Microsoft Opens the Doors of Perception

"And suddenly I had an inkling of what it must feel like to be mad."
-- Aldous Huxley, The Doors of Perception (1954)

Instead of opening the doors of perception, it's more like Microsoft (Nasdaq: MSFT  ) opened the doors of Perceptive Pixel ... and then bought those doors. The software giant has now announced that it is acquiring Perceptive Pixel, the maker of enormous multitouch displays. Aldous Huxley's classic book chronicled his adventures after taking mescaline, so it seems an appropriate reference as Microsoft CEO Steve Ballmer must have been mad on some type of hallucinogen when he opted to pick up the smaller company.

What's a Perceptive Pixel?
Perceptive Pixel got a lot of publicity in 2008 after CNN used one of its gigantic multitouch displays while covering the presidential election to display an interactive map, shortly after the company was founded in 2006. It began shipping its displays in 2007, and early investors include 3M (NYSE: MMM  ) and Intel's (Nasdaq: INTC  ) global investment arm, Intel Capital, among others. They'll probably get nice payouts from this deal.

82-inch LCD Multi-Touch Display. Source: Perceptive Pixel.

82-inch LCD Multi-Touch Display. Source: Perceptive Pixel.

Watching some videos and demos of Perceptive Pixel's technology at work is nothing short of breathtaking. The company's customers include government defense contractors, national laboratories, higher-education institutions, and media broadcast companies. Perceptive Pixel's large multitouch displays are available in three sizes: 27-inch, 55-inch, and 82-inch.

The technology itself isn't why I'm so skeptical of the deal. Like some of the things Microsoft has in its labs, I'd love to feature them in my living room. Like some of the things Microsoft has in its labs, odds are its chances at commercial success are slim.

This one's on me
The 82-inch models will set you back a solid $80,000. Mr. Softy opted not to disclose the financial terms of the deal, but I would wager that Perceptive Pixel operates at a loss, considering its youth and the fact that its market is anything but mainstream.

That's something Microsoft is hoping to change, with Ballmer saying, "Our challenge is to make that technology more affordable."

"We want to make this mainstream," Microsoft exec Giovanni Mezgec added. "We will do anything possible to get the cost down and to get new forms of this out in the marketplaces in any way possible."

"Anything possible." That sounds expensive. Why pick up the company now, before it's even ridden the cost curve down to commercial viability? Why jump in now and foot the bill?

When acquisitions attack!
Microsoft has its fair share of acquisitions gone bad, most recently with aQuantive, which was the primary contributing factor to that $6.2 billion goodwill impairment last week. The culprit there was that "the acquisition did not accelerate growth to the degree anticipated." What degree of revenue growth can Microsoft expect from a company that sells $80,000 displays into niche markets?

There was also the notoriously botched acquisition of Danger in 2008 for an estimated $500 million. Danger was originally co-founded by Andy Rubin, now head of Google Android. That deal led to one of the software giant's more misguided forays into hardware, the pair of Kin phones that were released two years later only to be axed literally 48 days after launch. Maybe that's where Hewlett-Packard (NYSE: HPQ  ) learned its TouchPad moves.

I have an inkling this Perceptive Pixel deal will similarly prove to be a financial failure, and I haven't been ingesting any controlled substances.

Hardware hopes
The deal is also further indication of Microsoft's hardware interests. You might remember that the company had a table-sized multitouch display named Surface before that moniker was repurposed for its new tablet. That Samsung-built device, now renamed PixelSense, is similar to Perceptive Pixel's offerings.

An immediately obvious use of the acquisition would be to make its own table-sized PixelSense, but again it's not as if this was ever a big market -- especially when compared with the massive PC and smartphone markets that Microsoft plays in.

As for its new Surface tablet, presumably one day Microsoft may scale down the technology for use in mainstream devices after riding that cost curve down, plunging in countless dollars -- even more reason why OEMs (including HP) should be more concerned as Microsoft becomes more vertically integrated into hardware.

You know what they say
Apple
(Nasdaq: AAPL  ) has been betting big on multitouch for years, including its own acquisition of FingerWorks in 2005. The difference there is that Apple didn't buy FingerWorks for its hardware of multitouch keyboards, but rather its IP and technology that would eventually be incorporated into its iDevices.

Perceptive Pixel's technology is also patented, but it seems apparent that its pricey (and probably unprofitable) hardware offerings are a big part of this deal. When it comes to potentially problematic acquisitions, "the bigger they are, the harder the fall" absolutely applies. Let's just hope this one wasn't too big.

Apple's smart acquisition strategy has allowed it to create the innovative products that have made investors a fortune. The best part is, Apple may have more room to run. If you sign up for our brand-new premium Apple research service, you'll get an in-depth detailed report and free quarterly updates. Sign up now.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Intel, Microsoft, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Intel, Microsoft, Apple, and 3M, creating a diagonal call position in 3M, and creating bull call spread positions in Apple and Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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