Hewlett-Packard Company (NYSE:HPQ) just yesterday announced their new tablet won’t be running Windows, unsurprisingly they went with Android. This isn’t a game changer for Microsoft Corporation (NASDAQ:MSFT) but is just one more example of competition chipping away at was once one of the widest moats in the corporate world.
PC makers used to be captive to Microsoft Corporation (NASDAQ:MSFT). In the 90s and 2000s, nearly early every computer application was designed for Windows so when deciding what operating system to install, PC manufacturers had only one choice. This gave Microsoft near unlimited pricing power. This wasn’t terrible for the PC makers as the cost could simply be passed on to consumers, so everybody was relatively happy.
Then the mobile smartphone and tablet revolution happened and unsuprisngly the incumbent was very slow to adapt (read: The Innovator’s Dilemma).
Just this week Bill Gates went on record admitting Microsoft Corporation (NASDAQ:MSFT) dropped the ball with mobile.
“We didn’t miss cellphones, but the way that we went about it didn’t allow us to get the leadership. It’s clearly a mistake.”
Google Inc (NASDAQ:GOOG) correctly bet that the future was mobile and their open source (free) software would garner sufficient developer support.
Now Microsoft is trying to catch up with Windows 8 but tablets sell at a far lower price point that PCs (just $200-$400). Given a free alternative operating system, PC makers can no longer simply pass on Microsoft’s expensive Windows license. Microsoft’s own attempt of creating a full Windows tablet (the Surface Pro) starts at $900, without the keyboard and uses more than half of the 64 gb of memory on just the operating system. In my opinion, the Surface was dead on arrival, but only time will tell.
But now we know why Hewlett-Packard Company (NYSE:HPQ) went with Android. It’s a viable alternative to Windows and equally important, its free!
Microsoft bulls will celebrate the fact that Microsoft’s share of traditional PCs (laptops and desktops remain above 90%) and that’s true. But with growing developer support Android has begun moving to PCs as well.
The recent Samsung Chromebook is a growing threat to Microsoft’s traditional business. Just look at the picture, this is a PC in nearly every sense of the word, sure it’s not as powerful and can’t yet run some programs but it is comparable and retails for just $250!
For the record, I’m not bearish on Microsoft Corporation (NASDAQ:MSFT) stock, it trades for just 7.5x earnings ex net-cash. This was just a post to remind us how often we think a company’s moat is impenetrable only to have competition bring things back inline.