This year has been a year of new product launches for Microsoft (NASDAQ:MSFT). Its major launches included a new version of its Windows operating system, Windows 8, a new mobile OS called Windows Phone 8 and a new tablet called the Surface. We think that with these new launches, Microsoft has taken a step in the right direction with its focus on the consumer, and we believe that the Windows 8 OS is the first step in revolutionizing consumer interaction with laptops and desktops.
Since the company’s suite of products are more or less dependent on the usage of Windows OS, we think that the way it fares over the next year will be key for the health of Microsoft’s business, in 2013 and beyond. In 2013, we will specifically be looking at (1) whether Windows 8 helps Microsoft influence consumers as they buy phones and PCs, (2) if the touch compatibility of Windows 8 eats into tablet sales and (3) Microsoft’s overall market share among consumers.
(1) Integration Will Help Drive Cross-Selling
One key feature of the Windows 8 OS is the integration that it has with Windows Phone 8 and Windows 8 based tablets. In our opinion, the integrated experience across the major devices that a consumer uses will likely be popular among individuals and enterprises, who are already familiar with the Microsoft operating system. It is likely that a user who already uses a Windows 8 PC could be swayed to buy a Windows Phone 8 because of the similarity in user interface.
Another key development for Microsoft in 2013, is the progress that Windows Phone 8 will make in the emerging markets because users in these markets are likely to own a smartphone before owning a PC. Therefore, when emerging market consumers buy a Windows Phone 8 phone and then decide to purchase a PC, the familiarity with the user interface is likely to push them towards buying a Windows based PC. We think that this is a real differentiating factor for Microsoft, since neither Apple (NASDAQ:AAPL) or Google(NASDAQ:GOOG) have operating systems that look and feel so similar across devices.
(2) Touch Feature Can Help Drive PC Sales
Another major feature of the Windows 8 OS is the fact that it was built with touch screen compatibility. This feature has already lead to a new line of laptops which can be converted to tablets easily. In our opinion, convertible laptop/tablets will appeal to both PC users and tablet users, and can over the long term cannibalize some tablet sales if laptops continue to get thinner and faster. Overall, this is likely to spell trouble for tablet manufacturers as users will be able to buy a small convertible laptop versus buying a standalone tablet. During 2013, we will be closely watching for signs about whether or this trend materializes. And if it does, it could provide upside to our PC sales forecasts, and consequently upside to our valuation of Microsoft.
(3) Improved Consumer Interface Will Keep With Windows Market Share
Some of Microsoft’s previous products are notorious for their lack of usability and innovation. Microsoft has been accused of being a company which takes its leadership position in the operating system space for granted, and pushing unfinished products onto consumers. However, with the release of Windows 8, we think that Microsoft has done a good job of providing an integrated and intuitive experience for the user, one which could change the way that consumers interact with their PCs. Overall, we think that this improved usability of Windows 8 has strengthened Microsoft’s position in comparison to Apple’s Mac OS X, and will be key in helping the company maintain operating system market share among PCs.
We currently have a $42 price estimate for Microsoft, which is approximately 60% above the current market price.