Microsoft wise to play the waiting game

In the rapidly evolving software market, Microsoft seems off the pace. But sustained by Xbox and Office, the company could simply be shrewder than many believe

Although Microsoft appears to be lagging its competitors, some analysts believe it is a deliberate strategy by the software giant.

The reason Microsoft can record a 31 per cent rise in profits only for its share price to drop 5 per cent is market confusion about the direction in which the company is heading.

Microsoft could focus on extending its traditional dominance of desktop software on to the new generation of mobile computing devices. Its successful entry into the games console market with its Xbox product range also gives it the option of extending its reach into consumer electronics as the market for its personal computer (PC) software shrinks.

This would mean going toe-to-toe with competitors such as Sony.

What troubles the markets is that no one is certain which direction the company will take or how successful it will be in these new markets.

The industry has acknowledged that Microsoft has not managed to keep pace with Apple products such as the iPad. Microsoft's search engine is puffing along well behind the market leader Google. Google has also stolen a considerable march on Microsoft with its Android mobile computing software.

"The mobile computing market is booming, but in the mobile space Microsoft is something of a laggard," says Richard Edwards, a principal analyst at the research company Ovum. "If Microsoft is to maintain market share, it must provide versions of its Office software for tablet computers and other mobile devices - especially Android and Apple."

But unlike those financial analysts who have downgraded Microsoft stock, Mr Edwards believes the company may have the right strategy in place for a successful assault on the mobile market, following a far-reaching partnership agreement with the phone maker Nokia.

"In my opinion, Microsoft appears to be preparing to buy Nokia, and this will give it a significant advantage in penetrating the mobile space, as Nokia has a strong reputation not only among business users, but also in the rapidly evolving markets of the developing world," he says.

But the financial markets remain unconvinced Microsoft will be able to pull out of a decline caused by the eventual shrinking of the PC market, where its software has been dominant for so long.

When unveiling the quarterly figures for the end of March, Peter Klein, the chief financial officer of Microsoft, admitted the Seattle software giant was suffering because of a declining PC market.

"We delivered strong financial results despite a mixed PC environment," Mr Klein said.

But despite all its shortcomings, Microsoft still makes money - a lot of it. During the quarter that ended in March, its profits shot up to US$5.23 billion (Dh19.21bn), an increase of 31 per cent over the same period the previous year. Sales growth was fuelled by the success of Microsoft's Office software and its Xbox games consoles.

"Consumers are purchasing Office 2010, Xbox and Kinect at tremendous rates, and businesses of all sizes are purchasing Microsoft platforms and applications," Mr Klein says.

Microsoft's Office software has traditionally accounted for half of the company's profits and continues to perform astoundingly well.

While free or low-cost versions of Office are widely available, users prefer Microsoft Office to ensure ease of communication with other users. For this reason, businesses frequently refuse to examine other options.

"Despite competition from a number of free or low-cost alternatives, the advent of Office-style software from Google and others will undoubtedly have an impact on Microsoft," Mr Edwards says. "But users will not want to bother with format or compatibility issues, and so Office will remain as a cash cow for the foreseeable future."

Microsoft has also been successful in carving out a niche for itself in consumer electronics with its Xbox consoles. But the company now faces the challenge of keeping pace with electronics giants as the internet invades the living room and TV sets start to come with built-in computer software.

"Microsoft has carved out a sizeable market share of the games console market with Xbox," Mr Edwards says. "But as consoles start to compete more with TV set-top boxes and even become integrated into the TV sets themselves, Microsoft must learn to sell its Xbox technology to a wider audience."

Why it makes sense for Microsoft to have a foot in the hardware market is that the industry move towards internet-based cloud computing is likely to shrink software profit margins radically.

"As the IT industry starts to market offerings as services through the cloud, Microsoft will have to adjust from profit margins of up to 60 per cent to retail-style profit margins of less than 5 per cent," Mr Edwards says.

Financial analysts, however, believe Microsoft is ill-suited to take on Sony in consumer electronics or Google in internet-based software.

But as the worlds of mobile computing and the internet merge with domestic consumer electronics, history may judge that Microsoft was wise to hedge its hardware and software bets.