Microsoft Corporation (MSFT) was once synonymous with its Windows operating system. Revenues from the operating system (OS) determined the movements of its stock price, and consumer reaction to its new releases bordered on a frenzy.
It is a measure of changing times, then, that the latest release of Microsoft's operating system and reviews of its new Surface hardware devices have only had a marginal impact on its share price. Between Oct. 5, when Windows 11 was released, and Oct. 8, the company's stock price inched up by roughly 2.7%.
While they are still important contributors to Microsoft's top line, Windows 11 and Surface devices are not as lucrative to the company's cloud computing unit. Based on reviews for Windows 11 and Surface devices, analysts are forecasting slow revenue growth for both categories in the quarters ahead.
- Microsoft released a new iteration of its Windows operating system this week, and reviews of its hardware devices are coming in.
- The overall consensus for Surface devices is mixed, while reviewers have cautioned users against downloading Windows 11 immediately.
- While the Windows operating system was important to Microsoft's bottom line at one time, its importance has diminished over the years.
- It might take some quarters before the latest operating system and Microsoft's hardware devices make a difference to its revenues.
A Mixed Response
Microsoft's approach to designing its hardware devices straddles multiple categories—laptops, PCs, and tablets—at the same time. The novelty of that approach has not always been successful. For example, reviewers were puzzled when the first Surface device was released. Its latest product lines have received a mixed response. The Surface Pro 8 laptop has earned high marks for its sleek design and powerful specs. But the Surface Laptop Studio, a combination of a laptop and a tablet, has been called "weird." The Surface Go 3, a mini computer, does not live up to the specifications promised by Microsoft.
Despite the hype prior to its release, the response to Windows 11 has also been less than enthusiastic. Research firm Gartner's vice president Stephen Kleyhans called the operating system an "overdue facelift" and a "marketing opportunity for the PC ecosystem." According to him, functionality contained in the company's latest iteration of its best-selling OS could have been released as feature upgrades for Windows 10. He has advised enterprises to wait for updates before deploying it on a company-wide scale.
His advice is echoed by Joanna Stern, Wall Street Journal columnist, who has asked readers to wait, for a few months at least, before upgrading their systems to the latest version. Other reviewers have called Windows 11 a "work in progress" and noted that "there are a lot of reasons to wait" before downloading the OS.
Complications in Microsoft's Hardware Forays
The success of Microsoft's hardware devices and operating system is tied to consumer demand. According to research firm Gartner, the global devices installed base will reach 6.4 billion units, up by 3.2%, from 2020 figures. The numbers for laptops and tablets will grow by 8.8% and 11.7%, respectively.
Those figures are a continuation of last year's trends, when PC sales rose by 13.2%. Microsoft was a beneficiary of the trend: the company's 2020 revenues from its Surface line of products jumped by 8%, or $457 million, "due to increased demand from remote work and learn scenarios."
But its market share in that category pales in comparison to other manufacturers of similar hardware. In fact, Microsoft does not even rank among the top five sellers of laptops or tablets even though the Surface line of devices has been around for almost a decade.
Part of the reason for that may be the company's pricing strategy for its hardware. With prices that are upwards of $1,500 for some of its products, the Surface line is not cheap. But it fails to distinguish itself sufficiently from other, cheaper products in the market.
For example, the Surface Pro 8 is priced at upwards of $1,800 with its bells and whistles. One of the device's reviewers pointed out that it is possible to get similar features and performance at a cheaper price with Apple Inc.'s (AAPL) MacBook Pro and Dell Technologies Inc.’s (DELL) laptops.
A further complication in Microsoft's hardware product portfolio is the company's relationship with hardware makers who carry its Windows operating system on their machines. To assuage their concerns of Surface devices stealing their market share, Microsoft has promised not to make any Windows features specific to its hardware devices, meaning consumers can often get its operating system for a much cheaper price point in the devices of other hardware makers like Lenovo Group Limited (LNVGY).
But that might also be Microsoft's intention all along. According to estimates by investment firm Morgan Stanley, it is slated to earn $13.3 billion in Windows OEM revenue and $6.5 billion in Surface revenue in 2021. Last year, Windows reported a 9% increase in Windows OEM revenue.
Will Microsoft's New Lineup Make a Difference to Its Bottom Line?
Less than two decades ago, the Windows operating system accounted for a major chunk of Microsoft's overall revenue. That mantle has been taken over by its cloud solutions nowadays. New versions of Windows no longer fly off the shelves after they are released.
For example, Windows 10, which was launched in 2015, was forecast to run on 1 billion devices by the middle of 2018. But it took roughly four years to reach more than 800 million devices, by March 2019, in the face of competition from Alphabet Inc.'s (GOOG) Android and Apple's iOS.
Analysts are predicting a similarly gradual ascent for Windows 11. Michael Cherry, senior analyst at Directions on Microsoft, told CNBC the new operating system will not sell "particularly well out of the gate." According to him, the OS might pick up traction with early adopters, but the chip shortage may hamper new PC sales and consequently Windows 11 sales. "By early 2023, less than ten percent of new enterprise PCs will be deployed with Windows 11," Gartner's Kleyhans wrote on his note.
Surface devices will also not make an immediate impact on Microsoft's bottom line. In the past, Microsoft has said that Surface cycles follow a cyclical trajectory, peaking during December and falling shortly thereafter.