Veteran Microsoft analyst Rick Sherlund, of Nomura Equity Research, has come out with his investor’s note on global software and how the year may unfold for Microsoft, ahead of Microsoft’s second-quarter earnings report on Thursday.
The note includes plenty of context about overall market trends that don’t entirely bode well for Microsoft.
That Windows 8 has gotten off to a “very slow and disappointing start,” according to Sherlund, is not news. But Sherlund notes that MIcrosoft’s share price (selling at about $27 mid-day Friday) already reflects a lot of bad news and Windows 8 traction should improve over the year.
He expects the latter half of the year to deliver more form factors to show off Windows 8’s touch capabilities, hardware running on new versions of processors with better battery life, and lower prices.
Yet Sherlund also sounds strong notes of caution. Among them:
- Surface Pro, which is expected to launch later this month, is priced more for business users than consumers, he believes. (Prices for Surface Pro start at $899 but if you include the attachable keyboard, which Sherlund believes most people would want, the total price comes to more than $1,000.)
The newest version of Office, which is also expected to launch later this month, “will likely be a slow ramp in the market,” Sherlund writes. Its expected collaboration and communications services are likely to be “hot areas in the enterprise market but there may be the need for early adapters to demonstrate the benefits to the broader market.”
Also not boding well for Office, which is part of the Microsoft division that earned the most revenue last quarter: The possibility that as more users turn to tablets, they’ll need Office less and less. Though businesses still find Office valuable, “for many consumers (probably over half the market), there is no strong need for Office, so it is unlikely Microsoft will be successful competing with low priced Android based tablets or even high priced Apple tablets in this segment of the market,” Sherlund says.
Since Office is “the one strong lever that Microsoft has to sell Windows 8-based devices,” the company needs to demonstrate the value of its devices that use it, he said.
Also a variable: Reports that Microsoft may be coming out with a version of Office for iOS and Android. The question, at that point, would be “how much cannibalization of its Windows operating system Microsoft wants to risk” by doing so, Sherlund wrote.
- On the corporate adoption front, Nomura estimates that desktop PCs are declining at a 3 percent annual rate, and that this will accelerate to at least 10 percent annually after mid-2014. Even with the presumption that Microsoft will be growing its tablet share, that’s not enough to offset the decline in desktop PCs, meaning: “This would imply no growth in the PC and Windows tablet market in 2014, unless we are underestimating the adoption of new form factors and effect of falling prices and the potential for a stronger notebook replacement cycle,” he wrote.
- Another big-picture trend worrisome to Microsoft — and Apple — investors: Whether low priced Android tablets will mean that Apple — and Microsoft, whose Surface is priced comparably to the iPad — will no longer be able to charge higher prices for their tablets.