Microsoft makes predictably safe move

07 Feb 2014

The Microsoft board pondered for more than five months to select a 22-year veteran, with software expertise in the server and cloud computing sectors, to lead the company into the mobile, post-PC era.

Talk about disappointment. The markets responded with a 5% drop this week.

Bill Gates, meanwhile, steps down as chairman and announces he’ll spend a third of his time as an advisor to Satya Nadella, who reportedly is the one who made the request during contract negotiations. (Certainly no outsider would ask for mentoring from Gates!)

Peter Cohan from Forbes raises the critical issue on many people’s mind: with Gates back in the picture as a part-time mentor, “employees and investors are going to wonder who is in charge.” Cohan asks: “will new ideas have to satisfy both Nadella and Gates?” That would of course slow down the company’s already glacier-pace of innovation. And for investors, does this mean Gates is the idea guy for new products?

For those aware of Gates’ innovation record, that’s a scary prospect.

The decision to go with a trusted insider, known for his collaborative style and technical aptitude, is certainly a safe move. He is unlikely to rock the boat and won’t face the “transplant rejection risks” an outsider would, as Cohan pithily describes it.

But does he have what it takes to move Microsoft into a new direction and put it on a path to growth as the healthy margins from Windows fade in a mobile and social future?

The safe choice of a Microsoft lifer, who previously headed the cloud and enterprise group, means the company isn’t thinking big, isn’t thinking mobile and obviously doesn’t have a concrete transformation plan in place.

Rethink Wireless’ Caroline Gabriel argues that with no mobile turnaround in the cards, there will be no boost to market confidence.
She says Nadella must bring in some mobile heavyweights and lay out a clear strategy.

The decision starts to make more sense if you listen to financial analysts who are calling for the company to spin off its lower-margin smartphone and Windows units so it can focus on the cloud and enterprise sector. Some investors believe the company’s valuation (with a P/E ratio of 12.8 vs the software industry’s medium of 25.5) is being dragged down by its consumer businesses, which include hardware (tablets and smartphones), Bling and Xbox.

But after paying $7.2 billion for Nokia, the company is surely committed to making smartphones a success. It has its sights on the higher-end segment, with juicier margins, but has been mostly successful in the midrange to low-end. Demand for high-end devices appears to be shrinking rapidly, with Apple’s share dropping to 15% last year from 20% in 2012 and the average price of a smartphone falling 13% to $337. IDC predicts the average smartphone price will reach $265 in 2017.

It certainly will be an uphill battle. With Lenovo acquiring Motorola Mobility from Google, the smartphone space is only become more competitive. Prices and margins are being squeezed by low-cost makers in China and India, and despite a 90% jump in Windows Phone shipments last year, its market share edged up just one point to 3%.

The markets are still waiting for some clarity on its direction for the future.

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