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The Economist Is Wrong About Microsoft Corporation (MSFT)

Recently, The Economist published an article titled “Microsoft blues.” The main theme of that article is that Microsoft Corporation (NASDAQ:MSFT) has always been late in the race to innovation mainly due to its huge success in the field of operating systems. Put it differently, it’s Microsoft’s success that is the cause of its long-term problems. Specifically,

“Microsoft knows only too well that the PC market is stagnating as people migrate to hand-held devices. Sales of PCs have shrunk for the past four quarters—they were 13.9% lower in the first three months of this year than in the first quarter of last year. But sales of licenses for Windows still provide the firm with about half of its profits. The company’s dominant position in operating systems meant that it was slow to enter the internet-search market in the 1990s. It has been equally slow to enter the hand-held market: Windows has less than 5% of the global smartphone market, compared with Google Android’s 70% and Apple’s 20%. It has less than 8% of the tablet market.”

Microsoft Corporation (NASDAQ:MSFT)

The Economist concludes the article by likening Microsoft Corporation (NASDAQ:MSFT)’s Windows 8 to the experiment by The Coca-Cola Company (NYSE:KO) with “New Coke” back in the 80’s. According to the writer of the article, Windows 8 is bound to fail tremendously just like the “New Coke” failed and forced Coca-Cola to rethink its marketing strategies.

I respectfully disagree with The Economist on its take on Microsoft for two main reasons.

Reason #1: Backward looking statements

I believe that the argument made by The Economist is flawed because it’s mainly backward looking rather than forward looking. The Economist focuses on what Microsoft Corporation (NASDAQ:MSFT) has not done, i.e. enter the tablet market early and recognize the shift to mobile computing, but that was also true two years ago. The newspaper utterly ignores the tremendous change that Microsoft has undergone in the course of the past two years.

First, its partnership with Nokia on the Lumia mobile phone with Windows OS is beginning to show early signs of success. Mass mobile sellers like Verizon Communications and Sprint are reporting stronger sales of Windows-based mobile phones.

In particular, analyst Mary-Ann Parlato of Kantar said, “For Verizon, Windows’ share rose from 0.2% in the three months ending April 2012 to 6.8% by the period ending April 2013. At Sprint, they continued to reap share increases thanks to their iOS offering- iOS sales share on Sprint grew from 33.4% to 38.4% over the last year.” That’s a remarkable increase in sales. On a personal note, I must also confess that I’ve had the opportunity to try the Lumia myself and found it to  be an extremely appealing and user-friendly phone.

Second, Microsoft Corporation (NASDAQ:MSFT) has been making solid progress on the tablet front as well. Its partnership with Barnes & Noble, Inc. (NYSE:BKS) on the Nook adds a lot of value to Microsoft by bringing a reading ecosystem for its Surface tablets and other Windows 8 devices. In addition, such partnership could also help Microsoft compete against Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL).

Kindle is still the leading e-reading platform, and Apple’s share of the e-reading market is small, but growing. While there is no guarantee that Microsoft Corporation (NASDAQ:MSFT) can become a leader in e-reading, it has a better chance of doing so if it harnesses an existing platform and customer base and then extends it to Windows users worldwide, rather than attempting to build a system from the scratch.

Microsoft offered $1 billion for the Nook business, after investing $300 million in it last April. The Nook business brought in $933.7 million in sales last year, compared to $695.1 million a year earlier. It is, by far, the fastest growing part of Barnes & Noble, Inc. (NYSE:BKS), and more than 100 million units have been sold. Some 533 employees are tasked with making it a viable competitor against not only other e-readers, like Amazon.com, Inc. (NASDAQ:AMZN)’s Kindle, but against all tablet computers, a space dominated by Apple Inc. (NASDAQ:AAPL)’s iPad.

Reason #2: Windows is no Coke

Yes, any operating system might have some bugs in it, and Windows 8 is no exception. But that Microsoft Corporation (NASDAQ:MSFT) has admitted to having a problem is encouraging. Few firms are good at recognizing their own flaws. The Coca-Cola Company (NYSE:KO), in contrast, vehemently argued that New Coke tastes much better and hence – it will stay.

And recognizing a problem very often leads to its fixing. Mr. Softy has just added Outlook to its new Windows RT,  and has added back the missing “Start” button from Windows 8. In contrast to Microsoft, it took Coca-Cola a few very long months before it decided to listen to its fans and restore the old taste of the sugary drink.

Microsoft, though, does resemble Coca-Cola in other, much more positive, ways. First, both have absolute dominance in their respective markets. Coca-Cola holds the largest beverage market share (40%) in the world. Microsoft holds the largest OS market share (90%) in the world. Second, both keep a big portion of each $1 of sales. Coca-Cola’s operating margin is at 30% while Microsoft’s is at 35%.

The Foolish bottom line

Microsoft Corporation (NASDAQ:MSFT) was late to recognize the transition to mobile computing. But it has recognized it and is making huge steps to control market share. I believe that, in time, everyone- including The Economist, will recognize the innovative power and financial strength of Microsoft.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool owns shares of Microsoft. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Economist Is Wrong About Microsoft originally appeared on Fool.com and is written by Shmulik Karpf.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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