Microsoft Investment Risks: Two Key Concerns For Investors

Investing in Microsoft comes with a variety of risks that potential investors should be aware of. Firstly, the company's exposure to economic risks, such as foreign currency exchange rates, interest rates, credit risk, equity prices, and commodity prices, poses a potential threat to its financial stability. Secondly, the shift from desktop to mobile computing has impacted Microsoft's market share, as their mobile operating system market share is smaller compared to their dominance in desktop operating systems. While Microsoft has taken steps to mitigate this risk, it continues to be a challenge.

Microsoft's cloud computing industry is becoming more competitive

The cloud computing market is dominated by Amazon, with a market share of around 48%. Amazon and Microsoft combined hold a market share of 60-70%, with Google as their closest competitor at 5-10%. However, Microsoft's position is under threat from companies like Teradata, whose subscription-based model and Teradata Analytics Platform pose a formidable challenge to Microsoft's Azure Machine Learning Studio.

Microsoft's cloud products, particularly its Azure platform, have contributed significantly to the company's growth in recent years. Azure offers a range of services, including web hosting, cloud storage, and machine learning capabilities, making it a popular choice for businesses and developers. However, the increasing competition in cloud computing could slow down this growth.

To maintain its competitiveness, Microsoft must continue to innovate and differentiate its products. The company has a broad differentiation strategy, offering unique products to a wide range of customers. It also employs intensive growth strategies such as market penetration, product development, and market development to enhance its market position and expand its business.

While Microsoft faces challenges from more agile and innovative competitors, its strong market presence, brand recognition, and diversified product portfolio provide a solid foundation. The company's financial stability and commitment to research and development enable it to adapt to emerging trends and technologies, ensuring its position as a leader in the cloud computing industry.

The company's revenue model has issues

Microsoft's revenue model has been criticised for its heavy reliance on a first-party business model, where the person receiving the benefit pays Microsoft directly for the software. This is in contrast to competitors like Alphabet, which offer third-party business models where applications, online services, and content are free, and revenue is generated through third-party advertising. This model has proven to be successful for Alphabet, as advertising revenue funds the development of products and services that are provided to users at little to no cost, directly competing with Microsoft's revenue-generating products.

Microsoft's revenue model has also been called into question due to the issues surrounding its licensed-based revenue. Licensed-based revenue is more uneven and unpredictable, as it relies on the release of new, compelling versions to induce consumers to upgrade. Additionally, having multiple versions of operating software requires higher levels of staffing for upgrades, patches, and software fixes, increasing costs for the company.

Another concern regarding Microsoft's revenue model is the potential pivot towards consumer markets. While Microsoft has found success in the enterprise markets, its forays into consumer markets, such as Groove Music and the Windows Phone, have been disappointing. There are worries that the proposed acquisition of Activision Blizzard, a consumer gaming company, could divert management attention from growth opportunities in the enterprise markets, such as Azure.

Furthermore, Microsoft's revenue model faces the challenge of increasing competition in the cloud computing industry. Companies like Teradata and Amazon's AWS have been gaining market share and pose a significant threat to Microsoft's cloud computing segment, particularly its Azure offering. The introduction of specialised platforms, such as Teradata Analytics, which offers unparalleled opportunities for analysing data based on sensory data, could render Azure outdated.

To address these issues, Microsoft has been working to convert users of its operating system and software to subscription-based billing, such as Office 365. This strategy aims to provide more stable and predictable revenue streams. However, most Microsoft users are still on licensed-based versions, and the success of the subscription model is not yet guaranteed.

The shift from desktop to mobile is a risk

The shift from desktop to mobile is a significant risk for Microsoft. In 2016, mobile devices exceeded personal computers for the first time in terms of internet usage. This shift poses a challenge to Microsoft as its mobile operating system market share is relatively small compared to its dominance in desktop operating systems.

Microsoft's previous efforts to enter the smartphone market, such as the acquisition of Nokia Mobility, ended in failure and resulted in a $7.6 billion writedown. While the company's current strategy focuses on partnering with large smartphone OS companies and improving its Surface line of tablets, the continued shift to mobile could impact its business.

The transition to mobile also affects Microsoft's revenue streams. The company primarily utilizes a first-party business model, where users pay directly for the software. However, competitors like Alphabet offer third-party models with free applications and services funded by advertising revenue, which competes directly with Microsoft's revenue-generating products.

The shift to mobile also impacts Microsoft's Office suite of products, with competitors like Salesforce, Oracle, and SAP offering similar functionality as part of custom solutions for enterprise clients. This competition may lead to a decline in demand for Microsoft's traditional software offerings.

Furthermore, the shift from desktop to mobile can impact the volatility of Microsoft's stock price. Volatility refers to the frequency and magnitude of price changes, and it is influenced by various factors, including industry-specific events, economic conditions, and company performance. The shift to mobile could increase the volatility of Microsoft's stock, making it a riskier investment.

In conclusion, the continued shift from desktop to mobile is a significant risk for Microsoft. It impacts the company's market share, revenue streams, competition, and stock price volatility. While Microsoft has taken steps to adapt to this shift, it remains a key consideration for investors when evaluating the potential risks and rewards of investing in the company.

Microsoft's hardware initiatives could continue to fall flat

Microsoft has had a number of failed hardware initiatives over the years, and there is a risk that this trend could continue. Here are some examples of past failures:

Zune

Microsoft Zune was a brand of digital media products, including portable media players and media player software for Windows PCs, launched in 2006. It also offered a music subscription service, Zune Music Pass. Despite Microsoft's attempts to compete with Apple's iPod, the brand performed poorly in the industry. It took two years to sell 2 million units, and it was shut down in 2012 due to a lack of profitability.

Kin

Microsoft Kin one and Kin two were mobile phones released in 2010 as Verizon exclusives. The company spent nearly $1 billion on the development of these phones, which featured small touchscreen displays and a slider keyboard. However, they did not support downloaded games and apps, which was a significant setback compared to the iPhones that were revolutionising the mobile phone market with their App Store. Microsoft had to stop selling the Kin phones due to very poor sales, rumoured to be less than 10,000 units.

Lumia Smartphones

Microsoft acquired Nokia in 2014, giving them ownership of the Lumia smartphones. However, the Lumia line soon became unpopular due to their bad features and lack of competitiveness with rival phones. By 2017, their quarterly revenue had dropped to $5 million.

Surface RT

Microsoft entered the tablet market in 2012 with the launch of the Surface RT and Surface Pro. While the Surface Pro was successful, the Surface RT was not. This was due to the fact that apps had to be written specifically for the Surface RT, confusing consumers and dismaying app creators. Microsoft discontinued the Surface RT in 2013, leading to a significant sell-off of Microsoft's shares and a loss of over $34 billion in market value.

Windows Vista

Windows Vista, launched in 2006, was another operating system failure for Microsoft. It suffered from various glitches and incompatibility issues between hardware and software, in addition to being slow and expensive. Security issues further eroded its reputation, making it another black spot in Microsoft's history.

The above examples demonstrate that Microsoft has had a mixed track record with its hardware initiatives, and there is a risk that future endeavours in this area may face similar challenges and fall flat.

The Office empire could decline

Microsoft's Office suite of productivity tools has been a dominant force in the market, but the company faces the risk of a potential decline in its Office empire. Here are some key considerations that could impact the future of Microsoft's Office business:

• Competition from Third-Party Business Models: Microsoft primarily operates with a first-party business model, where users pay directly for the software. However, competitors like Alphabet offer free applications and services, monetizing through third-party advertising. This model allows them to provide similar functionality to Microsoft Office at little or no cost to users, posing a significant threat to Microsoft's revenue stream.
• Enterprise-Focused Alternatives: Chief financial officers are increasingly turning to enterprise resource planning (ERP) and customer relationship management (CRM) systems from providers like Salesforce, Oracle, and SAP as alternatives to Microsoft Office. These custom solutions tailored for enterprise clients could erode Microsoft's market share in the business productivity space.
• Limited Mobile Presence: While Microsoft has a strong presence in desktop operating systems, its mobile operating system market share is relatively small. The continued shift from desktop to mobile devices poses a risk, as Microsoft has struggled to adapt to this changing landscape effectively. This could impact the adoption of Microsoft Office, as users may opt for more mobile-friendly alternatives.
• Challenges with Revenue Model: Microsoft has been transitioning users to Office 365, its subscription-based product. However, a significant portion of its user base remains on licensed-based versions. Licensed-based revenue is more unpredictable and requires compelling new versions to induce upgrades, increasing staffing needs for upgrades, patches, and fixes.
• Disruption in the Cloud Computing Industry: Microsoft's Azure platform has been a key growth driver, but the cloud computing industry is becoming increasingly competitive. Companies like Teradata are introducing innovative offerings that compete directly with Azure's Machine Learning Studio. A lack of specialization in Big Data products could lead to a slowdown in revenue for Microsoft's cloud computing segment, impacting the overall Office suite.

While Microsoft's Office empire has been a cornerstone of the company's success, these factors highlight the potential for a decline. The company must navigate intensifying competition, evolving market dynamics, and shifts in user preferences to maintain its dominance in the productivity software space.

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