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Microsoft Still Struggling to Adapt

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The razor and blade model is a classic business strategy: Give away the razor, and the consumer will have to purchase the associated blades. For a while, Microsoft  (NASDAQ: MSFT  ) has been the default blade for PCs. And while PCs have yet to be given away for free, that's where the price trend is headed as low margins and the exits of many PC manufacturers tell the story of companies giving them away almost at cost.

While Microsoft didn't have to worry so much as the PC became commoditized, it does have to worry as operating systems are losing their value -- both to consumers and companies.

The evidence
As an example, Microsoft just drastically reduced the fee it charges manufacturers for a Windows license from $50 to $15, as long as those devices retail under $250. This comes after Windows OEM revenue declined 3% in the latest quarter. Why is Windows losing ground? Many point to the competition from Google's (NASDAQ: GOOGL  ) Chrome operating system, as well as Apple's (NASDAQ: AAPL  ) move late last year to make upgrading to its latest Mavericks operating system free. Also, Microsoft has yet to score a win in the growing tablet market, where its traditional desktop operating system has failed to translate well.

Apple and Google are also encroaching on Microsoft Office's territory. Apple is giving away its Pages, Numbers, Keynote applications with all new Mac purchases. Google Drive, formerly Google Docs, is also free, and contains much of the same functionality as the other office suites. Microsoft has taken on these competitors with its own free version of Office Online.

Value in the ecosystem
While an operating system or office suite itself may not provide value that consumers will continue to pay for, there are plenty of ways to continue making profits off of them.

For Apple, it's in iTunes. Taking a cut of each piece of media or software results in a tidy bit of revenue -- at least $4 billion in three of the past four quarters.

For Google, it's in its Play store. Offering similar media and applications as iTunes, Google's wide installment base of Android reaches plenty of potential customers. Google lumps its Play revenue together, so exact figures are not known, but Citigroup analyst Mark May put last year's revenue at $1.3 billion, which is estimated to grow to $5.2 billion in 2017.

The Windows Store. Source:

And for Microsoft, future profits lie in its Windows Store ecosystem. Unfortunately, the Windows Store was late to the scene, and developers rarely prioritize creating Windows Store applications. In addition to its free Office Online, Microsoft sells premium subscriptions to its Office 365 service, offering additional features like cloud storage and Skype minutes as a subscription starting at $9.99 per month. Such a subscription plan, though, is a completely new model compared to previous Office offerings.

Scrambling for an answer
The declining value of flagship software products for consumers is evident. And it appears as consumers get accustomed to lower mobile application prices, they will be less likely to shell out hundreds of dollars for software as they've done for the past few decades. Microsoft could have the answer in its subscription model for Office, but it has to find footing in its Windows Store platform. Apple and Google have a more secure grip on their profits of the near future, but they must remain nimble in anticipation of the inevitable changes of the market and industry.

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Read/Post Comments (5) | Recommend This Article (2)

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 February 26, 2014, at 7:18 PM, VegasSmitty wrote:

    The MF must have a hard on for MS, always putting them down. Grow up!

  • Report this Comment On February 26, 2014, at 7:27 PM, tp2010 wrote:

    MS is clearly losing focus or a competitive edge.

    Case in point:

    In helping someone through an issue with their Outlook 2013, they received an error "There are too many devices syncing with this account" which apparently is a known issue on the server side:

    How does a large firm such as MS fail to account for a large number of mobile devices connected to an account? Would Google or Amazon or Facebook have this issue?

    In helping the person work through the issue, MS support uses LogMeIn to assist the user. Wouldn't MS have built a similar home grown tool?!?

    Another point of evidence: Bing.

    If one would sign up for Bing rewards and attempt to tell others about it you have 2 choices: Facebook or Twitter.

    Where is the competitive edge to MS these days? How do they not feel ashamed and disgusted at using other products to either fix their own or advertise their own?!

    If I go to Google, Amazon, Apple, Twitter or Facebook I would be shocked to see another company's product advertised to resolve an issue or see a new product.

    Wake up Microsoft, YOU have smart people there. Get rid of the bean counters and Project Manglers out of the process and just CODE.

    Code something new every day, fix someone else's code, write code to replace some other companies product. Just do it and guess what? I bet you'll get your competitive spirit back and drive.

  • Report this Comment On February 26, 2014, at 11:05 PM, chilero wrote:

    The strategy they are using (reducing the price of Windows for cheap tablets) is very similar to what they did for netbooks when Linux was being installed. They offered a cheaper version and ended up shutting Linux out.

    They won't be shutting out Android on cheap tablets this time though. More likely they are just trying to be competitive in the segment.

  • Report this Comment On February 27, 2014, at 12:30 AM, foolishlycuriose wrote:

    How about we give the new CEO some more time to work through the myriad of Balmer's blunders before using such strong verbiage as 'still struggling to adapt'. Why do you think he was fired?

  • Report this Comment On February 27, 2014, at 2:55 PM, CsPPP wrote:

    So, I began reading this article and thought to myself as I went along, "Man, this article is ridiculous; sounds like they would be one of those people who would tell you to jump ship because the waters were a bit choppy." And then I realized I was reading a Motley Fool article and then I was like, "Oh..."

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Dan Newman

Writing for the Fool since 2011. Interested in technology, the future of society, and how both overlap.

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