Microsoft (Nasdaq: MSFT) doesn't get a lot of respect from investors these days. I can hardly blame them. While Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) have stolen the show, Mr. Softy has plodded along in the background reminding us that it still makes Office and struggling to expand its presence in the consumer electronics market beyond the Xbox. However, 2012 is looking like it'll be an exciting year in Redmond. Here are the Microsoft stories you should watch.
Welcome to the era of the touchscreen, Windows
Of all Microsoft's new products, Windows 8 is the most important because it should bring Windows-based tablets into the mainstream and maybe make up for lagging PC sales. The latest research out of Forrester says that consumer interest in tablets running Microsoft's OS has dropped significantly since the beginning of the year. While I don't think the company has missed its chance to enter the tablet market, it can't afford to have another Vista-caliber failure. The market simply won't wait.
Fortunately, the early builds of Windows 8 looks promising. It's compatible with chips based on ARM Holdings' (Nasdaq: ARMH) designs, which should help Windows tablets compete on important points like price and battery life. The metro interface is gorgeous and the customizable live tiles should differentiate the OS from Android and iOS. Finally, Microsoft has taken a pro-developer approach to its coming app store by giving successful developers a larger cut and providing more flexibility for in-app payments. This plus the large potential market for Windows software should mean stocking the app could be easy.
Look to the clouds
There's no denying that cloud computing is a threat to Office. Online productivity suites like Google Apps continue to improve. Eventually such services could greatly reduce the demand for desktop-based software. In response, Microsoft launched Office 365, a subscription service that offers products like Exchange, SharePoint, and Office through the cloud. This should hold Microsoft's competitors at bay, since existing customers looking to move to the cloud will likely choose Office 365 in hopes of maintaining their established workflows, sparing themselves the costs associated with adopting an entirely new system.
As an added bonus, 365 transforms Office into a recurring-revenue model. Given time, the steady stream of subscription renewals could surpass the money Microsoft makes from selling one-time licenses.
In addition to offering a cloud-based version of Office, Microsoft launched its own cloud-hosting service, Azure. Since launching in February 2010, Azure has signed up 31,000 subscribers and hosts 5,000 applications, but it has a lot of catching up to do. salesforce.com (NYSE: CRM) and Google's App Engine both top 100,000 applications.
However, Microsoft has managed to snag a few big-name customers like Lockheed Martin, Xerox, and Travelocity. Also, tech news site The Register recently reported that Apple had selected Windows Azure and Amazon.com's (Nasdaq: AMZN) AWS to jointly host iCloud.
Time to harvest the Mangos
I remain cautiously optimistic about the future of Windows Phone, but I have to admit that the OS needs to gain traction soon. The OS' current 1.5% worldwide market share doesn't inspire much confidence, but there are a few positive signs. The first batch of Mango phones from Nokia (NYSE: NOK), Samsung, and HTC have begun to arrive, and have so far received positive reviews. Also, while Windows Phone's app selection still lags those of iOS and Android, it's starting to attract more developer interest. Hopefully, the combination of new hardware, a growing app library, and creative marketing will turn around the operating system's declining market share in the next year. Otherwise, Windows Phone will probably have missed its chance.
The evolution of the Xbox
It looks like the next big tech battle will take place in your living room, and for once, Microsoft may have the lead. The latest dashboard update adds Bing search to the Kinect-powered voice controls and allows Windows Phone owners to use their handsets as remotes. The company has also partnered with 40 content providers to expand the consoles' on-demand media offerings and bring live TV to the Xbox. In short, the system now has many of the features that make the rumored Apple iTV so exciting.
As a bonus, Microsoft has sold more than 57 million Xbox 360 consoles to date -- 1.7 million consoles in November alone -- and boasts 35 million active Xbox Live members. Microsoft only needs to convince these users to try the service in order to gain traction, which is a heck of a lot easier than getting consumers to buy a new gadget or high-priced television set.
Foolish takeaway
I won't deny that some or all of these products could fail spectacularly, but overall I'm bullish on Microsoft and so I've initiated an outperform CAPScall for the coming year. You can follow Microsoft and the rest of my picks here.
In the meantime, if you would like to learn about another tech company positioned for greatness in 2012 and beyond, then check out this special report: "The Next Trillion Dollar Revolution." It's free, so click here to download it today.
