As things are going, Microsoft (NASDAQ: MSFT ) Windows and Office will suffer an increasingly rapid death. It might seem a long way off, but these long-protected profit centers for Mr. Softy will be vaporized.
Windows and Office represent a huge chunk of Microsoft's profits. Of course, it won't happen overnight, but if these cash cows were to be killed off, as I think will happen, Microsoft's stock would tank.
Microsoft built its empire on a virtual monopoly. Windows and Office dominated the consumer and business landscape. For years, Microsoft had in excess of 95% market share and became entrenched as the default corporate OS.
While consumers got used to using Windows, corporations invested billions in storing their data, spreadsheets, and presentations with Microsoft, and it's difficult to switch. Mr. Softy does all the back-end work, and if a company were to make a change and data was lost, boards would face numerous shareholder lawsuits. It's often not worth it for companies to risk that potential headache just to save a few dollars.
Meanwhile, a drop to "a mere" 91% market share makes it seem like Microsoft is still the 800-pound gorilla in the room. But, that gorilla is not nearly as strong as it once was. Two companies in particular are mounting a multi-pronged attack on both Office and Windows.
Google (NASDAQ: GOOG ) has Chrome and Android operating systems. The Android system is the default choice for various mobile device OEM's, as it essentially eliminates the substantial cost of developing their own OS.
Additionally, Google Docs continues to become more popular with both consumers and businesses. While Google charges businesses for its use, as the software becomes more widely adopted it reduces reliance on, and familiarity with, Microsoft and erodes the company's economic moat.
Microsoft counterpoint and punch-back
Many knowledgeable investors will point out that Microsoft has successfully sued Google for patent infringement with regard to Android and, at least initially, makes more money than Google for each device sold. Plus, an argument can be made that Chromebooks are not nearly as powerful or effective as traditional PCs.
To counter, there is no doubt that Google engineers are developing a workaround to Microsoft patents. Don't expect Mr. Softy to be earning that revenue in perpetuity.
As for the Chromebook, the Google Fiber project and balloons bouncing Internet signals aim to bring high-speed Internet to every corner of the earth. In the future, you could be in the Australian outback and still be connected to the web via Google. As this vision plays out, there will be little need for a high-spec system, as all programs will be run from one gigantic cloud server.
Additionally, even if the Windows Phone and Surface tablets catch on, and Windows' perceived dominance extended, how much revenue is Microsoft generating from Windows licenses?
The second front comes from Apple (NASDAQ: AAPL ) in the form of its latest OS and iWorks. Apple has announced it will be giving away its software for free. You might pay for the free OS upgrades by buying a PC priced much higher than a comparable Windows-based system, but at least you won't have to pay for upgrades for the life of your hardware. This is certainly a powerful reason to consider buying an Apple product.
As for iWorks, if you have become part of the Apple ecosystem, there is no need to contemplate paying for an Office subscription. Loyalty among Apple users is incredibly high. Furthermore, Apple has gone on a hiring spree, attempting to market its software to corporations as an alternative to Windows, a direct attack on Microsoft's hallowed territory. Most recently, Apple was seen recruiting former BlackBerry employees with links to corporate IT departments.
Microsoft leads in corporate infrastructure, and many would argue that no sane IT department would make what a potentially risky switch. People used to make the same case for Blackberry devices, citing security concerns. Yet, how many corporations have adopted a BYOD policy today, or have switched altogether?
The status quo will remain until a tipping point is reached, and that moment will likely be sooner than later.
The writing is on the wall. While Microsoft is armed with an incredibly strong balance sheet, a yield of 3%, a 13.8 P/E, and a hoard of cash (less the $7 billion recently paid for Nokia's handset business to keep the Windows phone alive), there are simply no exciting products (aside from the gaming industry-leader Xbox) replacing the revenue and profit that's likely to be sucked out of the Windows and Office divisions.
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