Microsoft: The New Adobe? – Seeking Alpha
A lot of things have changed at Microsoft (NASDAQ: MSFT) since former CEO Steve Ballmer left the company in February 2014. Under their new CEO, Satya Nadella Microsoft has evolved into a different company with a new vision. In Nadella’s first statement as Microsoft CEO, he made it a point to use the words “software and services company”.
Microsoft has been doing just that, refocusing its efforts from a single purchase software business strategy to a subscription-based model. Microsoft made the move to subscription-based software back in 2011 when Office365 debuted as a cloud-based subscription service. This was a big gamble for Microsoft at the time, as Office was a big money maker for the company. Microsoft decided to make the jump to Office365 as a subscription service to start generating reccurring revenues and to move users to the latest version of Office to cut back on support costs for older versions of Office.
Adobe (NASDAQ: ADBE), in 2013, announced that they would not release new versions of its flagship product Adobe Creative Suite, which has previously been released annually. Adobe made all future versions of its software available only through the Creative Cloud. Companies like Microsoft and Adobe that previously made money on single purchase software were finding that users were only spending the money to buy the software once every three to five years. But with the subscription model, these companies can get a recurring revenue stream (much more predictable) instead of relying on spaced out sales over gaps of years.
Microsoft even started to embrace the cloud and offer cloud-based services like Microsoft Azure. Microsoft Azure is a cloud computing service offering managing applications and services through Microsoft-managed data centers. Microsoft Azure is based on the pay-as-you-go subscription model and is the largest growing division according to a recent Microsoft earnings report.
With this move toward being able to continue to capture customers with a Venus flytrap type model — read: ecosystem — they continue to make a case for keeping the company together, whether it be resisting calls for a breaking up of the company into a consumer-facing and commercial business, or a hardware and software business.
Microsoft has even expanded its business to computer and tablet hardware which is more of a different move than we have ever seen from Microsoft. Microsoft has been known in the past to build the operating system and let the OEM vendors build the hardware design. Microsoft has now grown and developed their Surface line of computers and tablets in an effort to be competitive against Apple (NASDAQ: AAPL) iPad market in the business space.
Microsoft entered into a $400 million partnership with the NFL in 2003 to make Microsoft “the official sideline technology sponsor of the NFL”. The deal was a huge deal for the NFL as the Surface Pro is now the tablet that players and coaches use on sidelines to analyze game film. This venture into computer hardware was a good move for Microsoft and is a growing business for them but it is important to point out that Microsoft’s Surface business is said to be a fifth of the size of Apple’s iPad business. But the hardware business has had its bumps — i.e. with the Windows Phone.
Still, with Nadella at the helm the company has become a bit more nimble and willing to make money wherever the opportunity presents itself.
One thing Microsoft has done to help profit from the size of Apple’s growing tablet and phone business is to build Office apps for the iPad, and iPhone, as well as Apple business products like the iPad Pro. Microsoft was even invited to the launch event of the iPad Pro to debut some of the Office365 apps on iPad Pro. The apps are free to download but you will need a Microsoft Office 365 subscription to use them and save your files.
Microsoft has evolved with the changing landscape of technology, moving away from the traditional client-server model and into more of a cloud-based services position. Its stock price reflects this. Shares of Microsoft are up 34% in the last year.
Microsoft is going back to its roots by making office and other products for Apple iOS and MacOS. One of Microsoft’s first contracts in the software development business was making software for Apple. Microsoft’s transition to a subscription-based business model and a cloud-based business shows them evolving from a company of yesterday into a company of tomorrow.
Going forward, we could see Microsoft do more with its Azure platform, which the market might be discounting. Amazon (NASDAQ: AMZN) leads the cloud with Amazon Web Services. Microsoft’s new Azure rollout helps put supercomputing power in more hands. Adobe’s successful pivot to higher margin businesses has pushed its stock price up 370% in the last five years. Microsoft has grossly underperformed this and other tech giants — Google (NASDAQ:GOOG) (NASDAQ: GOOGL) and Facebook (NASDAQ: FB). Still, Microsoft offers the best dividend and returns on equity on that list.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.