Microsoft (Nasdaq: MSFT ) can't rely on its great history forever. In the ongoing war between industry giants Apple (Nasdaq: AAPL ) and Google (Nasdaq: GOOG ) , old Microsoft finds itself shoved to the side by these fellow tech titans. With the burgeoning growth of mobile platforms and the slow decline of the PC, Microsoft will have to pick up the pace to keep up with its more innovative kin. Unfortunately, that train may have already left the station.
Microsoft's first forays into the mobile market haven't gone quite as well as planned. Some thought the Windows Phone would supercharge the company's efforts in this sector, but Google and Apple have surged ahead.
A report by the International Data Corporation on Aug. 8 confirmed the bad news. Although Windows Phone sales have picked up considerably in shipping nearly 5.4 million units in 2012's second quarter, its market share still wallows at fifth place in the smartphone industry. At a 3.5% share, that puts Microsoft squarely below flailing BlackBerry, to say nothing of Apple and Google's preeminence.
Combined, those two giants service a combined 85% of the global market. Google's Android phones picked up a gain of nearly 50% since the second quarter of last year, en route to shipping more than 100 million units in the most recent quarter. Every company not named Google or Apple -- including Microsoft -- is scrabbling for third place in this top-heavy industry, an ominous sign given the blossoming power of mobile.
Entering the tablet battle
Microsoft finally got into the tablet scene recently with the announcement of its Surface device. Expected to be priced in the $500 range for the cheapest unit, industry insiders predict the Surface to go head-to-head against the pricey iPad in terms of quality. On the other hand, Google's upcoming Nexus tablet appeals to the budget consumer with lower prices.
Ostensibly, this is a smart move by Microsoft as it pairs with Intel (Nasdaq: INTC ) and NVIDIA (Nasdaq: NVDA ) to maximize power and graphics. These two processing giants are renowned for quality products and should continue that trend with the Surface in connectivity and resolution. Indeed, Microsoft could take the lead in the tablet market as far as hardware performance goes, which could pay off -- tablet sales are expected to grow from 54.8 million units last year to 208 million in 2014.
The problem comes with the Surface's aim. Microsoft seems to be angling the Surface to close the divide between laptops and tablets, which makes little sense. Consumers desiring power and performance could just as easily purchase a laptop, falling back on familiarity rather than diving into the Surface's murky niche in the market.
Considering that Amazon's cheaply priced Kindle Fire has taken a bite out of Apple's lead in the tablet scene -- dropping the iPad's market share from 72% to 50% over the past year -- trying to battle for Apple's declining premium market seems misguided. Undoubtedly, the Surface will see gains as the tablet business grows, but investors should be wary before expecting Microsoft to rise as a third party in the Apple-Google war for tech dominance.
Wait before pulling the trigger
None of this says that Microsoft is necessarily a bad investment. With the company's P/E of 15.2, the market prices the stock below the industry average and considerably below Apple and Google. Microsoft pays a modest dividend of 2.6%, a nice return to income investors.
Microsoft's five-year sales growth rate of 6.9% -- far below the industry average of 12.7% -- should draw some concern, however. Investors would be wise to take a wait-and-see approach to the Windows 8 operating system release later this year, but Microsoft's clouded future in the mobile market should give interested shareholders pause in light of Google and Apple's onslaught.
It's hard to see where Microsoft can make up ground as Google and Apple revolutionize the tech industry. Microsoft entered late into the smartphone business and wants to compete in a shrinking premium share of the tablet market -- two big, red flags for potential investors. Although this company has numerous strengths, from huge cash reserves to a track record of solid performance, it's hard to see how Microsoft turns the Google-Apple struggle for the future into a three-sided engagement.
Forward-looking investors can see the mobile revolution's growth extending to the future. The Motley Fool's new premium report on Apple details the company's opportunities and threats for investors; additionally, check out this premium report on Intel to see what's in store for the semiconductor giant. Each report comes with a full year of updates, so pick up yours today.