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Microsoft Earnings: 3 Big Takeaways
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Michael Endler
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Michael Endler,
User Rank: Author
7/23/2014 | 5:34:08 PM
Re: No surprise
It's true that hardware margins aren't as high as software margins, as a general rule. But Apple still achieves pretty extraordinary profit. So too, since it was brought up in some of the comments, does Cisco.

I sympathize with Mel's indicated point about double standards; it's almost like people expect healthy hardware margins to be definitionally short-lived, whereas software margins are seen as potentially eternal. I can see why that bias exists in the abstract, since it's easier to move quickly and adapt as a software-reliant company than it is as one that also relies on hardware. But if anyone has earned some respect in this regard, it's Apple. I still remember when everyone thought Apple was a short-lived "anomaly" during the height of the recession, when its stock price was half what the post-split price is now. Says something about what analysts know. Maybe Android's huge installed base will lead to future glory as users in emerging markets upgrade, but I can tell you right now, in the present-tense, all that market share doesn't mean squat compared to the real dollars and real user-investment iOS is achieving.


That said, I think Microsoft's problem is more complicated than "no one wants their stuff." That might have been, by and large, the case when Windows 8 and Windows Phone 8 both debuted. I used each OSes extensively, and speaking as objectively as I can, neither was nearly as satisfying as OS X or iOS. Windows 8.1 and Windows Phone 8.1 are better, however. I still prefer the Apple OSes, but I don't think Microsoft's UI is a reason to avoid the platform anymore. I once would have had trouble recommending Windows 8 devices to people, especially if I was talking to someone willing to shell out for an Apple product. But the newest Lumias and the Surface Pro 3 have legitimate merit. I don't think they beat Apple's products, per se, but Microsoft has closed some gaps, from a functional standpoint. From a PR standpoint, however, is another matter-- which is probably why Microsoft will ditch the "Windows 8.x" branding and move to "Windows 9" - or perhaps even just "Windows," to reflect the multi-form factor, rapid-release model Microsoft is going for - early next year.
TerryB
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TerryB,
User Rank: Ninja
7/23/2014 | 1:50:26 PM
Re: No surprise
@Mel, I'm not sure I understand your take on IBM/Apple impacting MS on phones. Are you saying you expect IBM to solve the problem of Apple devices not playing well in a MS environment like Active Directory? Or have seamless access to SQL Server databases? Exactly how/why would IBM do that?

Lorna is right, MS came late to party on smartphones and Android/iPhone both have good enough products that most people see little reason to switch. Not unlike a new car model introduced by GM not  taking all customers away from other models because they do same thing. Now, if the new car can fly, and costs the same, how many people flock to it then? Question is whether another killer use of smartphones is ever found. If MS produced phone which battery lasted 1 week between charges, how would you like there chances against Android/iPhone then?

Windows tablets, not just Surface but OEM devices also, have much more potential in enterprises than existing Android/Apple/ChromeBooks. And, again, reason is that is only tablet which plays well in an Active Directory environment. Active Directory will be the determining factor. If you start seeing some other technology displacing AD, then all bets are off on Win based devices. But I haven't read anything saying that is on horizon, short term or long term.

Kind of curious what you do @Mel. You know your stuff but you are always dogging on MS and I'm not sure why. How many companies would take $4.6 billion profit in one quarter as a "bad" period of time? Only on the Bizarro world of Wall Street is that a problem.
melgross
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melgross,
User Rank: Ninja
7/23/2014 | 1:10:37 PM
Re: No surprise
Of course, by saying no one, I don't literally mean no one. But a 2 or 3% marketshare is as close to no one as can be achieved for a major company. Without actually knowing how many of these have sold, and we all know how inaccurate both Gartner and IDC are. Without Microsoft giving us numbers, we may never know. And they don't tell if the numbers are bad. As for fairness, I'm not saying anything is fair or not, but a lot of people do.
Lorna Garey
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Lorna Garey,
User Rank: Author
7/23/2014 | 12:48:57 PM
Re: The device dilemma
I'd argue that WinMobile failed mainly because Microsoft under Ballmer was hideously late to the mobile game, and the ecosystem is served by Android and iOS. 

As to no one wanting MS desktop products, apparently, businesses and consumers didn't get that memo. Take a look at the latest desktop OS numbers:

http://www.netmarketshare.com/operating-system-market-share.aspx?qprid=10&qpcustomd=0

As of June, all versions of OS X owned about 8%, Linux 1.74%. The rest is Windows.

Moreover, Android is doing just fine. It's even with iOS in the US and well ahead globally. I don't hear many uh-ohs coming from Google.
melgross
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melgross,
User Rank: Ninja
7/23/2014 | 12:08:15 PM
Re: The device dilemma
I think the problem is very simple. People don't want their mobile products. People include those running organizations. If people don't want your products, then it hardly matters what is being done. One major reason why people don't want their products is because they don't solve any problems that aren't being solved now. Something new must solve current problems that aren't being solved elsewhere. They must! If they don't, then why but them? Why leave a system that is already doing most (if not all) of what you want? This is a major problem for them. Nothing they've done is of any interest to the buying public. The second reason is that people, as a group, don't like the UI. Yes, I do know that some people do. But it's a small percentage. This is like digital cameras. In the beginning, manufacturers thought that they needed to come up with new forms, since there was no film chamber, or winding mechanism to contend with. They experimented with many form factors. Writers extolled these many, rather odd, factors as being the future. But what happened? All of those forms went to the dust bin. Why? Because over decades, camera manufacturers had already come out with the form factors that worked best. Now, digital camera resemble this old film counterparts. Why bother with all that exposition? It's simple, Microsoft tried a new form factor, and people don't like it. Their displeasure is echoed by sales numbers. This is true, as we know for their Desktop factor as well, something they are forced to back away from. But what about their mobile products? They can't go back. The total failure of Win Mobile shows that. What does this mean? Likely that Win Phone will never really make it, and that their tablets, won't do that well either. With Apple and IBM getting together on this, it makes any advantage Microsoft may have here, obsolete. Their chances are now less than they were before. And you just know that those at Microsoft, and possibly Google, are saying oops!
Lorna Garey
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Lorna Garey,
User Rank: Author
7/23/2014 | 12:06:39 PM
Re: No surprise
I didn't say anything about huge software margins being OK (more on that in a bit). But to start, saying "no one wants their products" is patently incorrect. Surface may not be for everyone, but my college-age daughter bought one (with her own money) and likes it a lot. I've talked with business people whose companies support the devices, and they find them of good quality and suitable for work.There's a huge market globally for lower-end and midrange smartphones. Not everyone is an Apple fan.

And, frankly, in terms of huge margins, we're a market-driven economy. No one "deserves" any given profit margin by right. A company is in business to make as much profit as the market will bear. If Microsoft or Cisco or Apple can get people to pay X dollars for a product, hard or soft, that's exactly what they should be charging. "Fairness" has exactly nothing to do with it.
melgross
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melgross,
User Rank: Ninja
7/23/2014 | 11:56:12 AM
Re: No surprise
Lorna, what do you mean by "thin"? Yes, it's true that manufactures with poor products, as we see for most of the Windows industry, the margins are thin. But for companies that make better quality products, that's not so. I would imagine that no matter what Microsoft may say, they expected big demand for their various Surface models, and correspondingly good profits. After all, they were targeting the iPad and iPhone, not cheap Android devices. The fact that people, and organizations, simply weren't interested in Microsoft's efforts, is what has resulted in their losing so much money in these areas. It's not that hardware has thin margins. But it would be true that software does have usurious margins. Why is it that companies that make good hardware margins are excoriated, while software companies that have absurdly high margins are not? Where does it say that over 75% margins in software is ok, when 40% hardware margins are considered to be almost criminal? Microsoft may have thin margins on their hardware, if not negative, because no one wants their products, so that marketing costs become the largest percentage of costs, right after R&D, making a profit impossible. Just curious. Do Apple and Cisco have thin margins, and are their margins fair? How about Microsoft's software margins?
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
7/23/2014 | 11:43:13 AM
The device dilemma
Some good takeaways here to think about. Very surprised to hear that Nadella & Co "plan to attack the higher end of the [phone] market with upcoming devices." Why would Microsoft keep trying to push that boulder uphill? To say nothing of "inventing new device types that highlight Microoft services." Microsoft is not cut out to invent new devices. They've proven that it's not in their DNA. Cloud services and software are where Microsoft clearly excels. I agree with @Lorna that Microsoft should stay in the hardware game as long as it's not actively hurting the company. But if they keep treating devices as an afterthought, the hurt will come soon enough.
Lorna Garey
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Lorna Garey,
User Rank: Author
7/23/2014 | 11:14:04 AM
No surprise
Hardware margins are always thin -- seems like the point is the linkage and driving adoption of your OSes and software. Oh, and your cloud services. As long as MS isn't actively losing money on phones and tablets I can't see the downside to being in the hardware game.
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