Should You Invest In The New Microsoft Corporation?

  • Microsoft is shedding its old image and creating a fresh, more relevant one.
  • What's driving this change, and how will it affect the company's top line?.
  • How will this new, sustainable model change Microsoft's attractiveness as an investment?.

Microsoft Corporation (NSDQ:MSFT) is a very different company from what it was under Bill Gates or even Steve Ballmer. Under the leadership of CEO Satya Nadella, Microsoft is slowly transforming itself from a software company - into a software company.

Let me explain.

The Microsoft of yesterday was a software company in the oldest sense of the word. They had a successful operating system and they developed an equally successful line of office productivity tools. And then they sold them piece by piece. That was it.

Today’s Microsoft still does the same thing, but in a very different way. As the world moves from PCs to mobile devices and from isolated private networks into the cloud, Microsoft has positioned itself to take advantage of that shift, but essentially by using the same technologies it has always been known for. Windows 10 is not a new operating system; Office 365 is not a new suite of productivity applications; yet, the way they are offering these tools is a world away from what they were doing in the last millennium.

Why Move to a Different Model?

The shift that Microsoft is making is not necessarily a voluntary one prompted by some inner need to be different. It is the result of an external force called change. The world is changing, and tech companies of yesterday are hitting that wall of obsolescence. IBM is going through it. Oracle is going through it. And those are just two examples of companies that are defying imminent death - or at least permanent disability.

If Microsoft did not react proactively to the change, then they would have likely gone the same way. Fortunately, they have a man of vision in Nadella who recognizes that change and is willing to re-create the success of the 1980s in a new form - a form called “Microsoft-as-a-Service”.

The PC Problem

One of the instruments of that change is the decline in PC shipments that is hitting device makers all over the world. With OEM licensing being a large slice of their revenue pie, Microsoft naturally had to look for an able replacement to offset that decline.

The choice they seem to have made is one based on the cloud concept, where everything is served over the Internet via secure protocols. Their offerings are still much the same, but they are now being offered on the cloud. First, it was cloud infrastructure as a service, then Office moved to the cloud, and now they’re doing the same with Windows 10 for enterprise customers.

win10subscrip1 win10subscrip2

Source: Microsoft Blog

Just last week, Microsoft took its Windows 10 and made it available as a subscription for enterprise companies as Windows 10 Enterprise E3 in CSP. Although this option is currently not open to individual consumers, they may consider doing that when the time comes for people to renew their free upgrades next year. Not everyone will be willing to spend the $119 or $199 to keep their Windows 10, so they might put it on a monthly offer - even if it’s only to make the annual rate look more reasonable.

The Microsoft-as-a-Service Push

The emergence of cloud as the preferred delivery platform for any type of software application is another major driver behind the change. However, many large enterprises continue to be wary of security issues with cloud, and cloud providers know this. That’s why they bend over backwards to be certified by the government. Case in point is AWS and Microsoft recently being awarded the highest-impact certification by FedRAMP, which certifies their cloud environments as secure enough to hold sensitive data from governmental agencies.

The strategy itself is to ultimately move everyone and everything to the cloud so companies can build, store, manage and share their data with employees spread around the world.

Possibly one of the biggest validations of this strategy is that Facebook has recently signed up as one of Microsoft’s customers for Office 365. Soon, all 13,000 of Facebook’s employees around the world will have their own logins and can collaborate on documents and other company assets.

In an article on Microsoft’s blog, Facebook’s Chief Information Officer Tim Campos said this:

“We collaborate on everything online—no files, no fragmented information stores—and we provide our employees with the ability to work anywhere and in any way they want. Our IT has to be flexible and available over the web, on mobile and across platforms — wherever our employees need it. This is why we’ve implemented Office 365.”

What Are The Implications for Microsoft?

By bringing their offerings to the cloud, Microsoft has created a one-click-away opportunity for companies to use all of their services. Free Azure credits are being bundled with Office 365 subscriptions, for example. And it’s very likely that once corporations start to sign up for Windows 10 across their offices and devices, Microsoft will attempt to upsell Office 365 as well as Azure cloud.

This ecosystem of infrastructure, platforms and applications will naturally be more appealing to an enterprise customer because they get the benefit of bundled pricing, and they’re not tied into long contracts. Moreover, they can pick and choose the services they want, give their employees the benefit of multi-device access and themselves be more nimble as businesses.

As an example, let’s take a startup that works on Mac systems. They will need productivity tools like Office, and possibly some infrastructure for their IT needs. Right now, they depend on Apple for device support, maybe Amazon’s AWS for their IT infrastructure and perhaps Google Apps for productivity tools. With Microsoft’s model, they still need the client-side hardware, but everything else can be taken care of by a single company. And that’s the kind of company Nadella is positioning Microsoft to be.

As they keep adding services like Microsoft Stream, for example, their enterprise customers have the choice to add it on to their plan. That makes the customer more efficient in terms of expenditure as well because they only pay for what they really need, and they only need to deal with a single vendor. That also means their IT procurement now becomes a breeze compared to having to deal with multiple vendors and multiple contracts, and hiring the manpower to manage it all.

The synergies here are limitless, and Microsoft seems to have zeroed in on a business model that will take it well into the next decade. With this strategy, they have not only found a solution to declining licensing revenues but have also created a sustainable model that could well drive revenues far beyond what mere licensing has done in the past.

If you’re looking for a tech investment that can bring you long-term returns, this is the company you want in your portfolio. Microsoft has aligned itself towards the future, and unlike the Microsoft of old, the new company is tuned into what the customer wants - mobility and flexibility.

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  • I do not have any business relationship with the companies mentioned in this post.
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