A tablet from Microsoft? It won't save the company.

Update 1: Mary Jo Foley of ZDnet tips a launch of Windows 8 next week at AllThingsSD.

From a Forbes blog:

Microsoft’s Windows OS For Tablets Coming Next Week?
May. 27 2011 - 12:11 pm, Agustino Fontevecchia

A tablet-optimized, Windows OS could be ready to see the light of day as early as next week, according to recent market chatter and media reports. (designed for System on a Chip)

... at the Ira Sohn Conference, Einhorn, president of Greenlight Capital, said that it is “hard to envision success in mobile” for Microsoft, despite its recent partnership with Nokia.

Why was Microsoft so slow to enter the tablet market?
It has to do with Microsoft’s dominance of the PC operating system market.
As the world leader in PC/Client platform space, with Windows as one of the most expensive components in a PC (along with the CPU), the company receives “anywhere between $40 and $100 for a Windows OS license with 85% contribution margin when someone buys a new PC,” explained Aggarwal.
Lighter and cheaper tablets push down prices for PC, putting pressure on Windows pricing.  The same thing goes for smartphones, which lower users’ dependency on PCs.
The incentives to lead the charge into cheaper products are not in place.

But now, with tablets eating their way into the market, Microsoft is being forced to adapt.
Reuters reported a Citigroup forecast that Microsoft could garner a 'meaningful' share of the Tablet market by 2013.
In two years, what's the iPad going to be like, and how will have Android manufacturers responded?
Unlike the latest Windows Mobile release meant to "bury the iPhone", Microsoft can't just be "me too", but must be substantially better than than all competitors.
It has to play in a field it has no demonstrated leadership in: Usability.

The big lesson from Apple's iPod, iPhone and iPad is they've understood the price-point in this market, as well as the importance of usability and design, on top of a strict requirement for Content (via iTunes).
Microsoft in the PC world has competed on its "universality" (ie. near monopoly) and if that fails (Internet Explorer vs Netscape) on price, even resorting to "free" or worse.

Neither of those strategies is going to work in the smartphone and Tablet market.

What I love about the Forbes piece is the optimism and its refusal to remember inconvenient facts like:
  • "everything is a PC" according to Ballmer this year.
    So why aren't you shipping iPhone killers with Windows Vista or 7?
  • Microsoft invented the smartphone market with Windows CE, at least a decade before the iPhone, yet they've become essentially irrelevant.
    So what went wrong? Microsoft definitively had the First Mover Advantage.
Will Microsoft repeat it's X-Box strategy of subsidising the hardware? (a retail price below cost of manufacture).
That's high on my list: they will try to buy market-share without thought of impact on profits or longevity. Microsoft focus on market-share rather than the more important, profitability.

And like the X-box, will be able to tell themselves for years they are doing "great things" while bleeding red-ink.

The benchmark is Apple: when did their new products, even less successful ones like Apple TV, make losses?

I agree with Einhorn that Ballmer is the reason that Microsoft shares are undervalued.
But I don't think there's an opportunity there, for the same reason I've declined Telstra shares.

Even at a %Yield of 5-10% versus the current 2.6%, I'd need 10-20 years to recover my investment.
The way the company's stock performance is going (dropping stone-like), I'd never get my money back.

i.e. If you bought stock 10 years ago and sold it today, the loss is more than the dividends paid, so you've made a nett loss.

I expect the stock price to keep falling by more than Dividends paid, and cant see a change until Microsoft manages to compete successfully in a New Internet Market (search, game consoles, smartphone, ...) or comes up with a better revenue model plus methods to drastically cut overheads, while maintaining "Software Development" efforts and good product (code) quality.

Microsoft could be a profitable company for many decades to come by concentrating just on its "mature" and market dominant products, "Windows" and "Office". It can only do this by being a much smaller, more focussed and better run company.

To be a profitable PC-focused company, it can't be a $70B/year company with a 75+% gross margin.
It has to be a $5-20B/year company with a 40% gross margin, which a consequentially much reduced market capitalisation.

There is no way the current Board, CEO and major stockholders, Gates and Ballmer included, could countenance such an outcome. Ballmer is a self-made "10 Billion-dollar Man".  He'd rather lose all that money than wilfully backtrack. His ego won't let him admit things have changed.

So Microsoft and all their shareholders are stuck in a death spiral, where every turn inspires riskier plays, more squandering of its wealth and less capacity to change.
("lets buy Skype!" "Why?" "Because it will save us!" "How?" "Because it will!")
(or "lets do a Tablet O/S!" "Huh?" "We'll kill everyone!" "Huh?!" "We always have before!")

So I respectfully disagree with Mr Einhorn and maintain that Microsoft is a bad investment at any price.
It can't stay big and manage its way forward in The Age of the Internet, it's had 10+ years trying, and if it transitions to a profitable well-managed 'small' PC company, it's share price must collapse.

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