Microsoft in a better place than many people think, concludes Bernstein report

Popular sentiment about Microsoft assumes “an unrealistically bad scenario” for the company’s future, concludes a recent Bernstein Research report. The firm say Microsoft is actually in a good position to manage threats such as tablets and cloud computing and avoid a “doomsday” situation.

The 44-page report delves into the company’s financials and models a variety of possible outcomes for key Microsoft products, coming away with a conclusion contrary to many of the assumptions investors are making about the company.

“Today’s share price implies a scenario in which the company’s core Windows/Server/MBD business never grows again, the Online division bleeds billions of dollars of cash forever, and management destroys value in ill-fated acquisitions and investments,” says the report, led by Bernstein senior analyst Mark Moerdler. “We don’t believe such a dire scenario will play out; and believe potential threats (e.g. tablets, alternative OS’s, cloud) are manageable.”

Bernstein Research says Windows 8's compatibility with existing enterprise apps will boost Microsoft's tablet push.

On the topic of Windows, a key question is how the rise of tablets will impact PCs running Microsoft’s operating system. Bernstein’s report shows tablet shipments exceeding 200 million units by 2014, with some cannibalization of business and consumer PCs. But the firm says it expects most businesses and consumers to buy tablets in addition to Windows PCs, not as replacements for them.

[Previously on GeekWire: Apple's Tim Cook sees tablets eventually becoming bigger than PC market.]

The Bernstein report notes that much of the growth in PC sales comes from emerging markets, where the analysts expect tablet uptake to be lighter. Bernstein also expects Microsoft’s traditional strength in business platforms to work to its advantage.

“We are encouraged by various Windows 8 features (e.g., backward compatibility, live tiles, Metro Style apps), and believe Windows 8 is a decent competitor in the tablet OS market,” the report says. “We believe Windows 8 tablets would be particularly attractive for business users, due to its compatibility with existing enterprise apps.”

On the other hand, the report notes, apps “may have to be completely re-developed to operate on either Apple iOS or Android. If even a portion of the Windows ecosystem apps migrate to Metro Style, then Windows 8 could launch with more than the games and news apps that are the lion share of both the Apple and Android app stores.”

Microsoft previewed Windows 8 in September and is expected to release a public beta in February. The company hasn’t yet given a final release date for the new operating system.

Moerdler initiated coverage of the global software sector this fall with an “outperform” rating on Microsoft stock. Bernstein’s analysis puts a target price of $33 on Microsoft shares. The company is trading this morning just above $26.

  • Sysnet

    The problem is that backward compatibility won’t feature with Windows 8 on ARM and backward compatibility on Windows 8 on Intel won’t really be backward compatibility, but the ability to run both Windows XP/7 desktop apps with a mouse and keyboard and very kludgily with a touchscreen. In effect Windows 8 on ARM will be a Windows Phone 7 tablet renamed Windows 8, and Windows 8 on Intel will be a combination of Windows 7 with a touch interface, and Windows Phone 7 tablet on the same device. The problem is that neither Windows Phone 7 nor Windows 7 tablets have been successful. Windows desktop and laptop users are likely to stick with Windows 7.

    Having said this, Microsoft’s ability (due to their market monopoly of desktop OSes) to force users to upgrade shouldn’t be underestimated. In addition Microsoft has in place a set of OEM cartels woven together cover of contracts and terms protected by a web of non-disclosure agreements with which they control the PC OEM market. Microsoft has also worked worked hard to build up a similar web of cartels to control of the Android OEM market. According to reliable sources Microsoft already has “patent licensing agreements” protected by non-disclosure agreements with 50% of Android OEMs “to legally allow use of Android and Chrome OS” and although it has only a few trivial and suspect patents and therefore owns at best a trivial part of what makes up the Chrome and Android OSes, according to Barnes and Noble, despite this it is asking for a higher royalty fee for trivial patents on Android which it doesn’t own, than it charges on the entire Windows Phone 7 OS. Microsoft could push up the price of Android and Chromebook “licensing” and use that revenue stream to fund giving away Windows 8 and Windows Phone 7 free. In addition Microsoft could use their Windows OEM monopoly to give rebates, preferential terms, and discounts for Windows 7 licensing and advertising, and preferences for driver support to those OEMs that do not ship Android or Chromebook devices at competitive prices. This is indeed what Microsoft seems to be doing. This is the power of a monopoly, and the reason why we have anti-trust laws to limit abuse of monopoly.
    http://arstechnica.com/microsoft/news/2011/11/barnes-noble-microsoft-using-patents-to-cripple-android-competition.ars

    Whatever you think about the quality of Microsoft’s software offerings, one should not underestimate Microsoft’s ability to leverage their market monopoly to eliminate their competitors, and to subvert the anti-trust authorities through astute political lobbying. As proof, the corporate market is littered with dead innovative companies and products which dared to try to compete with Microsoft’s monopoly products, and despite having serial convictions for some of the most blatent anti-trust abuse that has taken place in recent years, they still maintain the market monopoly, and by recent evidence, the abuses seem to go on unabated.

    • Kalodev

      Your rhetoric is a decade old.

      • http://www.ratdiary.com spragued

        Replace every instance of “Microsoft” with “Google” in his final paragraph and it will be current. :-)

    • Thisistheslam

      Windows Phone 7 isn’t dead or on its back.  It’s growing, and growing faster with Mango making a splash in the consumer markets.  Lots of awesome stuff with the OS too.  I definitely see MS cutting into the iOS and Android unit sales.  It might not be king, but it doesn’t have to be right now as it’s only a year old.  Look how long it took Android to truly compete with Apple.  Give WP a couple years before any judgements are made.

  • Anonymous

    Whistling past the graveyard.

    • Guest

      Still trolling, huh?

  • http://twitter.com/cheezr Jeff P

    Does Bernstein Research have a position in MS stock? A report like that without a disclosure doesn’t do it for me

    • http://geekwire.com Todd Bishop

      Jeff, that’s a good point. There’s a list of disclosures in the Bernstein report, following the standard practice. Here are the relevant parts that I could find. 

      “Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

      “Bernstein currently makes a market in the following companies MSFT / Microsoft Corp.

      “The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking securities related services and received compensation for such services MSFT / Microsoft Corp.

      “An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies MSFT / Microsoft Corp.”

    • Guest

      Virtually every large brokerage has a position in MS stock. Even among hedge funds it’s the second-most widely held equity last time I looked, which was just a month or so ago. So yeah, they’re talking their book. What else is new?

  • Selim Dridi

    the +1 button is way way too small .. #justsaying 

  • Anonymous

    Dude, is that like totally rocking or what? Wow.

    http://www.Total-Privacy dot US

  • Thisistheslam

    2012 is probably going to be a big year for Microsoft.  I’m betting the reveal of Windows 8 beta and a host of other announcements will really rally MS in the public spotlight.  I’m excited to see the PC market get an OS to compete with Apple and Google.  While I enjoy their OS experiences, they both lack certain usability options and expansion paths that I as a consumer would really benefit from (Word documents on a tablet for one).  While MS has been hit in the view of the public these past couple years with Apple and Google making strides in the phone/tablet market, these coming products are bound to make a big impact.  As much as I love competition berthing ingenuity and the race for the latest & greatest, I’ve always enjoyed much of what Microsoft ends up releasing.  And there’s nothing on this article about the Xbox influence and how incredibly well its doing for the company.  The whole entertainment division seems to be the bread and butter of profits and 1st place ribbons at the moment.

  • http://twitter.com/jclaussftw Jason Gerard Clauss

    Traditional computers (Mac or PC) are not in any immediate or medium-term danger from tablets. I cite the following reasons:

    Serious gamers don’t use anything but actual computers. Console games are dumbed-down and FPS is worthless without a keyboard and mouse. Tablets are useless for games because the requisite graphics cards still don’t even fit in laptops, let alone tablets. I bought a top-end “gaming” laptop in 2008 and it choked on a game from 2007. Four years later there’s no sign of progress in that area. The cloud is only useful for inherently online, multiplayer games. For single-player stuff nobody in their right mind wants to be beholden to a well-functioning internet connection in an era when connections remain unreliable.

    Graphic designers, video producers, and people running power-hungry applications need big processor power. Once again, the cloud might be a possible alternative for some but even more than with gamers, power users would not want to depend upon a functional internet connection especially if it is their livelihood. Then there is the question of security. Their valuable files are at stake and they may not want to have them out on some server. The only 100% unhackable computer is one that is not on the internet.

    People running basic office applications, while perhaps not needing mondo processors or airtight security, need an actual productive setup. This means a keyboard, mouse, monitor, and access to removable physical storage media. A non-sucky tablet can accommodate all these things, yes, but that’s what makes it not a big threat for microsoft. This is where a Windows tablet makes the most sense.

    If, maybe 10 years from now, microchip technology is such that tablets pack all the punch of today’s beast machines, Microsoft will by then have acclimated to the world of tablets and mobile devices. Tablets will have replaced computers insofar as tablets will have become computers. Where people have an unwieldy jumble of wires and cords now, people will have an elegant docking station they can place their tablet in which will facilitate large screen monitors, surround-sound speakers, control peripherals, and storage media.

    • Anonymous

      I don’t think there are enough serious gamers and power graphics and video users out there to sustain a true mass market in full function desktop PCs.

      • http://twitter.com/jclaussftw Jason Gerard Clauss

        Considering manufacturing technology is around the corner from a major sea-change (practical 3D printing), a mass market may not be necessary.

  • Guest

    When an analyst feels the need to write a 44 page report refuting the popular doomsday opinion, that really underlines how far this company has fallen over the last three years particularly, but really the past decade. The fact that Ballmer is still CEO despite all the setbacks and failures really shows that the board is entirely derelict. He should have been fired at least five years ago. But they left him in place and by losing mobile and tablets he may well have permanently damaged the company’s future. MS needs a new CEO, a new board that doesn’t include Gates, and a new strategy for growth because the current one is nonexistent.

    • Anonymous

      How dare you question Ballmer’s qualifications to be CEO.  He fulfills the most important requirement for that position: he was Bill Gates’ college buddy.

  • Bob

    “Today’s share price implies a scenario in which the company’s core Windows/Server/MBD business never grows again, the Online division bleeds billions of dollars of cash forever, and management destroys value in ill-fated acquisitions and investments,”

    The first is very possible given MS’s failure in smartphones as well as tablets and how those are now eating into PC sales. Online will continue to bleed billions for the foreseeable future. It has been another ridiculous waste of shareholder money. More than $8 billion lost and share now lower than when MS started getting “serious” about search. And based on track record, management will continue to destroy value on ill-fated acquisitions and investments. A recent example is Ciao, which they originally paid half a billion for and recently unloaded for a fraction of that. Before that was AQuantive. $6 billion spent and virtually nothing to show for it. Skype will play out similarly and be the most costly yet.

    You can’t keep the same clueless leadership and board and expect a different result.