Microsoft's "One" Strategy Is Starting to Work

Last year, Microsoft (NASDAQ: MSFT  ) reorganized itself around a new strategy. Instead of simply being a software company with a hodgepodge of different businesses, Microsoft shifted to a devices and services model. "One Microsoft," as the strategy is called, is an attempt to unify the company behind a single strategy, increasing collaboration between groups and presenting a consistent experience to customers. While Windows 8 has been drubbed in reviews for being confusing, mixing the classic desktop with the new tile-based start screen, it's part of a strategy that is starting to come together for Microsoft.

A single experience
Switching from using a Windows PC to a mobile device running Android or iOS certainly isn't seamless. This is the problem Windows 8 looks to solve, presenting the same operating system and interface to users of Windows PCs, tablets, and convertible devices. Windows Phone, while distinct from Windows 8, has a similar interface and is based on the same architecture, and Microsoft's acquisition of Nokia's phone operation allows the company to push the platform forward. The recently released Xbox One actually runs multiple operating systems, with a stripped-down version of Windows 8 optimized for non-gaming applications, as well as a different OS built for gaming.

One advantage of having the same underlying Windows architecture powering all of these devices is that developing multi-device applications becomes much easier. The goal for Microsoft is to allow developers to simply "design for Windows" instead of designing for each individual device, and the next update to Windows, code-named "Threshold," aims to unify the different platforms even further.

For consumers, this means having the same experience and apps on every device, be it a PC or a phone. With such a huge Windows install base already intact, this strategy -- executed correctly -- could give Microsoft a big advantage against Android and iOS. There's no guarantee, however, and the next CEO of Microsoft will have to work to make this vision a reality. Microsoft has certainly made plenty of mistakes in the past, from Windows Vista to being years late on the shift to mobile. But its strategy seems more sound today than it's been in a long time.

Microsoft Azure is the glue
The second part of this strategy is services, and Microsoft's Azure cloud-computing platform is the glue that connects these services with Windows devices. Azure has been growing rapidly, with cloud services revenue more than doubling year over year in Microsoft's most recent quarter.

Azure offers the same cloud computing and storage services as Amazon's (NASDAQ: AMZN  ) Web Services, but Microsoft also utilizes Azure to power its many services. Skype now runs completely on Azure, and SkyDrive, Microsoft's cloud storage service built into Windows 8, is transitioning to exclusively running on Azure. Xbox Live partially runs on Azure, and certain games, like Electronic Arts' upcoming Titanfall, use Azure to run multiplayer.

For developers, Microsoft's Visual Studio Online service allows applications to be tested and deployed to Azure directly from Visual Studio, as well as supporting source control and other features. This is the type of service that makes Azure more appealing than Amazon's web services for those developing applications, and it takes advantage of Microsoft's broad catalog of software and services.

The cloud has become sort of a catch-all term, but there's a real difference between Microsoft's strategy and Amazon's. While Amazon has built up a large cloud business by offering computing and storage at extremely low prices, these services are a commodity. Microsoft offers the same thing, and it matches Amazon's prices, but that's not where the real money is made from the cloud. Using the cloud to deliver high-value services, like Microsoft is doing -- or like IBM is doing with its own cloud -- is what differentiates Microsoft's cloud business from Amazon's.

What this means for investors
Microsoft's vision is compelling, and I'm a big believer in the long-term story at Microsoft. While the technological landscape is fast-changing and unpredictable, it's the most diversified of companies that often stand the test of time. Microsoft is one of those companies.

If Microsoft's recent strong quarter is any indication, the company is managing the decline of the PC market quite well. PC weakness, along with uncertainty over the next CEO, may be what's holding Microsoft's stock back, and investors should take advantage. Microsoft is extremely inexpensive, and backing out the nearly $100 billion in cash and investments from the balance sheet yields an adjusted forward P/E ratio of just 9.

What makes Microsoft a good investment, though, is the potential for growth, driven by Azure and the myriad services that are powered by the cloud. While products like Windows and Office continue to generate huge profits, growth will come from the new businesses that Microsoft is just starting to expand. Not only does Microsoft have serious competitive advantages in its core businesses, the company has also found the business that will drive it into the future. Nine times earnings seems like a pretty good deal.

The bottom line
Microsoft's new "One" strategy is exactly what the company needs, bringing the same interface and experience to all devices and utilizing the cloud to deliver high-value services. The explosion of mobile devices put Microsoft in a position where Windows was no longer powering the majority of computing devices, and this new strategy looks to reverse that trend by giving consumers a real reason to choose Windows over Android and iOS. Execution by the next CEO is critical, but I think that Microsoft has the right idea.

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