A Desperate Microsoft Strikes Back on All Fronts

Microsoft Minecraft
Ted S. Warren/AP

Microsoft (MSFT) used to be on top of the world. Windows dominated the computing experience. Office was the undisputed leader in productivity software. The Xbox 360 was this country's video game console of choice.

A lot has changed in recent years. Mobile has been the big driver in the computing revolution lately, and Windows is a distant third as a mobile operating system. Office is still the top dog for word processing, spreadsheets and presentations, but the popularity of free and nearly free cloud-computing alternatives is proving a big challenge to Microsoft's second-largest software franchise. On the gaming front, the Xbox One and Sony's (SNE) PlayStation 4 came out just a week apart last November, but it's Sony that's squarely in the lead this time around.

Microsoft is still growing, but that's happening because the global appetite for technology is on the rise. It's still the world's largest software company, but it could be doing better if it wasn't relinquishing market share in key segments. It realizes this, and recent moves suggest that it's willing to sacrifice margins in the near term for bigger payoffs in the long run.

Mobile Madness

Google's (GOOG) Android and Apple's (AAPL) iOS dominate the mobile market, which includes smartphones and tablet devices. Industry tracker IDC reports that smartphone manufacturers shipped more than 255 million Android devices during this year's second quarter, accounting for 84.7 percent of the market. Apple has slipped to just an 11.7 percent slice, but that springtime showing tends to improve in the fall when the new iPhones come out. This leaves us with Microsoft commanding just 2.5 percent of the market.

Microsoft acquired Nokia's handset business in a push to expand the global reach of its fledgling mobile business, and one can only wonder how much lower its share of the market would be if it couldn't count on Nokia's Lumia phones.

Microsoft needs more than just Nokia, of course. The challenge has been how to get other smartphone makers to offer more than just Android. The challenge in the past has been that it charges handset makers $5 to $15 to install Windows Phone, but that may change. Earlier this year, reports out of India claimed that some phone makers there were given free licensing deals in a push to gain traction in the world's second-most-populous nation.

Word Up

Office has been a meaty contributor to Microsoft's financial performance over the years, but the growing popularity of tablets, smartphones and free online platforms -- such as Google Drive -- are starting to drag it down. Earlier this month Microsoft responded by making a comprehensive version of Office free on mobile devices. Folks on iPads, iPhones and Android tablets can now perform the most essential tasks on new Office apps.

Giving away the cash cow may sound crazy at first. Office accounted for nearly a third of Microsoft's revenue last fiscal year. However, this is a push for expanding its audience and keeping them close to Word, Excel, PowerPoint and other Office features. There's a big problem if the genie gets out of the bottle. Will folks continue to pay for Office? Microsoft feels that it's a gamble worth making at a time when its applications are starting to lack relevance.

Thinking Outside of the Xbox

Then we get to gaming. Windows is still the operating system of choice when it comes to PC gaming, but it's been a challenge on the console front. The PS4 has outsold the Xbox One by millions of systems over the past year, and Microsoft can't afford to let that happen.

The Xbox One began selling for $349 on Nov. 2, a $50 price cut ahead of the critical holiday shopping season. Microsoft can't let Sony run away with the market in back-to-back holiday periods, and the discount -- a markdown that is as large as $150 for some bundles -- will make sure that it stays cheaper than the PS4.

All of these moves will come at a price, of course. Analysts see revenue climbing 13 percent in fiscal 2015, which began in July, but they only see earnings per share moving 2 percent higher (and that's with Microsoft's aggressive stock buybacks, whereby the share count has fallen with every passing fiscal year). It isn't easy to grow the bottom line when you're cutting prices and investing in new opportunities, but Microsoft knows that if it wants to matter tomorrow, it's going to have to make some sacrifices today.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google (A and C shares). The Motley Fool owns shares of Apple, Google (A and C shares) and Microsoft. Try any of our Foolish newsletter services free for 30 days. Looking for a new tech investment? Check outour free report on the Apple Watchto learn where the real money is to be made for early investors.

Originally published