Microsoft (NASDAQ:MSFT) is in trouble.
Shares of the software giant kicked off the new trading week at their lowest close of the year, bucking the trend of the tech bellwethers that have moved higher through 2012.
Then again, it makes sense that Microsoft should close at its lowest level since December of last year. This was supposed to be a turning point for the company. Windows 8 was supposed to raise the bar in operating systems, breathing new life into fading PC-manufacturers. Windows Phone 8 was supposed to give the company a shot at gaining serious market share in the booming smartphone realm. Microsoft's Surface tablet -- and the other Window RT-powered devices -- could've given the iPad a run for its money.
None of this is happening.
Windows 8 may be a flop
Microsoft was quick to announce last week that there have been 40 million Windows 8 licenses sold in the new operating system's first 30 days of availability. This puts it ahead of Windows 7.
Now, 40 million is a big number, but what does it really mean? Microsoft made upgrading to Windows 8 a lot cheaper than earlier incarnations, knowing that so much was riding on the platform's success.
However, the new operating system hasn't been the catalyst hardware makers were hoping for.
Industry tracker NPD Group reported late last week that Microsoft-powered PC sales through the four weeks ending Nov. 17 fell 21% from the same period a year earlier. Think about that. There was no new operating system last year, yet desktop and laptop sales are tanking since the Oct. 26 release of Windows 8.
The NPD data isn't perfect. It tracks only the major physical retailers. However, wasn't Windows 8 -- with its tablet-friendly ways -- supposed to trigger a spike in sales of desktops and portables with premium touch-screens?
Hanging up on Windows Phone 8
When Microsoft agreed to pay billions to Nokia (NYSE:NOK) if the Finnish phone-maker would champion Microsoft's fledgling mobile operating system, it seemed like a win-win deal. Microsoft would get the world's largest handset manufacturer on its side, and Nokia would get paid well not to follow the pack to Android.
Well, the deal hasn't worked out well for either company. Nokia's stock has seen its value shrink by nearly two-thirds since the partnership was announced last February, and Microsoft's market share in mobile remains negligible.
True, reports of the scarcity of Lumia 920 abound, but that is probably more a problem of supply than of demand.
Consumers are too deep into the ecosystems of iPhones and Android devices. Because Android is open-source, handset manufacturers don't have a reason to stray elsewhere. Wireless carriers love that Android gives them cheap alternatives.
There may not be room for a third relevant player, and even if there were, there's little reason for it to be Microsoft when Windows itself is getting lost in the operating-system-agnostic ways of the cloud-computing revolution.
Windows 8 RT isn't a tablet savior
It doesn't matter if Microsoft sold just one Surface tablet or hundreds of thousands of them. That ship may have sailed.
Surface is available only through Microsoft, and the limited distribution is going to make it a nonplayer this holiday season. The more powerful Surface Pro -- fueled by Windows 8 Pro to give a more complete PC-like experience than today's Surface -- will be out next month, all but killing demand for the less powerful Surface that's available now.
The rub here is that Surface Pro starts at $899, a price tag that is too big a gamble for an unproven tablet platform. The battery life will also be just half as long as the Surface and other tablets. The Surface Pro, with Microsoft's clever magnetically attached keyboard cover, would fly as a lightweight laptop a few years ago, but no one seems to be buying those these days.
The stakes are big here. If Microsoft fails with the Surface, why would any hardware manufacturer pay for a Windows license -- competing against Microsoft itself -- when Android is low-hanging fruit?
Value trap incarnate
Investors may be drawn to Microsoft for what it was, but only if they don't grasp what it will fail to be.
Sure, the stock's compelling on a valuation basis, but why is it that revenue and earnings will grow in the single digits this fiscal year ending in June? This is the Windows 8 year! Microsoft may never come up with organic double-digit top-line growth again.
Yes, that 3.5% yield is attractive. Apple is only yielding half as much, and Google doesn't declare distributions at all. However, Microsoft investors may want to consider how yield-chasing played out for Nokia shareholders.
There are pockets of growth for Microsoft, but it continues to lose money online, and it has achieved market leadership in video game consoles at a time when the industry itself is in decline.
Microsoft is too rich to die, and it's too smart to let it happen without a fight. However, the company is starting to gradually fade, and none of this year's turnaround attempts appear to be working.