Microsoft's Next Mistake

The inevitable is happening.

Microsoft (Nasdaq: MSFT  ) is reportedly working on rolling out Microsoft Office in iPad form.

Apple (Nasdaq: AAPL  ) sold 11.1 million iPad 2 tablets in its latest quarter alone, so clearly this is a booming computing market that the world's largest software company needs to address. iPad sales have spiked 166% over the past year, while desktop and laptop sales have been languishing. Unit sales of Windows-fueled PCs have posted year-over-year declines every single quarter this year.  

The writing is clearly on the tablet wall. The "good enough" computing revolution is here, and folks are buying smartphones as necessities and tablets as novelties at the expense of more powerful desktops and laptops.

Microsoft has no choice but to roll with the changes. Right?

Here comes the quandary
When 20th-century bank robber Willie Sutton was asked why he held up financial institutions, he reportedly responded, "That's where the money is."

If Windows is starting to fade as an operating system of choice for light computers powered by Apple's iOS and Google's (Nasdaq: GOOG  ) Android, why should Microsoft's productivity suite go down with the ship? Android and iOS weren't even around five years ago, yet both platforms now have more than 200 million activated devices apiece.

Tablets and smartphones may not seem like gadgetry made for word processing or spreadsheet crunching, but it's happening. The popularity of Bluetooth keyboards are making tablets more PC-esque, especially for folks with pudgy fingers that can't seem to get the hang of touchscreen keyboard pecking.

Apple's own Pages word processing and Numbers spreadsheet programs -- as well as Quickoffice suite -- have been among the top premium iPad apps since the tablet's inception last year. Over in the Android space, Quickoffice Pro and Polaris Office are popular workarounds for Microsoft's own programs. Why should Microsoft let everyone else cash in on the tablet craze?

Perhaps the more problematic dilemma is that many of these programs encourage users to turn to Google Docs and other free cloud-based solutions to make their files portable and shareable. In short, Microsoft Office compatibility isn't a resource: It's a cookbook! All of these productivity suites are weaning consumers off Microsoft's second-biggest software product. Microsoft better jump right in and show everybody how it's done!

Well, that's the quandary. If it does in fact roll out Word, Excel, and PowerPoint as apps, isn't it vindicating the migration process? Won't it make it easier for folks to give up their PCs? I mean, have you seen the ASUS Transformer Prime tablet that comes out next week? The docking station is a touchpad keyboard. It's practically a light laptop that you can break in two when all you need is the tablet.

If Microsoft isn't careful here, Windows may become the Research In Motion (Nasdaq: RIMM  ) of computing. It will be largely eschewed by consumers in favor of iOS and Android operating systems. Corporate customers will reluctantly stick with the dinosaur, perpetually eyeing a way out.

Even if Microsoft's extinction is inevitable, does it really want to make the meteor fall faster?

The price will never be right
Let's say that Microsoft does go through with reports of Office apps hitting the tablet market next year. What should Mr. Softy charge?

There is no right answer here. Apple charges $9.99 for stand-alone versions of its Pages, Numbers, and Keynote iWork components. There are freely available open-source alternatives. Does this mean that Microsoft should follow suit, pricing Word, Excel, and PowerPoint modules at $9.99 apiece? What if this happens, and after a few weeks of curious purchases, it falls back in popularity to rival offerings? What if it aims higher and is summarily dismissed? What if it take an aggressive pricing stance, only to upset users of pricier versions on PCs?

There's really no way that Microsoft can win here. Sure, it can scale back the functionality of its tablet apps to justify the pricing discrepancy between its PC versions, but then it still has to compete with more full-featured dedicated apps.

Ideally, Microsoft Office components for iOS and Android would be bridges or temporary patches. Consumers will buy both the apps and the actual computer programs, and it will all dovetail nicely into Microsoft's own cloud computing initiatives. It's not going to play out that way. Most people don't need a tablet today, but the more computing on tablets and smartphones that they do -- the more that people move to the cloud -- the more operating system agnostic they will become.

The only intelligent solution would be to wait until Windows 8 tablets to arrive before jumping in here to make Microsoft Office exclusive to Windows-flavored tablets, but by then it will probably be too late.

Tell me how this leads to folks sending more money to Microsoft in the future -- because I don't see it.

Take two tablets and call me in the mourning
How much longer will investors put up with market share bleeding at Dell (Nasdaq: DELL  ) and PC shenanigans at Hewlett-Packard (NYSE: HPQ  ) before realizing that weakness at longtime Windows ambassadors doesn't bode well for Microsoft itself?

Many of my fellow Fools -- including several of our Motley Fool newsletter services -- are bullish on Mr. Softy. I'm not. After years of being a Microsoft naysayer I'm going to make my words accountable. I entered a bearish CAPScall on Microsoft in Motley Fool CAPS this morning.

Microsoft is approaching a dangerous point in its once-glorious life cycle, and selling a ton of low-margin Xbox consoles last week isn't going to make things right. If Microsoft Office on the iPad -- with the software giant forking over nearly a third of that revenue to Apple as its developer toll -- isn't a "jump the shark" moment, then why is Steve Ballmer wearing a Fonzie jacket?

The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Dell, Google, and Microsoft. Motley Fool newsletter services have also recommended creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for HP. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (11) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2011, at 11:30 AM, deemery wrote:

    What if Google brings out Google Apps for the iPad? Apple already has its iApps on the iPad, but Google has better enterprise integration.

    I think Microsoft will have Big Problems bringing the bloat that is Microsoft Office to the iPad and living within the tight resource/environmental constraints. Those constraints Are Good Things, they keep software on the iPad generally tight and efficient. The alternative for Microsoft would be a cloud-based offering, but see my first point. Would Microsoft be willing to basically -give away- iOffice to compete with Apple and Google? That hasn't been Microsoft's style; Office has been a huge cash cow.

  • Report this Comment On November 30, 2011, at 11:51 AM, nuno89 wrote:

    Remember that microsoft already has a cloud offering (office365) that is free. It is very similar to google docs with a better integration with the desktop product.

    So they are already testing this strategy.

    Of course the tablet version of Office will have to be scaled down compared to the desktop version. The keyboard is one thing but the screen size, the amount of memory and storage are another aspect that means the applications have to be scaled down. Apple did the same thing by the way. Their desktop product is more powerful.

  • Report this Comment On November 30, 2011, at 12:15 PM, gskorich wrote:

    your thinking is old school at best. making office for ipad is step in the right direction. everyone knows this suite and having the option to have it on a tablet is great news. think of it: writing a report in excel or word and then emailing it to yourself or the cloud and finish working on it at your desktop pc or mac. same format same application. whats wrong with that? i think it will besome time before the the workplace gets rid of their desktops and even longer before google docs catches on, how long has that product been around?

  • Report this Comment On November 30, 2011, at 12:44 PM, MoolaMonster wrote:

    I believe your premise is flawed: Tablets will not take over the computing world anytime soon. (Just like Segways will not take over the people-mover market anytime soon.)

    And, tablets will not force downward pressure on Office pricing. There have been competing cloud-based productivity suites for a decade (in our desktop/laptop world), and I am no more inclined to use these products on a 9" x 7" touchscreen.

  • Report this Comment On November 30, 2011, at 1:06 PM, vantan wrote:

    The best way forward might be to just do an html5 front end to their cloud based office system. Then it should work the same on browsers in ios, android, windows, osx, linux or whatever as long as the browser is html5 compliant and the device can provide adequate storage as needed for the users requirements. Google docs do not work all that well for creating / editing on e iPad but just viewing seems ok. Maybe MS and Google just need to devise a better way to create and edit via the browser by copying form based web apps that seem to do this well.

  • Report this Comment On November 30, 2011, at 1:25 PM, deemery wrote:

    I'm having a hard time figuring out how I'd use the current Office mouse/keyboard interface on a tablet. So part of my concern is that an Office "look and feel" won't work on a tablet, but that's exactly what Microsoft will offer!

  • Report this Comment On November 30, 2011, at 2:01 PM, applefan1 wrote:

    About 8 years or so I told my financial analyst that Microsfot would not go beyond 30 and Apple is the stock to invest in.

    Here are some of my reasons.

    Microsoft has (had) 90% marketshare in the OS market, but due to Apple's innovative approach, they will and are capturing more marketshare every quarter. Once people switch to apple, they rarely go back. Apple is less costly to implement, support and mantain and pretty much has no virus and spyware annoyances like Microsoft.

    Microsoft is STILL trying to catch up to SnowLeopard in many ways, and Lion. From my perspective, I think it has to do with the development tools are just much better so apple can do things quicker.

    Apple has a much better grasp on the mobile device markets (iPhone, iPad, iPod) than Microsoft.

    Microsoft marketing is like watching a commercial for a medical drug. BORING. They get no real attention from the media like Apple.

    If apple keeps up the momentum, I see Microsoft just becoming a company making money from different versions of Office and that's about it.

  • Report this Comment On November 30, 2011, at 4:34 PM, wolfmansbrother wrote:

    Reports of Bill's demise have been greatly exaggerated.

    Tablets are fun little consumer gadgets, but MS has a stranglehold on the business market and it's hard to imagine corporate America cancelling their enterprise contracts and giving out iPad's to their workforce any time soon. Moreover, MS Sharepoint has become the de facto choice for a collaboration platform and then there's still the Windows server business.

    Oh, and the guys programming all those cool apps? The vast majority of them are doing it on computers running Windows.

  • Report this Comment On November 30, 2011, at 4:41 PM, ldgpangeo wrote:

    The key challenge is whether MS can understand the iPad user interface. In its past tablet forays it has tried to move the laptop world down to a touch screen instead of creating a new world that is natural to the new environment. That paradigm shift is what makes IOS and Android exciting to users.

    Right now, I can compose in Word, and then import it into Pages on the iPad for carrying around to clients, and then move it back to my laptop. Some formatting is lost, but not enough to hurt. Hence, it's not immediately clear what MS will bring to the iPad when it offers its own Office Lite for this device.

  • Report this Comment On November 30, 2011, at 5:29 PM, CluckChicken wrote:

    "I'm having a hard time figuring out how I'd use the current Office mouse/keyboard interface on a tablet."

    I have to agree with this, especially for anything outside of Word. I do not understand what is ment by "look and feel" about the office products. Other than the menu options which in the most recent Office would actually not be that bad for a touch interface there really is not much you can do to change the "look and feel" of what the programs are. What is the "look and feel" of a spreadsheet or word processor is.

    The real issue is that virtual keyboards suck and fingers are not as good as a mouse.

  • Report this Comment On November 30, 2011, at 9:26 PM, rlcato wrote:

    @Cluckchicken: the reason 'deemery' is having a hard time is what he wrote after the quote: "...Office "look and feel" won't work on a tablet..." but MS will give us that; 'MS Office-on-a-Tablet'. 

    A tablet can be like a notepad; something immediate to jot down info but with just enough 'grunt' to get a point across -conveniently- 'look' with your eyes & 'feel' with your FAT fingers. You don't need '3 copy & paste' or '2 zooms' or '5 close windows' or '3 previous & redo's' etc. or 40 different menu pulldowns and links or the 'ribbon' in its present state on a pad. But that is what MS thinks you should have... as well as 'office365'. This is why there are 2 types of iWorks; one for your desktop (heavy) and one for your iPad (lite) and both able to share between the two. 

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