Microsoft (NASDAQ:MSFT) announced that it will be deprecating its Hotmail service and replacing with a newly designed email client called Outlook.com. Like AOL (NYSE: AOL), which announced a redesign of its email client last week, this is the first email redesign by Microsoft in years. The company hopes that the new product will attract more users to its services by integrating social networks such as Facebook, Twitter and LinkedIn to its email client. Microsoft competes with Google‘s (NASDAQ: GOOG) Gmail, Yahoo‘s (NASDAQ:YAHOO) Yahoo! mail and AOL (NYSE:AOL) in the online email provider space.
Social is the Key
We think that the differentiating factor between Outlook.com and other email providers is integration with social networks. In the new client, tweets and Facebook status updates are imported to the email thread that users share with one another, making social networking much simpler. The service will also use Facebook chat as its messaging service, presenting an interesting alternate to Gmail for heavy Facebook users. Lastly, the service will also help generate additional traffic to Skype because users will now be able to call each other directly through the email client.
Potential integration with Office 365
While news of integration with Office 365 has not yet been announced, we think that this is the next logical step for the product. By integrating cloud-based Outlook with Office 365, the company can strengthen its enterprise suite and offer stiffer competition to Google Apps. Additionally, it can also leverage its newest social networking acquisition, Yammer, and provide a comprehensive social experience in work place.
Impact on Stock
While the new Outlook interface is already garnering positive reviews in the press, we do not expect the offering to have a material impact on the company’s value. We currently forecast Hotmail’s revenues using the Xbox, Windows Phone, & Other driver, and even a 100% upside to our forecast would increase Microsoft’s value by $0.01 per share. You can assess the impact of an increase in revenues from Outlook.com by using the chart below:
Even if the overall impact of additional revenues from the new interface is immaterial, we think this product could generate value for Microsoft by attracting new users to its services. It can leverage its search client and social services to provide a unique experience for its users.
We currently have a $41.38 price estimate for Microsoft, which is approximately 40% above the market price.