68 billion of cash, including $7 billion held domestically, versus $14 billion in debt. Cash on hand alone is adequate to meet all of the firm’s contractual obligations during the next five years more than 6 times over. Microsoft has steadily increased its dividend in recent years, including a 15% bump in 2012 following a 25% increase the year before.
Bullish supportive points
1). The already strong server and tools business to continue gaining share in an expanding market.
2). Microsoft’s Windows 8 launch provides a more cohesive strategy for its Windows OS franchise to compete with tablet and mobile devices.
3). The Azure platform has the potential to develop into a significant contributor alongside the company’s other cash cows.
Bearish supportive Points
1). The Windows OS business is declining due to a variety of factors including alternative devices, alternative operating systems, and the mix shift toward lower-priced, lower margin emerging-market sales.
2). The decline of the Windows OS business has begun the decoupling of the primary components of the Windows ecosystem as consumers gain comfort with alternative products.
3). The growth in Microsoft’s cloud-based products and services is likely to weigh on margins over the long term.
Risk
Microsoft’s flagship Windows operating system and Office productivity software suite are under assault from tablet computers, cloud alternatives, and OS X offerings from Google, Apple, and open-source providers like Linux.
Windows-based PC shipments have slowly eroded from approximately 95% market share a decade ago to 90% today owing to shifting consumer preferences and the rise of OS X and Android-based tablet computers and smartphones. With the release of Windows 8, the Surface tablet, and the pending release of the Nokia Windows phones, Microsoft hopes to reverse market share declines while establishing beachheads in the smartphone and tablet markets.
I believe the Surface and upcoming OEM Windows-based tablets are good first efforts and the inclusion of Office should help broaden the appeal of Windows tablets to traditional laptop users in addition to tablet users.
Ahsan Aslam Khan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft.
The article Is Microsoft a Good Buy ? originally appeared on Fool.com and is written by Ahsan Aslam Khan.
Ahsan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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