Microsoft's Making a Big Bet... on Itself

Microsoft (NASDAQ: MSFT  ) is reportedly considering joining a consortium of investors to offer Dell (UNKNOWN: DELL.DL  ) the financing to go private. It wouldn't be making a direct investment in the equity of Dell, according to reports, but it would give the company some sway among Dell's owners. This would be a big move for both companies and continue a string of somewhat desperate moves by Microsoft.

This isn't the first major investment Microsoft has made in customers. In 2011, the company paid more than $1 billion to assure that Nokia (NYSE: NOK  ) used Windows Phone on its next generation of smartphones. It was an effort to keep Google (NASDAQ: GOOGL  ) from gaining another major partner for the Android operating system.  

So, is this a new trend for Microsoft and what's the upside? The truth is that Microsoft is in need of partners to push Windows 8, which is really just a bet on the new OS itself

The upside
Microsoft needs strong customers to keep using its operating systems for PCs, tablets, and smartphones. Even if Windows 8 and its mobile versions were superior to iOS or Android (debatable at best), the devices companies produce make all the difference when customers are making choices. Microsoft needs the best devices from HTC, Samsung, Dell and Nokia to come with Windows Phone 8, and if that means shelling some money over to keep Dell strong or make sure Nokia doesn't choose another partner, then that's what Microsoft needs to do.

On the PC front, Microsoft needs Dell to be financially strong so it can innovate and grow in the PC and tablet market. Dell is the third-largest PC maker behind Hewlett-Packard and Lenovo, so the company is a huge customer for Windows operating system and the Office Suite.

Long term, both of these moves have more to do with new markets than the traditional PC or smartphone markets. We've seen a blurring of lines between everything from small smartphones to big-screen TVs in recent years, and Microsoft needs to maintain a central role in this shift. That's why it designed Windows 8 to be used on all kinds of different devices, opening up form factor options for manufacturers. Locking up Dell and Nokia as customers for the new OS means millions of customers will be exposed to it, growing the network.

The danger
There are a few dangers if Microsoft puts money into a customer. As Microsoft invests in customers, the danger of alienating other customers grows, particularly in new markets. There aren't any solid operating system competitors for PC customers to turn to, but in smartphones and tablets there certainly are any it can't lose the likes of Samsung or HTC out of spite.

Google's Android operating system is already the No. 1 smartphone OS and is a close no. 2 behind Apple's iOS in tablets. These two established operating systems slowly leak into markets like corporate PCs, which Microsoft once dominated. The iPad, in particular, has become a common business tool, opening up new markets for Apple that Microsoft would like to continue to control.  

Just as important for investors, Microsoft also risks throwing good money after bad. A few billion dollars here and there isn't the end of the world for Microsoft, but if it tries to come to the rescue of the entire PC business, it could be a major detriment to the company.

Foolish bottom line
Microsoft needs to make moves like investing in Dell and paying Nokia to use its operating systems in hopes that Windows 8 and Windows Phone pick up momentum. Microsoft is already falling behind in the smartphone business, falling from 4% market share in May to 3% in November, according to comScore. Microsoft needs partners to push its operating system and maybe even needs a slipup from Google or Apple. But this bet is really a bet that Windows 8 will be a hit, so really, Microsoft is just betting on itself.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


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