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Guest Commentary – Microsoft Too Slow In Innovating?
Op-ed, Tradeable | 30 January 2013

By Elaine Chiam

“Our big, bold ambition to reimagine Windows as well as launch Surface and Windows Phone 8 has sparked growing enthusiasm with our customers and unprecedented opportunity and creativity with our partners and developers,” said Steve Ballmer, chief executive officer at Microsoft. “With new Windows devices, including Surface Pro, and the new Office on the horizon, we’ll continue to drive excitement for the Windows ecosystem and deliver our software through devices and services people love and businesses need.”

The FY13 Q2 financial report pivots on Ballmer’s reiteration (above) that Microsoft is anchoring on mobile to push for earnings in its Windows business unit.

Murky Numbers Offer No Indication Of Windows 8 Take Up Rate
This makes strategic sense of course, in the mobile-centric climate of today. But one does not equate Microsoft with innovation at the pace of other mobile platforms at Google and Apple. Looking at the Windows segment of earnings, 2Q13 revenue was US$5,881 million over 2Q12’s US$4,741 million. For 1H13, this was $9,125 million over 1H12’s $9,616 million. We are looking at a slow pick-up in what is often viewed as the mainstay of Microsoft’s business. This is further cemented by the decline in Microsoft’s Device sector that includes the performance of Windows 8 mobiles devices. The Entertainment and Devices product segment actually shrank by 11 percent in 1H13 over the previous year. The numbers as a whole reflect a slow rate of innovation if indeed mobile is to be their wonder kid for now.

Until the rate of earnings in the Windows sector matches its present strategy as envisioned by Ballmer, investors should be prudent when taking in Microsoft’s claims of growing the mobile sector to a point where Windows rides towards “unprecedented opportunity and creativity.”

Creativity and Innovation By Microsoft’s Internal Culture?
How the creativity claim is overreached is further shadowed by some negative publicity regarding Microsoft’s internal management policies that seem to thwart innovation against its competitors. Vanity Fair, The Economist and Forbes reported on how the management practice of internally ranking their employees against one another internally, a system known as stack-ranking, has potentially jeopardised its own rate of innovation.

We should not, however, altogether abandon the growth potential of Windows’s mobile division. Windows mobile is gaining traction again after a pretty dull moment, with the Windows phone and the Surface Pro. While it may not be considerable on the innovation forefront that is reflected so far in its revenue growth, it is still highly possible for expansion in this segment. The question remains, how much. Microsoft has been stagnant for a while now, but it is still moving along. Continue looking at Windows mobile news weighted against its competitors for growth opportunities.

As a whole the Windows business unit is still on an upward trajectory, looking at a reported 24 percent increase over 1H12. Key products to look at ahead are Windows 8 and Microsoft Office upgrades. Over 60 million Windows 8 licenses have already been reported sold and the rate of growth is likely to remain steady. Microsoft will likely remain a safety net type of investment in the technology sector because of its Windows products.

Other business divisions that reported growth – Server and Tools, where enterprise products such as SQL servers fall into, reported a 9 percent growth over the previous year. Online services such as search-driven advertising rose 11 percent. While these product segments seldom appear overhyped in the media, they remain strongholds in Microsoft’s survivability.

Earnings per share reports fell in 1H13 but stabilised in 2Q13 during the holiday season when the mobile products, Windows phone 8 and Surface tablet, saw sales numbers grow. Its share price fell after the release of this FY13 Q2 report, reflecting that sentiments seem to remain rather mixed about the growth of Microsoft.

Further sentiment-dampening numbers can be seen in the reported income for 1H13 compared to 1H12. 2Q13 net income was reported at $6,377 million, compared to the 2Q12’s $6,624 million. Operating expenses had gone up, but did not yield corresponding profit within the same quarter. This is testament to the Microsoft style of slow innovation.

What Can Interested Investors Look Out For?
Much thus seems to ride on Microsoft’s performance in the beginning of this year. Bullish signs will include positive mobile device launches, growth in revenue, steady share prices. These must also be countered with the performance of Microsoft’s competitors, especially but not only in the mobile sector. Without positive signs for the investor, Microsoft may continue in its slump for another year.

Editor’s note:
Have any thoughts/comments or feedback regarding this article? Reach out to me on my twitter account, @Tradeable. I will also discuss and tweet about various other investment and economic related news in Singapore and beyond, there.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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