Is Microsoft Corporation (MSFT) In Catch-Up Mode?

Microsoft Corporation (NASDAQ:MSFT) is cutting prices on its cloud services, according to Reuters, so it can better compete with Amazon.com, Inc. (NASDAQ:AMZN). Will it work?

The Cloud

The Internet is a confusing place. While more and more people are accessing it from mobile devices, that doesn’t change the backbone of the web. Every time a person tries to look up a site, stream a movie, or buy a book there is a computer on the other side of the transaction.

In fact, more and more companies are using the Internet as their main computing power. That includes using the Internet as a conduit into a private network and using software that is located on “the web.” Often called software as a service (SAS), the latter is just one example of the so-called “cloud.”

Sharing computing power is a big business. Amazon.com, Inc. (NASDAQ:AMZN) was among the first big companies to step into the field. There are even real estate investment trusts the specialize in housing the thousands of computers that support the web.

Since Amazon has to have a vast amount of computing power to support its own business, it makes sense that it has an impressive level of expertise in the area. Letting others join in on the company’s web-based computational ability leverages on existing strengths. Simply put, the company is a clear leader in the space, offering both a good name and a good product.

A Big Lead

Reuters also reported that developers prefer Amazon’s cloud services by a more than two-to-one margin over Microsoft Corporation (NASDAQ:MSFT)’s similar offerings. That’s a big problem for Microsoft Corporation (NASDAQ:MSFT). If a company hires an expert to get them into the cloud, they are most likely going to follow that person’s advice—which means Amazon is getting recommended more often than Microsoft Corporation (NASDAQ:MSFT).

By cutting prices to compete with Amazon, Microsoft Corporation (NASDAQ:MSFT) is at least leveling the playing field to some degree. While this is only one segment of a vast company, it’s an important growth area and Microsoft Corporation (NASDAQ:MSFT) needs to be a big player. The only problem is that the price drop is pretty steep, 33% by Reuters’ estimates. That’s a big pinch on margins.

Could it Work?

Microsoft has something that Amazon doesn’t, a full suite of business products that all work together, from desktop software to the “cloud.” And the business community is very comfortable with the company’s products and reputation. So, trimming the price could be a good call to drum up new business and win accounts that otherwise would have gone to a cheaper option.

A Mobile Laggard

The real concern here is that Microsoft’s price shift exposes one more area in which it is a mobile laggard. However, Microsoft isn’t standing still. For example, it launched a new mobile operating system in conjunction with Nokia Corporation (ADR) (NYSE:NOK). That company’s Lumia phone was a showcase for the power of its new mobile operating system and for Nokia’s ability to build a desirable cell phone. While the phone may or may not turn out to be a long-term success, it clearly proved that both companies still have something to offer.

In fact, for aggressive investors, Nokia Corporation (ADR) (NYSE:NOK) is a good way to get exposure to emerging markets. While it is an also ran in mature markets, it still has a notable position in lesser developed ones. So, even without breaking into the big leagues, it could still have a solid future as emerging markets industrialize. This is also why Microsoft’s efforts with the company could prove an astute long-term decision.

If both companies can establish themselves in growing markets that can’t yet afford high-priced products from competitors like Apple, they would be tapping into the world’s big growth story. They would also build a barrier against new competition when the emerging markets can afford more expensive offerings. That’s a clear win for Nokia and Microsoft.

Back to the Web

Getting a foothold in a growing market is also why the “cloud” services price drop makes long-term strategic sense. In this case, Microsoft is trying to cement its position before it winds up an also ran, again. It has the cash and the cash-cow businesses to support the effort, too.

While Amazon is a great company, its shares are trading at pretty steep levels. Microsoft’s are not. Only growth minded investors should be looking at Amazon. Since there’s plenty of room for both companies in the “cloud,” Microsoft looks like a better value and income play at the moment.

That said, Microsoft has a lot of moving parts. Still, it is a financially strong company that is very well run. It’s worth taking the risk that its transition to a more desirable product lineup is a little bumpy.

The article This Tech Giant Is Playing Catch Up originally appeared on Fool.com and is written by Reuben Brewer.

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