Scratching the Surface
Microsoft recently reduced the price of its Surface tablets to $349 from $499, with the version that includes the keyboard dropping to $449 from $599. It also took a $900 million charge to reflect unsold inventory of the device during the last quarter. Microsoft Corporation (NASDAQ:MSFT) doesn´t seem to find its way in mobile, and this has some serious implications for the future of the company.
According to Gartner, PC sales declined 10.9% in the second quarter of the year; this was the fifth consecutive quarter of declining PC shipments. Tablets have been gaining market share versus PCs for a long time, and the trend has not been reversed by Windows 8. Far from that, Microsoft Corporation (NASDAQ:MSFT)´s new operating system has received lackluster acceptance from customers, and it may even be accelerating the decline of the PC industry.
When it comes to tablets, Apple Inc. (NASDAQ:AAPL) is the undisputed leader in the high-end segment of the market, and the iPad Mini has been a big success for the company by providing a more affordable alternative to larger iPad versions.
At the same time, just as in the smartphones markets, Google Inc (NASDAQ:GOOG) has leveled the playing field with its enormously popular Android operating system. Second quarter tablet shipments have not been released yet, but according to IDC Android tablets surpassed iOS devices in the first quarter of 2013.
Apple Inc. (NASDAQ:AAPL) is still the biggest vendor in tablets with a 39.6% market share, but companies like Samsung, Asus and Amazon.com, Inc. (NASDAQ:AMZN) have been outgrowing the Cupertino giant thanks to high demand for their lower priced products, especially in emerging markets.
Tablets are killing PCs, and the industry seems to be becoming a competition between Apple Inc. (NASDAQ:AAPL) and a group of manufacturers like Samsung that capitalize on the popularity of Android to gain market share in the low-end of the pricing spectrum.
In the mobile paradigm, platforms and ecosystems are more important than devices per se, and this puts Microsoft Corporation (NASDAQ:MSFT) in a very uncomfortable position as Apple and Google Inc (NASDAQ:GOOG) continue to expand their dominance.
Culture and Management
Microsoft is losing the consumer, the company is still quite strong in the corporate sector, but that´s hardly enough to regain its former glory. The company, which used to rule the technology industry, missed many of the most important trends in the industry over the last decade: mobile, search, online advertising and social networks, among others.
Importantly, it wasn´t because the company didn´t have enough resources to capitalize them that Microsoft Corporation (NASDAQ:MSFT) missed these opportunities. On the contrary, its near monopolistic position provided by Windows and Office ten years ago meant not only big, fat profit margins for the company, but also an invaluable strategic asset in terms of competitive strength.
The company has followed the strategy of not trying to be the first to innovate, but the first to profit. This means selling its own versions of new technologies as opposed to building new things from scratch. This used to work when Microsoft was bigger and stronger than its rivals, but that’s not the case anymore.
The Netscape vs. Explorer example can be quite illustrative about how this used to function: by owning the operating system in the vast majority of computers around the world, Microsoft Corporation (NASDAQ:MSFT) managed to beat Netscape in spite of starting in second position to the browser race.
But things are very different nowadays, mobile computing is here to stay and Microsoft is seriously lagging the competition. Judging by the Surface flop, the company no longer has the strength to make big profits in areas where other companies innovate first.
Microsoft has lost its competitive strength in several key areas, and that requires a new strategy if the company wants to compete effectively. Microsoft needs to start thinking outside the box and transform its culture to move like a challenger, not like the leader it once was.
This would likely require much more than an internal reorganization; a change in top leadership may be in order before Microsoft runs out of time.
Yes, I´m looking at you Mr. Ballmer.
Bottom Line
Microsoft´s problems go way beyond disappointing financial figures for the last quarter. The mobile revolution is running at full speed, and it’s leaving Microsoft Corporation (NASDAQ:MSFT) behind. This is very different to competing from a leadership position, so a change in top management may be required if Microsoft is going to remain a relevant player in the tech industry.
The article Microsoft Needs Brain Surgery originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Andrés 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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