Our Take On Windows 10: What It Could Mean For Microsoft

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Recently, at a launch event, Microsoft (NASDAQ:MSFT) shared more information about Window 10, which was launched for beta testers in September last year. While the operating system is expected to be launched later this year, it will be a free update for users running Windows 7 or Windows 8.1 on PCs or notebooks for the first year. According to the latest data, Windows 10 attracted close to 1.7 million beta testers (initial users that test the software for bugs). This indicates that Windows 10 might surpass the earlier versions of Windows, especially Windows 8, in term of subscribers. In this note, we explore how the Windows 10 might boost Microsoft’s revenues.

See our complete analysis of Microsoft here

Installed Base to Help As Weak PC Sales Continue

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Windows Operating System is Microsoft’s third largest division and makes up 9.7% of its stock value by our estimates. However, it contributes 25% to Microsoft’s top line. One of the primary drivers for Microsoft’s Windows division is global PC sales. Approximately 65% of total Windows Division revenue comes from Windows operating systems purchased by original equipment manufacturers (“OEMs”) and pre-installed on their devices. [1] According to IDC, the global PC sales continue to decline and global shipments were down by 2.4% in Q4, and 2.1% in 2014. [2] Although, IDC expects that PC sales will pick up in 2015, we think that global PC sales will remain tepid. Currently, we forecast that the global desktop sales will decline by 5% to 130 million and global notebook market to remain flat at 180 million units shipped in 2015.

However, as the company has offered the free Windows 10 update to the existing users of Windows 7, Windows 8 and Windows 8.1, we believe that Windows 10 will have widespread adoption amongt users. To ensure that Windows 10 finds traction with early adopters, Microsoft has gone beyond purely visual changes like reworked desktop icons. Windows 10’s start menu will now expand to a full-screen view that looks like Windows 8.1’s home screen so that users are familiar with the new OS.

Focus On Mobiles Through Cross Device User Experience And New Features

One of the primary reasons for decline in PC shipments is the growing popularity of tablets. According to Gartner, tablets shipments to exceed those of PCs in 2105. [3]

While iOS and Android based smartphones and tablets continue to rule the market, Microsoft’s Windows based Surface tablets and phones have not fared as well.  According to IDC, Windows based tablet’s market share was 2.5% in Q4 2014. Despite offering discount on its tablets, and selling smartphones at lower price points, Windows mobile sales continue to lag the tablet market.

While Windows 8/8.1 was targeting tablets and PCs, Windows 10 can be used with devices less than 8 inches in size. Through this cross compatibility, Windows will be able to sell more windows based smartphones, and this will grow the Windows architecture user base.

Moreover, Microsoft is focusing on rectifying a major flaw in Windows 8 by introducing universal apps that would help the phone to work with other major apps like Instagram or Gmail. Microsoft’s own applications – from Xbox to Office can further supplement app development program, which would be a meaningful step up for Windows 10 Phone store. A stronger Windows Phone OS, with better apps and developer support, could make Windows ecosystem the third platform behind Google’s Android OS and Apple’s iOS. This may help convince customers to persist with Windows PCs and tablets. This can incentivize app development and create a sustainable and profitable ecosystem for developers and users to thrive in, thus improving user experience.

We currently have a $44.46 price estimate for Microsoft, which is 5% below the current market price.

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Notes:
  1. 10-K Fillings []
  2. PC Leaders Continue Growth And Share Gains As Market Remains Slow, According to IDC, January 15 2014, www.idc.com []
  3. Gartner Says Sales of Tablets Will Represent Less Than 10 Percent of All Devices in 2014, October 15 2014, www.gartner.com)) Furthermore, The IDC predicts total device shipments will reach 1.4 billion in 2015, a 12.2 percent year-over-year growth rate, and will only continue to slow in the next few years. ((IDC: Windows Will Gobble Android and iOS Market Share; Smartphone Prices Will Drop, December 02 2014 []