Microsoft Still Struggling to Adapt

Apple and Google will be reaping their first-movers into mobile advantages for awhile. Can Microsoft keep up?

Feb 26, 2014 at 7:00PM

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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Dan Newman owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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