The Windows 8 Ecosystem

My biggest theme this year has been Windows 8. Things looked good earlyin the year, but as the launch approached, the lack of hype, coupled with the slow sales of PCs, and the thought that the PC was dead, drove the stocks in the ecosystem down: Dell, Hewlett, Microsoft, Nokia. Nokia bottomed on July 18, and is up 70% since then. Microsoft made it’s low on October 23 and has been up over 5% in a market which has been essentially flat. The timing of Microsoft’s move is interesting, as it is essentially coincident with the Window 8 launch, and with a great deal of weakness in Apple’s stock. Microsoft isn’t “cool” and its stock has suffered from the perception that it’s products don’t measure up to those of Apple. Over time, though, Microsoft has been adept at becoming a mass market leader in businesses invented by others. It overcame a lead by CPM to become the PC OS leader. Lotus was once the leader in spreadsheets, and Word Perfect in word processors, while Excel and Word are now the staples of Microsoft Office, one of the three big revenue producers at Microsoft. Let’s not forget how Microsoft has performed in the gamebox business. It doesn’t always work, but Microsoft has a lot of patience. On the “cool” front, word is that Oprah sees the Surface tablet as one of her “Favorite Things” of the year. There are a at least two important innovations in Window 8. First is the use of essentially the same operating system and user interface among PCs, tablets, and cell phones.Second is the idea of a touch interface on PCs. The latter may not be perfected yet, but it’s a big change to see Microsoft leading the way, instead of following. As a user, I like the idea of using the same apps on my PC as I do on my tablet and cellphone, with a similar user interface. On my investment axis, I see Microsoft as offering a solid economic value proposition, but it’s brand image is not “cool.” This may slow consumer acceptance of the new system. However, I believe businesses will look at this and see reduced training time, increased help desk efficienncy, and easier integration with corporate systems and security regimes. Many corporations are still running XP. haven’t skipped the Vista and Windows 7 upgrade cycles. XP support runs out in 2014. I think this will be a very attractive upgrade. This upgrade plays right into moving Office to the Cloud and Microsoft’s dominance of the corporate infrastructure software market. It looks to me that market expectations are low, and the company is entering a powerful upgrade cycle. That’s why Microsoft is my largest position. There are some hardware opportunities in the space, but they seem less certain to me. Given the OS integration, we will see convertible devices such as laptops that have detachable tablets. But right now, the speed and simplicity of Windows 8 has given my old laptop new life. I may actually delay purchase of a new laptop. Hewlett and Dell make printers, and the printer business is endangered. Network printers mean we don’t have to have a printer for every PC, tablets are easy to read on, and cell phones allow me to carry electronic travel intineraries instead of printing them, as well as eliminate the need for printing out those Google maps directions. Printing seems to be in secular decline. New products are aimed at enticing users to remotely print stuff from mobile devices for later viewing. We’ll see. Because of all this and it’s other issues, I don’t own any Hewlett, and I wish I didn’t own any Dell. The opportunity for these two is that the market seemed to reprice them since their latest earnings report for a secular PC decline. If that quarter reflected the typical decline in demand before a new OS launch there is plenty of upside. And if the last quarter’s decline was exacerbated because corporate customers wanted to wait for a new generation of machines to run the new OS, there’s even more upside. Dell has $11 billion in cash on a $16 billion market cap, and now has a 3.5% yield. The company has a reputation for finding ways to get cash to shareholders, although there’s a risk that DELL makes more acquisitions to bolster the IT services business and reduces the flow back to shareholders. I’ll probably swallow hard and average down in this one. It’s likely I’ll buy some mbefore the earnings cll and some after. It may be too soon yet for positive guidance to emerge from the call. Even if Windows 8 phones capture market share, the question for Nokia is whether they will make them or somebody else will. If Windows 8 is successful, then Intel also looks cheap. The new iPad mini is selling well, and over the next few years I see a lot of creativity in devices. I see a convergence of tablets and phones, especially among women, who seem to be willing to use devices with larger screens--possibly because they carry purses to put them in! There are signs that some PC makers are thinking about building phones, maybe with Intel chips. It’s clear that the PC hardware makers want to follow the customers into their new devices. If innovation slows down at Apple, their lower cost structures could begin to gain share in the non-PC device market. It would appear even now that Samsung may be making phones that can go toe-to-toe with the iPhone, and how much change will we see from iPhone 5 to iPhone 7? It may be more about forms than function. In a rapidly changing world, the Steve Jobs vision may not last forever. I still think there are lots of things to happen in the future that can keep the PC alive. The touchscreen is here, and it is likely that effective voice recognition is getting closer. Siri is wonderful, but faster chips, which are usually found on PCs rather than mobile devices, are more suited to really practical voice recognition. I believe the market grows as functionality improves.