Microsoft's Next Mistake

The inevitable is happening.

Microsoft (NAS: MSFT) is reportedly working on rolling out Microsoft Office in iPad form.

Apple (NAS: AAPL) sold 11.1 million iPad 2 tablets in its latest quarter alone, so clearly this is a booming computing market that the world's largest software company needs to address. iPad sales have spiked 166% over the past year, while desktop and laptop sales have been languishing. Unit sales of Windows-fueled PCs have posted year-over-year declines every single quarter this year.

The writing is clearly on the tablet wall. The "good enough" computing revolution is here, and folks are buying smartphones as necessities and tablets as novelties at the expense of more powerful desktops and laptops.

Microsoft has no choice but to roll with the changes. Right?

Here comes the quandary
When 20th-century bank robber Willie Sutton was asked why he held up financial institutions, he reportedly responded, "That's where the money is."

If Windows is starting to fade as an operating system of choice for light computers powered by Apple's iOS and Google's (NAS: GOOG) Android, why should Microsoft's productivity suite go down with the ship? Android and iOS weren't even around five years ago, yet both platforms now have more than 200 million activated devices apiece.

Tablets and smartphones may not seem like gadgetry made for word processing or spreadsheet crunching, but it's happening. The popularity of Bluetooth keyboards are making tablets more PC-esque, especially for folks with pudgy fingers that can't seem to get the hang of touchscreen keyboard pecking.

Apple's own Pages word processing and Numbers spreadsheet programs -- as well as Quickoffice suite -- have been among the top premium iPad apps since the tablet's inception last year. Over in the Android space, Quickoffice Pro and Polaris Office are popular workarounds for Microsoft's own programs. Why should Microsoft let everyone else cash in on the tablet craze?

Perhaps the more problematic dilemma is that many of these programs encourage users to turn to Google Docs and other free cloud-based solutions to make their files portable and shareable. In short, Microsoft Office compatibility isn't a resource: It's a cookbook! All of these productivity suites are weaning consumers off Microsoft's second-biggest software product. Microsoft better jump right in and show everybody how it's done!

Well, that's the quandary. If it does in fact roll out Word, Excel, and PowerPoint as apps, isn't it vindicating the migration process? Won't it make it easier for folks to give up their PCs? I mean, have you seen the ASUS Transformer Prime tablet that comes out next week? The docking station is a touchpad keyboard. It's practically a light laptop that you can break in two when all you need is the tablet.

If Microsoft isn't careful here, Windows may become the Research In Motion (NAS: RIMM) of computing. It will be largely eschewed by consumers in favor of iOS and Android operating systems. Corporate customers will reluctantly stick with the dinosaur, perpetually eyeing a way out.

Even if Microsoft's extinction is inevitable, does it really want to make the meteor fall faster?

The price will never be right
Let's say that Microsoft does go through with reports of Office apps hitting the tablet market next year. What should Mr. Softy charge?

There is no right answer here. Apple charges $9.99 for stand-alone versions of its Pages, Numbers, and Keynote iWork components. There are freely available open-source alternatives. Does this mean that Microsoft should follow suit, pricing Word, Excel, and PowerPoint modules at $9.99 apiece? What if this happens, and after a few weeks of curious purchases, it falls back in popularity to rival offerings? What if it aims higher and is summarily dismissed? What if it take an aggressive pricing stance, only to upset users of pricier versions on PCs?

There's really no way that Microsoft can win here. Sure, it can scale back the functionality of its tablet apps to justify the pricing discrepancy between its PC versions, but then it still has to compete with more full-featured dedicated apps.

Ideally, Microsoft Office components for iOS and Android would be bridges or temporary patches. Consumers will buy both the apps and the actual computer programs, and it will all dovetail nicely into Microsoft's own cloud computing initiatives. It's not going to play out that way. Most people don't need a tablet today, but the more computing on tablets and smartphones that they do -- the more that people move to the cloud -- the more operating system agnostic they will become.

The only intelligent solution would be to wait until Windows 8 tablets to arrive before jumping in here to make Microsoft Office exclusive to Windows-flavored tablets, but by then it will probably be too late.

Tell me how this leads to folks sending more money to Microsoft in the future -- because I don't see it.

Take two tablets and call me in the mourning
How much longer will investors put up with market share bleeding at Dell (NAS: DELL) and PC shenanigans at Hewlett-Packard (NYS: HPQ) before realizing that weakness at longtime Windows ambassadors doesn't bode well for Microsoft itself?

Many of my fellow Fools -- including several of our Motley Fool newsletter services-- are bullish on Mr. Softy. I'm not. After years of being a Microsoft naysayer I'm going to make my words accountable. I entered a bearish CAPScall on Microsoft in Motley Fool CAPS this morning.

Microsoft is approaching a dangerous point in its once-glorious life cycle, and selling a ton of low-margin Xbox consoles last week isn't going to make things right. If Microsoft Office on the iPad -- with the software giant forking over nearly a third of that revenue to Apple as its developer toll -- isn't a "jump the shark" moment, then why is Steve Ballmer wearing a Fonzie jacket?

At the time thisarticle was published The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Dell, Google, and Microsoft. Motley Fool newsletter services have also recommended creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for HP. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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