This Was Microsoft’s Biggest Mistake of the Last 10 Years

Microsoft (NASDAQ: MSFT  ) , like many of the "old tech" names lately, has gotten a lot of love during the last year. Multiple expansion, coupled with healthy profit growth, have propelled Microsoft to levels not seen since the tech bubble. Best of all, Microsoft still isn't all that expensive, trading at just 16.78 times trailing 12-month earnings. And it's even cheaper if you net out its gigantic cash position.

However, Microsoft made a huge mistake that cost its shareholders dearly during the last decade, one that new CEO Satya Nadella is taking bold action to correct.

What's Microsoft really good at?
Ask yourself -- what's Microsoft's core competency? (Hint: it's in the name --- Microsoft.)

Software. Microsoft's core competency has traditionally been -- and will likely continue to be for decades to come -- the development of fast, well-designed software, as well as the tools that go into the development of software -- which, OK, is software, too. For example, whether one likes or loathes the interface of Windows Phone, it's hard to ignore the fact that the platform is very smooth and efficient under the hood. 

Unfortunately for Microsoft, Apple (NASDAQ: AAPL  ) envy clouded the company's judgment.

Apple envy drives Microsoft to do strange things
If you look at Apple's financial statements, you'll see that there's plenty to be envious about -- this is the world's most-profitable technology company, and not by a small amount, either. This vast profitability has been the product of -- frankly -- a revolutionary set of products (iPhone, iPad), an unmatched retail presence, a beautiful subsidy model for high-cost smartphones and, of course, fantastic products. Microsoft's big mistake was in trying to -- pardon the phrasing -- ape Apple.

The Surface flop
For the longest time, Microsoft has tried to double down again and again on developing and marketing its own hardware, instead of doing what it does best. The Microsoft Surface RT -- intended to go head-to-head against the iPad -- was such an abject failure, that the company ultimately ended up dumping them for dirt cheap.

Not only did Microsoft make a product that nobody wanted -- Windows RT couldn't run any traditional Windows applications -- but imagine how Microsoft's longtime OEM partners felt. These companies, already living on shoestring margins as Microsoft and Intel capture the majority of the value in PCs, now had to worry about getting completely cut out!

The Nokia hookup wasn't much better
Microsoft's purchase of Nokia's handset business wasn't much better. Nokia, which was at one point the "Samsung" of the feature-phone world, was in rough shape after the smartphone revolution left its handset business in shambles.

After initially partnering with Intel to deploy MeeGo-based smartphones, Nokia left the chip giant to work with Microsoft in trying to get its Windows Phone more broadly deployed. Surprising to few, the Nokia-designed Windows Phones largely flopped. A few years later, Microsoft outright bought Nokia's handset division in a bid to become even more like Apple.

This purchase may have made sense to anybody who believed Microsoft's financial projections, which were given following this acquisition. However, the reality of the situation is that the low-end and mid-range of the smartphone market is a profitability nightmare, and even Samsung -- one of the few companies in this space that's actually making money -- is beginning to see significant margin/competitive pressures. CEO Satya Nadella sees this madness for what it is, and appears to be putting a stop to it.

Satya Nadella – Microsoft's savior?
It's no secret that Satya Nadella, Microsoft's new CEO, was against the Nokia handset business purchase. He's cutting much of the fat that came with the Nokia purchase, is bringing Microsoft's software and services, like Office, to successful mobile platforms -- i.e. iOS -- and may finally make the next Windows palatable to traditional PC users.

With Microsoft's relatively cheap valuation, and with costs cut in areas that aren't essential to the core business and strengths of the company, Satya Nadella appears to be taking a different path to delivering shareholder value. Bringing to market the world's best software and services, regardless of platform, will be Nadella's legacy, for better or worse. 

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Read/Post Comments (7) | Recommend This Article (13)

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 July 20, 2014, at 12:00 PM, bobbyedwards wrote:

    Fool,

    When you learn to look at Microsoft as Microsoft, and quit trying to get an Apple angle in every Microsoft story, then maybe you will write one that makes sense.

    Surface RT was discounted because companies like Acer came out with full blown Windows 8 tablets that were far cheaper. Notice that even after that Microsoft came out with a new version of the Surface RT?

    The Lumia Windows Phones are not a flop, they just are not selling as fast as other because there are so few model, they are lost in the store. The other thing is when Fools keep writing their Obit, it puts people off, too bad none of the fools ever gave them an honest try.

    But the good news is that more vendors than ever are now coming out with WP8.1 devices, and in some parts of the world they are the #2 in sales. (those parts don't have as many fools claiming to be "media")

    WP will continue to grow as will RT, chances are both will be making money and existing long after the Fool website is gone.

  • Report this Comment On July 20, 2014, at 2:08 PM, JJ82 wrote:

    The only thing Nadella has changed is made Microsoft SEEM less arrogant and smug and that is only because he speaks in PR terms and smiles when he talks.

    To anyone actually paying attention (A lot of people) they can see that he is just Ballmers talking piece and isn't really in charge.

    Saying you are giving up on the previous mission of "Devices and services" only to say your mission is "mobile and cloud" isn't going to fool anyone but a mouth breather. Its the same thing, just different words.

    Mobile = Devices

    Cloud = Services

    And "saying" you want to focus on the customers and listen to them all while creating Windows 9 they way that they are is proving they are lying about that too.

    Windows 9 is Windows 8 extreme.

    The Metro UI is still there tagged onto the start button even though so many have said it needs to go and has no place on a desktop/laptop PC. They are still forcing authentication only now even worse, through Windows Store. imbedded advertisements that cant be blocked/turned off...yeah, that's really listening to the customer right? Also really cannot wait for the vast increases in viruses/malware that will come of it since it cannot be blocked/turned off at all. integrated Windows Defender into the OS core code even though they have been blasted for doing it with Windows 8 because of the massive security issues it causes.

    The idiocy at MS is truly mind boggling. They have gone insane because of the mobile market and completely lost their way trying to figure it. Its to the point that they have become a company incapable of serving more than one type of customer.

    THAT is the difference between them and Apple. Apple knows that a person that buys a tablet does not have the same needs as a person that buys a Mac...or a person that buys an Iphone. That is why they have 2 different OSs. Made to serve the needs of the 2 different markets.

  • Report this Comment On July 20, 2014, at 8:42 PM, doawithlife wrote:

    MS is becoming an example of trickle down economics at it's worst.

    As this article points out, MS produces software. Their entire RnD process is dependent on humans programming. The more humans, the more software they can create.

    How can profits be soaring and yet MS is slimming down the workforce. Shouldn't MS be looking to increase RnD at this point, which would mean MS should be hiring more humans to create new programs.

    When I saw the big names move their money from supporting Apple(remember the nose dive Apple took before Christmas), into companies that support Intel(as well as investing in Intel). That was the point when I knew it was all over, since that point I have been working on moving away from Windows. It's good though, I have wanted to get better at Linux based shell scripting for years. Now I am actually passable.

  • Report this Comment On July 20, 2014, at 9:00 PM, kellenbmiller wrote:

    Microsoft has done well not copying Apple. The innovative devices are great. But if you do not allow what is already in play to be aligned with your OS. You are shooting your self in the foot. So to speak. Microsoft should use what is being marketed to their advantage not try bend the current trend. Windows phone is a pivotal device for them. They are not going to hurt them selves by giving the Metro theme some lee way with normal Icons and horizontal scrolling. They could link all of the pages back to a metro theme or vise versa. They could still incorporate Metro live tiles.

  • Report this Comment On July 20, 2014, at 10:33 PM, RMacky wrote:

    Microsoft came too late to the party. The cake is gone and they are excited over the crumbs they find on the floor. After all this time Microsoft is 1% ahead of the Blackberry zombie in phones. Microsoft's own government won't buy their phones or tablets...not even considered viable by GSA.

    And now, whether you want to believe it or not, the IBM/Apple alliance will hurt Microsoft the most where the most money is at. Microsoft has really nothing going on in mobility. Anyway you cut the pie, Microsoft is number three, and not even close to number two.

    What do you think will be happening between now and December while everyone will be wondering if they are on the short list or not? Nothing. Nada. We are talking about the one group of employees that survived a decade of office politics (stacked raking, anyone?) and have office politics down to an art.

    Microsoft never was into creating a customer first experience. It's always been about COA, looking out for uno numero, dodging bullets and kissing @sses.

    Nadella is also the sacrificial CEO. His job is to cut out the fat and trim up the bloated organization, and when he's done, he will be thrown out because of all the luggage he'll accrued while doing the job as axe man. (he ain't done cutting yet).

    The next CEO will have a chance at running Microsoft, for the above reasons and there will be a decent distance from Uncle Fester's reign. By then what will mobility crumbs will MS find on the floor — I'm talking a year or more away, more likely two years?

    MS has a future, but it ain't in mobility.

  • Report this Comment On July 20, 2014, at 11:40 PM, kellenbmiller wrote:

    They are not planning to cut Nadella. That is your conspired opinion. The Iphone is great. Google copied it and gave away the OS to make popular. Microsoft maintained integrity but they must realize the trend is App pages and themes. Apple has a strong phone and OS. Googles looks more like windows with App pages. The Windows phone is Tiles ??? The problem might not be the Tiles as much as it is as the fact that people need to add Tile pages that look like Icons or what ever. The way they have it set up. You have a start page. App page that scroll vertically. OVER. People need pages.

  • Report this Comment On July 21, 2014, at 7:34 PM, Midnight001 wrote:

    Microsoft is now heading towards failure. Those who have been clamoring for years that Linux would take over the desktop are going to finally see that is about to happen.

    I myself won't get anything new from MS and for those naysayers will be with a big surprise when more users are switching towards Linux. W8 is junk and W9 looks like W8's ugly stepchild. W9 looks ok, at least there's an option to get rid of the start screen but that isn't enough and there's a lack of stability with W8 which may well be apparent in W9. Not only that the size of W8's updates that are also in the MS store are overbloated. Another trick to get users to upgrade their storage space from 40GB to 100GB? Yeah don't think so.

    But while the fools continue to justify the junk that W8 is, they will soon drown along with the others that continue to use Windows.

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