How Quickly Will Windows and Office Die?

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.

Importance
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.

The fortress
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. 

Big G
Google  (NASDAQ: GOOGL  ) 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? 

Apple
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.

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. 

Final thoughts
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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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 January 06, 2014, at 3:40 PM, MacAddict3 wrote:

    Google has to start with more than rewriting around Microsoft's Pattens. Google needs to come up with a legitimate Office package and Open Office will not cut it. Google needs to come up with a legitimate back end, Google cloud is a joke for any company wanting to maintain proprietary tech. Giving the backend away with anything tied to Google is a dead giveaway that it will be sorted out for meta data.

    Apple has a cross license non compete agreement with Microsoft. Apple by contract cannot directly compete with Microsoft. So unless you think the department of justice and commerce is going to OK a merger then that is out. As long as Apple continues to point at consumers and Microsoft continues to point at business, Apple is not going to challenge Microsoft.

    Microsoft has a lot to worry about but Google and Apple in the business is not one or two of them.

    Linux on a for profit basis is a real concern. If Red Hat or Suse or Ubuntu or you name it verity of linux will byte the bullet and make a real standard version with an intuitive interface for the front end and back end. This version needs to be both forward looking and run most if not all of the legacy business software. This version must have a real profit ability for third party developers and a complete IDE that is easy to develop for and maintains a low level language. This environment must have a complete ecosystem, not just a piece here or there. It must have a COMPLETE ECOSYSTEM. Right now Apple has all except a back end that is real, and the legal ability. Nobody else even comes close.

  • Report this Comment On January 06, 2014, at 3:57 PM, twolf2919 wrote:

    @MacAddict3, what does "Apple has a cross license non compete agreement with Microsoft. Apple by contract cannot directly compete with Microsoft" mean? Apple and Microsoft may have cross-licensing agreements with regards to their patents, but to say that they have a "non compete" agreement is ludicrous. What do you think they've been doing for the past few years if not compete? MS sells tablets, Apple sells tablet; MS sells smartphones, Apple sells smartphones..hellooo?

  • Report this Comment On January 06, 2014, at 5:24 PM, CALayman wrote:

    This article has the depth of a mud puddle.

  • Report this Comment On January 06, 2014, at 5:54 PM, emilykulish wrote:

    Since Google started charging Google Apps for $50/user/year, the advantage has disappeared and the momentum has halted.

    The author clearly has no clue about Enterprise IT. Neither Google nor Apple has anything to compete with Microsoft.

  • Report this Comment On January 07, 2014, at 4:56 AM, margiecfl wrote:

    @macaddict-- a non-compete agreement?? huh?

    you want to look at something that wouldn't hold up in court ...

  • Report this Comment On January 07, 2014, at 5:42 PM, gb101089 wrote:

    no way no how.you can't compare office with enterprise solutions offered by google and apple (especially apple)...EVER. I work at a small business that uses Google as our email provider and we also have access to docs, sheets, etc......its rubbish....we ended up purchasing office... and don't get me started on google drive ...

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