The Sum Is Greater Than the Parts

The internet today is dominated by Google services: Gmail, Google Search, Google Maps; social sites: Facebook, Twitter, LinkedIn; smart devices: iPhone, Samsung Galaxy, Nexus, Kindle; and thousands of innovative applications. The past few years have brought in a revolution in personal technology not seen since the birth of the PC, and one that is heralding the death of the PC. The technology of big business too is changing; it has seen the advent of cloud services: Amazon, Google; and SaaS applications: Salesforce.com that capture efficiencies of scale. The vast amount of information generated by billions of people online is being stored, analyzed, and used. IBM and Oracle have taken a lead in this world of Big Data.

It is a story that is playing out, with an ominous omission: Microsoft. The company that brought in the PC revolution, and desktop productivity, seems to be no longer relevant. Eric Schmidt has already written it off. Is it then time to sell MSFT and move on? Not quite, on the contrary, Microsoft has not looked better in years.

Microsoft is lagging in many things: Windows Phone 8 leaves a lot to be desired – the apps are far from competitive, the map and navigation hardly as good as alternatives. Windows Surface is more expensive than the Nexus, and not as cool as the iPad. Office 365 is just emerging from the fiasco that was Office Live and it still feels clunky. Amazon and Google clouds are more popular with developers due to early limitations and pricing of Windows Azure. Oracle, not Microsoft SQL Server, remains the database of choice to run enterprise databases.

The Strength of Good Enough

Microsoft may be lagging, but it is certainly a player in all fields. A “good enough” solution with a few twists of its own, and universal reach, can be surprisingly competitive.

Windows Phone: The tile interface is edgy and unique. It is also consistent with the Windows 8 desktop. The hardware is catching up; the new phones from HTC and Nokia are at par with iPhone and other Android devices in terms of processor, camera, and screen size. The phone and allows you work with Word and Excel documents. The phone now uses Nokia maps that can be used offline and speak out turn-by-turn directions. Microsoft promises a Skype app that will the Windows phone the best platform for VOIP calls and video chat.

Windows Surface: The tile interface is interesting and fresh. It is consistent with the Windows phone and Windows 8. The keyboard cover is a great addition. The Office suite, the world’s best productivity software, is available in both Windows RT and Windows 8 Pro.

Office 365: It is now simply Exchange, SharePoint, and the ability to view and edit Office documents in the cloud. The pricing is more competitive. Office 365 subscribers will soon get iOS and Android apps that allow editing Office documents.

Window Azure: Windows Azure is now open to many development methodologies including Python, MySQL, node.js etc. The pricing has improved, and a much-needed FREE tier is available. It is now also part of the popular MSDN subscription.

Windows 8: The Windows 8 looks modern and is ready for touch – a noteworthy gap in Apple’s desktop OS. It does have a learning curve, but just like the Office ribbon, it will catch on.

Office Suite: Office is still the professional productivity suite of choice; additions like PowerPivot make it stronger. SkyDrive with cloud storage and its ability to work with Office documents in the browser will stave competition from Google Documents.

Microsoft Business Software: The Microsoft Dynamics suites of applications are new, but an ecosystem is emerging. The combination of cloud services (Microsoft CRM Online, Office 365 with SharePoint), and the ability to run the same on premise is unique to Microsoft. Microsoft also is the only company that manages federated identities in a seamless way. This flexibility will help win enterprise accounts.

The Illusive Synergies

Synergies rarely materialize (aka aQuantive), yet even a very conservative analysis cannot ignore the obvious links.

The Microsoft Devices will do better with a flourishing cloud offering (Windows Live: SkyDrive, Skype; Office 365 etc.). The Microsoft cloud will do better with devices like Surface, and Android/ iOS apps that tap into Office 365. The Windows 8 platform will benefit from the consistent look and feel in all devices: the phone, the tablet, and the desktop. And the whole Microsoft ecosystem continues to benefit from the best developer tools in the industry.

There are signs that Microsoft management is focusing on this transition. Only a few years ago, a dazzling amount of overlapping technology and products were causing confusion in the marketplace – many are gone. Office 365 has replaced Microsoft Office Live. The Windows Phone, the Windows Tablet, and the Windows Desktop now have the same look and feel. Even the Microsoft kiosks are current, urban, and utilitarian – just like the brand they intend to portray.

The Microsoft Kaizen (改善): Service Pack 2

Microsoft is a Service Pack 2 company. Unlike Steve Jobs and Apple, who have shown the discipline to perfect things before they are unveiled, Microsoft has always had long beta periods. Significant updates and patches will continue to roll on and will make all these offerings stronger in the coming months.

This is no accident. When Apple releases a product, they control the whole value chain – the hardware, the software, and even the retail space. That is ideal for a “revolutionary” product (iPhone) because you need all aspects of technology and marketing aligned for it to succeed. On the other hand, a loosely held federation of companies: Nokia, Intel, Dell, HP, multitude of retailers and many others, market Microsoft products. They are like herd of thundering buffalo’s that make alignment in strategy difficult. However, they also make an “evolutionary” product (Windows 7) shine.

We are entering an evolutionary phase of cloud and device technologies. The iPhone 5 hardly any different from iPhone 4, the iPad Mini, the small changes to Gmail, all speak to this. This is where Microsoft excels – slow continuous improvement.

The Prediction

As I write this, MSFT closed at $27.70 on Nov 23, 2012. I see at least a 20% upside ($33.24) over a period of 2 years excluding dividends. Add to this the current dividend of (23 cents) 3.32%, which I expect to continue. That makes MSFT a great investment for the next 2-3 years. I expect the holiday season to be worse than expected resulting in a great buying opportunity in the first quarter of 2013.

Disclosure: I own MSFT at an average price of $28.08 a share. I also own Google at an average price of 595.38 a share.

 

 

About amit

I was born in Kanpur, India in 1977. I did my schooling partly in Kanpur, Surat and Udaipur. I spent most of my schooling years in Udaipur in a boarding school. This was the most enjoyable period of my life predominantly because I made a lot of friends and played a lot of football (my first love). My school years brought in a sinking realization that I was good in academics, average in football [even after my most sincere efforts :( ] and to put it euphemistically 'artistically challenged'. Hence cool careers in photography, sports, art & design or music were all beyond me. I took up what I could do best, and enrolled for engineering at Nagpur University. College brought its own pleasures, I had my share of beers, bunked classes, read the 'Bhagvad Gita', learned yoga and picked up love for traveling. After graduating I was one of the lucky few to get a great job at Infosys Technologies. The best thing I got from my first job - my Yamaha Rx 135. There were not many weekends when I did not explore places in and around Bangalore on it. In two years though my desire to pursue further studies caught up with me and I enrolled for a M.S in Computer Networking at North Carolina State University. Here I picked up basketball, love for stand up comedy, liking for the 'other football' and offcourse a little bit of computer networking. I graduated in Dec 2002 and am currently working for /n Software. I am slowly evolving into a die hard Linux and Open Source enthusiast, trying to pick up skydiving, biking, running and photography. Some might call that progress. :)
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