The World's Largest Software Company Wants More Hardware


Microsoft (MSFT) has been the world's largest software company for decades. Now it wants some more skin in the hardware game.

"It's important to recognize a fundamental shift under way in our business," CEO Steve Ballmer writes in the company's 2012 letter to shareholders. "We see ourselves as a devices and services company."

Now this doesn't mean that Microsoft is giving up on software. The vast majority of the $73.7 billion in revenue it generated in its most recent fiscal year came from its software stronghold. That isn't going to change anytime soon.

However, the company is no longer willing to simply put out the software and establish the ecosystems for the benefit of its longtime hardware partners. This may work most of the time, and Microsoft watches over 1.3 billion users this way. However, there will come a time when the company plays both ends of the game.

A Brief History of Microsoft Hardware

"There will be times when we build specific devices for specific purposes," Ballmer writes.

Microsoft has certainly had success with its Xbox. It isn't always a very profitable business for the company, but the company's persistence and perseverance have made Xbox 360 the country's most popular video game console.

However, most of its consumer-facing initiatives haven't exactly panned out.

Zune -- the company's brazen attempt to taken on Apple's (AAPL) iPod -- flopped. When it decided to make a smartphone play by rolling out Kin, the peculiar wireless devices were nixed only weeks later.

Microsoft is likely to fare far better than it did with the Zune or Kin when its Surface tablet is introduced later this month.

Partners Will Have To Be Patient

Surface is generating buzz as a Microsoft-crafted tablet running the new Windows 8 operating system. It's easy to see why many of Microsoft's longtime hardware partners aren't happy about this.

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Why should they put out tablets running Windows if Microsoft is doing it already? How would Dell (DELL) and Hewlett-Packard (HPQ) react if the software behemoth began promoting its own PCs? It would be awfully tempting to just jump ship and join the growing number of original equipment manufacturers hopping on the open-source Android platform.

The PC itself is dying, and with it Microsoft's dominance as the operating system of choice. Industry researcher IDC's latest report shows that worldwide desktop and laptop shipments fell a staggering 8.6% during the third quarter, and domestic demand fell even more.

Instead of just hoping that its partners get tablets and smartphones right -- or whatever devices come next -- Microsoft is no longer afraid to roll up its sleeves and do the job itself.

Surface isn't just the name of Microsoft's tablet -- it's also the software leader's hardware strategy.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft.

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