Microsoft Corporation (MSFT)’s Surprising Future

Is Microsoft next?

That same potential for greater long-term earnings growth may look tempting to Microsoft Corporation (NASDAQ:MSFT), too. A cloud-based, cross-platform subscription service would make it easier for Microsoft’s customers to upgrade both their software and their hardware, since they wouldn’t have to worry about buying discs or downloads, or purchasing new machines that need new, expensive licenses to Microsoft Corporation (NASDAQ:MSFT)’s programs.

Microsoft Corporation (NASDAQ:MSFT) has already tested out a cloud-based business model through its successful Xbox Live subscription service. Console gamers’ accounts keep track of all their data, and store their online purchases.

But Microsoft Corporation (NASDAQ:MSFT) has had mixed feelings about adopting cloud technology across its business. From an accounting standpoint, the revenue recognition would hit Microsoft’s EPS growth figures hard. On the other hand, a subscription-based model will maximize profitability better than its current license-based business model.

I anticipate that Windows-based services like Microsoft Office Suite will move toward subscriptions. Office Suite shouldn’t have to be constantly upgraded with uninstalls and re-installs after each computer upgrade. A cloud-based service will eliminate that hassle. But Microsoft Corporation (NASDAQ:MSFT)’s operating systems shouldn’t fall under a subscription-based business model; no one will pay a monthly fee to keep using a computer they’ve already bought.

Conclusion Many Chief Financial Officers at the largest technology companies — Microsoft Corporation (NASDAQ:MSFT) likely included — will be watching the performance of Adobe Systems Incorporated (NASDAQ:ADBE) going forward. It’ll provide the best real-world case study of a software company’s ability to effectively transition from selling programs to selling services.

Investors should expect more such companies to adopt subscription-based business models. That shift will most likely lead to declines in year-over-year earnings over the short term. But if investors are patient enough, companies like Adobe Systems Incorporated (NASDAQ:ADBE) and Microsoft Corporation (NASDAQ:MSFT) will eventually figure out a way to maximize the profitability of a subscription-based business model for software licenses. When they do, their share prices could enjoy a sudden surge.

The article Microsoft Will Eventually Sell a Subscription-Based License originally appeared on Fool.com.

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