Microsoft Corporation (MSFT) has been all but left in the dust in a mobile age, struggling to connect with consumers with its Windows Phone operating system and Surface tablet.
MSFT stock holders who hoped the acquisition of Nokia’s phone business a few years back have been sorely disappointed, most recently with Microsoft writing down $7.6 billion this summer proving the tech giant remains way behind on mobile.
So should consumers expect anything different going forward, as Microsoft launches a new line of smartphones this week?
Of course, that’s not the whole story for MSFT stock. Because while the company is admittedly giving up on mass-market appeal of its smartphones and tablets, a recent report indicates that Microsoft CEO Satya Nadella is OK without being the belle of the ball so long as he still gets on someone’s dance card once in a while.
Or as the Wall Street Journal puts it, “The new approach boils down to two words: Redefine success.”
Microsoft Cedes High Ground to Apple and Google
It’s not hard to understand why Microsoft has taken this route. Apple Inc. (AAPL) is a powerhouse with its iPhone, and while Alphabet (GOOG, GOOGL) is still struggling to turn significant profits from its dedicated smartphone business it has massive market share that can (theoretically) turn into mountains of cash eventually.
MSFT stock has languished, hand-in-hand with fallen smartphone star BlackBerry (BBRY), and become the butt of many tech jokes among consumers despite offerings that are impressive in their own right and successful in a certain niche of tech geeks. Despite a storied history with Windows and a dominant PC business, MSFT commands just 3% of smartphone market share.
So why not nurture that niche instead of trying to go toe-to-toe with AAPL and GOOG?
After all, in many ways going mass market is not just a near-impossible feat but a money-losing proposition, too. According to The Wall Street Journal, “Microsoft’s phone operation lost 12 cents for each smartphone sold in the three months ended June 30, on average.”
Google can afford to bleed cash on its smartphone operations because of the hopes of secondary revenue — media sales via Google Play, advertising through mobile browsing, things like that.
Microsoft doesn’t have that luxury.
So if MSFT can put all its weight behind the much-hyped Windows 10 OS and try to appeal to a small group of die-hards instead of preaching to faithful iPhone users, the thinking goes, it will be more focused and more successful as a mobile company.
MSFT Stock Has No Choice
Of course, naysayers would insist that the strategy to get smaller isn’t a voluntary one. After all, consumers have spoken and few are reaching for Windows Phone devices. Making fewer of the gadgets is the only logical course for MSFT.
After all, the writedowns of the Nokia acquisition also came with some deep layoffs. Cutting staff and cutting back production isn’t exactly a proactive strategy, but a reactive one.
Furthermore, it’s worth noting that for all the overtures about figuring out mobile, Microsoft is still very much in the business of enterprise tech and would prefer investors in MSFT stock not pay that much attention to the phone biz. Remember, a 2014 restructuring also reshuffled the deck to move different segments of the business around and pay more lip service to mobile and the cloud… even while Windows licenses remained the biggest cash cow.
MSFT stock investors have seen this movie before. The hard reality is that Microsoft knows its mobile devices will never be the top of the heap now that it has lost nearly a decade playing catch-up to Apple and Google mobile strategies.
The real question is not whether Microsoft’s decision to get smaller on smartphones is the right one, but whether MSFT stock can still rely on any material mobile business going forward.
There’s no doubt Microsoft has the scale, the enterprise relationships and a ton of cash. But execution has been lacking in the past, and MSFT stock holders are hoping Current CEO Nadella can succeed where his predecessor Steve Ballmer failed quite miserably before him.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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