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Instant Analysis: Uncle Sam Wants You, Microsoft

By Jamal Carnette, CFA - Feb 17, 2016 at 5:20PM

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How important will the Department of Defense's big adoption of Windows 10 be?

What Happened?
(MSFT 1.14%) investors received positive news when it was announced the Department of Defense would be migrating to the company's current Windows 10 operating system on an accelerated time frame. The DoD is aiming to upgrade 4 million machines to Microsoft's new operating system within the next year. The decision was made, in part, due to Windows 10 offering better security features to prevent data breaches and withstand hacking attacks.

This is a big win for for Microsoft's enterprise division. While nearly 200 million devices are running Windows 10, the company reported only 22 million of these Windows 10 devices are in the enterprise and education environments, meaning the DoD deal alone will add nearly 20%  to that. Business tends to be more skittish about migrating to unproven software updates, the government even more so, making the accelerated transition schedule eyebrow-raising.

Does it matter?
The announcement was significant on three levels. First is the direct revenue and profit, which will be significant for Microsoft. Second, and nearly as important, Uncle Sam essentially stamped a seal of approval on Windows 10, which could contribute to a surge of enterprise upgraders in the private sector. Third, the DoD also bestowed security certification upon the newest Surface products, meaning they are on its approved list of products its agencies can purchase for employee use. This points toward a longer-range strategy for Microsoft to leverage its software in order to grow device sales in its enterprise business.

Computer security has been a greater focus for the U.S. government since it experienced a series of data breaches, most notably the Office of Personnel Management hack that exposed the sensitive data of at least 22.1 million people. On a device level, BlackBerry and Samsung have worked toward developing enterprise-focused mobile-security solutions with the former's Good Secure EMM Suites and the latter's Knox security suite. The DoD's seal of approval on Microsoft will be to the detriment of these competitors.

For Microsoft, this is good news for both the enterprise business and the prospects for the Surface line, but whether the private sector will follow the Pentagon's lead remains to be seen. Until we know more, it's not necessarily a thesis-altering event. I'd continue to follow Windows 10's adoption in the private-sector enterprise markets closely.

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