On October 26, 2012, Microsoft (NASDAQ:MSFT) launched Windows 8, as the first major software update out of Redmond in three years. As such, the Microsoft marketing apparatchik mobilized quickly to proclaim Windows 8 a “revolutionary” event. Windows 8 introduced the Metro concept to consumer electronics, where traditional desktop, smartphone, and tablet interfaces were fused together beneath one operating system.
One year later, on October 17, 2013, Microsoft released its Windows 8.1 update as somewhat of a compromise between PC loyalists and haughty executives pushing the Metro concept. In any event, MarckHachman and PC World recently went on to rip the Windows 8 movement as “fail plus fail equals more fail.” Microsoft has literally been shut out of the mobile market.
The mobile market
On June 4, 2014, research firm comScore (NASDAQ:SCOR) published its April 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of the report is somewhat misleading, as comScore statisticians have actually presented averages of data compiled from the three-month period that spanned between February 2014 and April 2014. Throughout this time frame, comScore estimated that Microsoft tacked on 10 basis points in market share, to close out this latest quarter with a meager 3.3 percent of the U.S. smartphone subscriber market. On average, Microsoft has generated $26.1 billion in annual operational cash flow over the past five years. Despite this impressive cash haul, Microsoft has been relegated to battling against fallen star BlackBerry (NASDAQ:BBRY) for relevance at the bottom of the smartphone market.
Recent information out of International Data Corporation may confirm a similar structure for the tablet market – with Microsoft also on the outside looking in. For calendar Q1 2014, IDC listed out Apple, Samsung, ASUS, Lenovo, and Amazon (NASDAQ:AMZN) as the top-five tablet vendors, in terms of unit sold. Fifth-place Amazon, for its efforts, shipped one million tablets for 1.9 percent of the market through Q1 2014. Microsoft, again, has been shut out of the tablet market, in light of Windows 8.
Windows 8 has been no match for the Google (NASDAQ:GOOG) Android – Apple (NASDAQ:AAPL) iOSduopoly that now dominates the mobile market. Taken together, the Android – iOS duopoly control respective 93.9 percent and 54.8 percent shares of the smartphone and tablet markets. In response, Microsoft has recently made its Surface Pro 3 available for pre-order, and markets the machine as “the tablet that can replace your laptop.” Surface 3 machines will ship out by August 31. Surface Pro 3 prices now range for between $799.00 and $1,949.00. Be advised that Microsoft Surface Pro 3 keyboard – covers are sold separately and retail for $129.99.
In terms of nominal pricing, the Microsoft Surface Pro 3 would compete directly against the MacBook Pro. Cost conscious consumers, of course, may opt for the Apple iPad tablet, or even a $250.00 Google Chromebook, instead of the relatively expensive Surface Pro 3 machine. Going forward, Microsoft and Windows 8 are likely to continue losing the mobile war upon multiple fronts.
The bottom line
Beginning in 2014, Microsoft was to fold its mobile sales within separate subsets of the Devices and Consumer division. Be advised that phone sales are included alongside side “non-volume” licensing of the Windows operating system as part of the Devices and Consumer Licensing operating segment. Meanwhile, Microsoft has folded the Surface together with the popular Xbox gaming console within its Devices and Consumer Hardware unit. Last quarter, Microsoft Devices and Consumer Hardware generated a mere $258 million in gross margins off $2 billion in Q3 2014 segment revenue. In all, Microsoft posted a respective $14.5 billion and $20.4 billion in Q3 2014 operating profit and revenue. For Microsoft, fiscal Q3 2014 ended on March 31, 2014.
Be further advised that the aforementioned financial results do not include Nokia. On April 25, 2014, Microsoft was to close out its $7.2 billion acquisition of Nokia Devices and Services. Nokia broke out results for this Devices and Services division as Discontinued Operations within its latest Q1 2014 report, which did coincide with Microsoft’s Q3 2014. Nokia Discontinued Operations closed out its Q1 2014 having racked up $442 million in operating losses off $2.6 billion in segment revenue. Year-over-year sales for Nokia Devices and Services actually declined by 30 percent between Q1 2013 and Q1 2014. The weak results out of Nokia may serve as further evidence that Windows 8 has failed to gain traction within the mobile market.
Microsoft Commercial Licensing delivered a robust $9.4 billion in operating profits upon $10.3 billion in Q3 2014 revenue. Microsoft Commercial Licensing includes “volume” sales of Windows and Office software. Microsoft has remained somewhat shackled to a personal computer market in secular decline. According to Gartner, global PC shipments have contracted for eight straight quarters. As such, long-term investors should consider avoiding Microsoft stock. At best, Microsoft shares may simply track the S&P 500 Index, while financial managers pay out larger dividends and quietly buy back company stock.
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