Microsoft’s share price has gained 0.75 per cent on Nasdaq after the company announced on Monday the launch of its tablet, Surface. Investors saw in it an attempt by Microsoft to ring-fence its Windows franchise. The personal computer market is fast evolving from laptops to tablets, and Apple’s iPad lords it over this market with a share of almost 50 per cent. With its own tablet, Microsoft will perhaps be able to ensure a longer life for Windows, the latest version of which, Windows 8, is to be launched soon. That the Surface might bring Microsoft in conflict with its big customers like Dell and Hewlett-Packard doesn’t seem to bother investors, nor does the question of whether Microsoft will be able to develop a sufficiently large ecosystem of software applications, or apps.
Microsoft has had some reverses in the hardware business in the recent past. Zune, the music device, was discontinued, and so was Kin, the smartphone. Its runaway success has been the Xbox and Kinect (the fastest-selling consumer electronics item of all time), both gaming devices. Shareholders have the right to question the large research budgets of the company: $9 billion in 2008-09, $8.7 billion in 2009-10 and $9 billion in 2010-11. (Microsoft closes its year on June 30, so the 2011-12 research expenditure is not known.) Elsewhere too, Microsoft has suffered reverses. Hotmail has fallen way behind Gmail and Yahoo!. Recent attempts to revive the mail service didn’t yield any tangible result. Bing, devised to take on Google in the internet search space, too has failed to make an impact.
Still, Microsoft share price has gained almost 25 per cent in the last one year. What has also enthused investors is Microsoft’s acquisition of Skype for $8.5 billion in May last year and Yammer, the enterprise social-networking company, for $1.2 billion recently. Yammer is similar to Facebook and Twitter, but is used exclusively in an office environment, enabling employees to chat in collectives and forums. Almost 85 per cent of Fortune 500 companies use it. Meanwhile, Oracle has sought to strengthen itself in this market with the announced acquisitions of Collective Intellect and Virtue. The challenge for Microsoft will be how well it can integrate Yammer with its Office suite of products.
Investors perhaps like what the company has been doing in its area of expertise — software. For example, though it has got out of smartphones, it has focused on the Windows Phone operating system for mobile phones. This autumn it will come out with Windows Phone 8, which leading handset makers like Nokia, Samsung, HTC and Huawei have agreed to support. Of course, the software business happens to be hugely profitable — the incremental cost of selling software is negligible. The company reported operating income of $20.3 billion, $24.1 billion and $27.1 billion on revenue of $58.4 billion, $62.4 billion and $69.9 billion in 2008-09, 2009-10 and 2010-11, respectively. An operating profit margin of over 35 per cent is impressive by any standards. Perhaps that’s why investors have overlooked giant research budgets that have failed so far to produce any big new breakthroughs.