windows8

Why Windows 8 Made Me Sell MSFT

in FP: Latest/Stock Analysis by

sang love serenades to Microsoft in the December issue, but a few weeks ago we sold our shares of Microsoft. Because we believe the stock is undervalued, that decision was not easy. What changed? A very important part of my thesis was the success of Windows 8, an operating system that Microsoft made for both PCs and tablets. When I saw Windows 8 demonstrated in early 2011, it looked like a very innovative, un-Microsoft-like product. Windows 8 was very important for Microsoft’s response to Apple’s iPad — a tablet that was deservingly stealing market share from low-end laptops. Windows 8 was supposed to take Microsoft to the next level, leapfrogging Apple and Google.

A few months ago Microsoft released the public Windows 8 beta, and I tested it out. To my shock, I found it to be a very confusing product. The interface was slick and visually very appealing, but I simply could not figure out how to use it. All the experience I had accumulated using Windows over the past two decades was useless with Windows 8, and the fact that Microsoft took out the Start button did not help, either. I found myself staring at the screen helplessly, clicking the mouse on different corners, trying to discover how to do basic tasks that we normally take for granted, like starting a program or running two programs side by side. Even figuring out how to shut down the computer was an ordeal.

After a while our frustration built up to the point where I wanted to curse and scream obscenities at Microsoft and its CEO. I decided, however, to wait. Windows 8 had just been released for consumer preview; it was in beta, not a final product. I thought Microsoft could not possibly release a product that was so important to its future but so obviously confusing. To be honest, I simply could not process the situation; I thought maybe it was me; maybe I’m lacking the Windows 8 gene in our DNA. However, in May I read several professional reviews that confirmed our worst fears: the Windows 8 I had used was the product Microsoft would ship (less a few bugs). And I was not the only one with that deficient Windows 8 gene. As John Dvorak of MarketWatch put it, “The real problem is that it is both unusable and annoying. It makes your teeth itch as you keep asking, “Why are they doing this!?”

I know why. Microsoft wanted the same version of Windows to work on both a PC that is controlled with a mouse and a tablet controlled by touch. Microsoft had learned from past mistakes and had stopped trying blindly to port Windows made for PCs to tablets and mobile phones. Instead, it took the Metro interface it created for mobile phones and ported it to tablets and PCs. Though this strategy should work for tablets — after all, tablets are just supersized mobile phones — it fails miserably when you port it to PCs. But that is what Microsoft did. The touch gestures that work well and are intuitive on tablets and mobile phones fall flat when you try them on a PC with a mouse — swiping, a very natural touch gesture, is simply cumbersome with a mouse.

Microsoft’s ambition was to make tablets running Windows 8 as powerful as your average Windows PC. Tablets, to date, have been great at receiving information (reading, watching movies) but weak at creating content. When I travel I still have to bring along a laptop and a tablet. Microsoft wanted to make a tablet that was good at both receiving and creating content. This could have given Microsoft a significant leg up on the iPad, which is terrific for consuming information but still limited when it comes to productivity. I don’t have a view on how good Windows 8 is for tablets, but I think that Windows 8 for PCs turns PCs into productivity-reducing tools; and I think this unfortunate OS is going to be bad for MSFT.

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3 Comments

  1. I am happy to hear you tested the Win8 preview.  Its always a good sign see someone willing to change their mind when they uncover new facts. (Yes, I know that’s obvious, but unfortunately its not so common).

    IMHO, Win8 is going to be as successful as the Zune media player.  Metro is not getting deployed in corporate America. It just ain’t gonna happen. In the past this would not necessarily be a problem.  The first versions of all Microsoft’s programs have always had deficiencies but with each successive version the application/OS would just get stronger and stronger. 

    Win 2.0 was a total dog used by no one, but Win 3.0 changed the tune, and win 95 sealed it.  Maybe Win 9 or 10 will return Microsoft to its glory days, but that’s not  a sure thing. Microsoft is still a great cash generating business, but that’s exactly its problem.  Its the classic innovatator’s dilemma.  For the same reasons that Microsoft overtook IBM, Apple is stealing Microsoft’s lunch on the laptop/tablet. Its really hard to eat your children, but at a certain point Microsoft is going to have to separate itself into a corporate company and a consumer company with different code bases, price points, and lifecycles.  They desperately need an enterprise supportable tablet, but once every company with a need has bought a few thousand ipads to serve as glorified e-readers, the opportunity will be lost.

    My Microsoft bashing aside, Microsoft has a fantastic moat on the enterprise applications like Office, Exchange, SQL, Active Directory, etc..  So, after the bad publicity of win8 comes out and the stock price drops, its not inconceivable that I might just buy it to grab a low downside, moderate gain opportunity, but its highly unlikely that I will ever be buying Microsoft  in the future because I think it deserves a higher valuation ratio that the market average.  Microsoft’s desktop operating moat is very, very slowly but surely being filled in. Microsoft’s margins will never be so high again, but that’s just the way capitalism works.

    See you next year at Billy Blue’s in Omaha…

    -Doug
    Houston, Tx

  2. Vitaliy,

    If a user hates the new Metro interface or just doesn’t want to use it, can’t they just turn it off and make it look just like Windows 7?  That’s what I plan on doing.  I’ll probably try and learn the new interface if/when I get a Windows tablet or tablet/laptop combo, but I’m guessing that most people with desktops and laptops will opt to just make it work using the “old” interface.  So if I’m right about that, wasn’t your decision to sell a bit extreme?

    Regards,
    aagold

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