Close impact for new operating system and new hardware from Microsoft (MSFT)

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Microsoft Corporation (MSFT) was once synonymous with its Windows operating system. Operating system (OS) revenues determined its stock price movements, and consumer reaction to its new releases bordered on frenzy.

So it’s a measure of changing times that the latest version of Microsoft’s operating system and reviews of its new Surface hardware devices have only had a marginal impact on its share price. Between October 5, the Windows 11 release date, and October 8, the company’s stock price rose about 2.7%.

While still big contributors to Microsoft’s revenue, Windows 11 and Surface devices aren’t as lucrative for the company’s cloud computing unit. Based on ratings of Windows 11 and Surface devices, analysts predict slow revenue growth for both categories in the coming quarters.

Key points to remember

  • Microsoft released a new iteration of its Windows operating system this week, and reviews of its hardware devices are coming.
  • The general consensus for Surface devices is mixed, as reviewers cautioned users against downloading Windows 11 immediately.
  • While the Windows operating system was important to Microsoft’s bottom line at one point, its importance has waned over the years.
  • It may be several quarters before Microsoft’s latest operating system and hardware peripherals make a difference in its revenue.

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 this approach has not always been successful. For example, critics were puzzled when the first Surface device was released. Its latest product lines have received mixed reviews. The Surface Pro 8 laptop got 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 minicomputer, falls short of the specifications Microsoft promised.

Despite the hype before its release, the response to Windows 11 has also been less than enthusiastic. Research firm Gartner vice president Stephen Kleyhans called the operating system a “late facelift” and “a marketing opportunity for the PC ecosystem.” He said the features contained in the company’s latest version of its best-selling operating system could have been released as feature upgrades for Windows 10. He advised companies to wait for updates. day before deploying them enterprise-wide.

His advice is echoed by Wall Street Journal columnist Joanna Stern, who has asked readers to wait, at least a few months, before upgrading their systems to the latest version. Other critics called Windows 11 a “work in progress” and noted that “there are many reasons to wait” before downloading the operating system.

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 base of installed devices will reach 6.4 billion units, up 3.2% from 2020 figures. The figures for laptops and tablets will increase respectively by 8.8% and 11.7%.

These figures are a continuation of trends from last year, when PC sales rose 13.2%. Microsoft benefited from the trend: The company’s 2020 revenue from its Surface product line jumped 8%, or $ 457 million, “due to increased demand for work and learning scenarios at distance ”.

But its market share in this category is paltry compared to other manufacturers of similar equipment. In fact, Microsoft doesn’t even rank among the top five sellers of laptops or tablets, even though the Surface line of devices have been around for almost a decade.

Part of the reason may be the company’s pricing strategy for its hardware. With prices over $ 1,500 for some of its products, the Surface line doesn’t come cheap. But it does not stand out sufficiently from other cheaper products on the market.

For example, the Surface Pro 8 costs over $ 1,800 with its bells and whistles. One of the reviewers of the device pointed out that it was possible to get similar features and performance at a lower price with MacBook Pro laptops from Apple Inc. (AAPL) and Dell Technologies Inc. (DELL). ).

An additional complication in Microsoft’s hardware product portfolio is the company’s relationship with hardware manufacturers who carry its Windows operating system on their machines. To allay fears that Surface devices might steal market share, Microsoft has promised not to make any Windows features specific to its hardware devices, which means consumers can often get its operating system for a much cheaper price. in devices from other hardware manufacturers like Lenovo. Limited Group (LNVGY).

But that could also have been Microsoft’s intention from the start. According to estimates from investment firm Morgan Stanley, it is expected to generate $ 13.3 billion in Windows OEM revenue and $ 6.5 billion in Surface revenue in 2021. Last year, Windows announced an increase of 9 % of Windows OEM revenue.

Will Microsoft’s new lineup make a difference in its results?

Less than two decades ago, the Windows operating system made up a significant portion of Microsoft’s overall revenue. This mantle has been picked up by its cloud solutions nowadays. New versions of Windows no longer fly off the shelves after release.

For example, Windows 10, which launched in 2015, was expected to run on 1 billion devices by mid-2018. But it took about four years to reach over 800 million devices, by March 2019, against competition from Android from Alphabet Inc. (GOOG) and iOS from Apple.

Analysts predict a similar ramp-up for Windows 11. Michael Cherry, senior analyst at Directions on Microsoft, told CNBC that the new operating system would not sell “particularly well from the start.” According to him, the operating system could gain traction with early adopters, but the shortage of chips could hamper sales of new PCs and, consequently, sales of Windows 11. “At the start of 2023, less than ten percent One hundred of new enterprise PCs will be deployed with Windows 11, “Gartner’s Kleyhans wrote in his memo.

Surface devices also won’t have an immediate impact on Microsoft’s bottom line. In the past, Microsoft has said Surface cycles follow a cyclical path, peaking in December and declining shortly thereafter.

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