Dueling Fools: Microsoft Bear

When it comes to the long haul, Microsoft's (Nasdaq: MSFT  ) wheels are spinning.

Any investor looking for long-term growth should look elsewhere. Technology's changing swiftly, and Microsoft's a massive behemoth that has historically had a hard time moving quickly enough to keep up. Its operating-system business is definitely in the uptrend of the cycle now, which should bode well for the next couple years. But for the true long term, I'm thinking that an investment here might be the equivalent of stuffing cash under your mattress.

The company certainly sports some very entrenched, cash-generating businesses, particularly its Windows operating system and Microsoft Office software. However, it's worthwhile to note that it makes money on only three of its seven product lines. As technological innovation continues to show rapid progress, Microsoft will have to evolve if it wants to compete.

Information is slowly but surely moving off the desktop. People can argue about whether Google (Nasdaq: GOOG  ) is a bargain or terribly overvalued, but one thing's for sure -- it's helping to bring us closer to the time when most of what we do on our computers happens on, and is stored on, the Internet. As that transition continues, operating systems will become less and less significant. Soon, it won't matter whether one uses a PC, one of Apple's (Nasdaq: AAPL  ) Macs, or even the Linux OS. Microsoft's competitive advantage in operating systems has faded compared with a decade ago, given increasing compatibility.

Although Microsoft's still the top dog in the enterprise market, there's still good evidence that some consumers are switching over to Macs, or at least contemplating such a move. Now that Macs can also run Windows, it's not such a radical concept these days. Meanwhile, note that Dell's (Nasdaq: DELL  ) top customer request on a recently launched "suggestion box" on its website was to include Linux on its PCs. (Request No. 2 was for OpenOffice, a free software alternative to Microsoft Office.)

Microsoft seems to be playing a constant game of catch-up by trying to emulate other successful products. Zune's trying to take on the iPod, but its ultimate success now that the initial hoopla is over remains to be seen. The Xbox may have loyal devotees, but it faces both Sony's (NYSE: SNE  ) next-generation PlayStation 3 and the surprise contender in the space, the popular Nintendo Wii. Search? Microsoft may be making great inroads with its Internet search products, but it's proving hard to wrest people away from Google's dominant search engine.

All of these happenings are good examples that Microsoft has become a "me-too" type of company -- one that hopes to find something that sticks and becomes a smash hit.

I know many people argue that Microsoft shares look cheap and unloved these days. However, getting back to Vista, let's not forget that Microsoft CEO Steve Ballmer even recently said analysts' expectations for sales of the operating system in fiscal 2008 were too optimistic. That might prompt Fools to wonder what surprises lie in store, even as we enter the sweet spot of the upgrade cycle.

Indeed, NPD recently noted that sales of Vista at retail stores such as Best Buy (NYSE: BBY  ) , Circuit City (NYSE: CC  ) , Target, CompUSA, and so forth paled in comparison with those of Windows XP in its comparable launch week, at 59% less. Apparently, many consumers are holding off on buying high-performance machines, rather than simply upgrading their old ones. Given recent consumer sentiment, they may not be in a hurry to loosen their purse strings.

I admit that Microsoft is historically an important company. It's been ever-present as personal technology takes an increasingly important role in the lives of everyday consumers. However, given the competitive landscape and its traditional culture, I think that Microsoft, as a potential long-term investment, is just plain history.

Microsoft is aMotley Fool Inside Value recommendation. Best Buy and Nintendo areMotley Fool Stock Advisor picks. Check out either service free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.


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