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Microsoft Analysis

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Microsoft Industry Trends

Microsoft
One Microsoft Way
Redmond, Washington 98052
+1-(425)-882-8080

9/19/2012
Microsoft
One Microsoft Way
Redmond, Washington 98052
+1-(425)-882-8080

9/19/2012

Contents List of Figures 2 Executive Summary 3 Purpose Statement 4 Business Highlights 4 Microsoft Divisions 5 Windows Marketplace 5 Competitive Marketplace 5 Findings 7 Recommendations 7 Conclusion 8 Appendix 1: Microsoft’s Revenue Change by Division from 2010 - 2012 9 Appendix 2: Duration to Reach Milestone of 100,000 Apps 10 References 11

List of Figures
Figure 1. The figure displays the number of apps in Apple, Google, and Microsoft’s individual app stores over a two-year period.

Executive Summary
Microsoft is self-aware of the gradual decrease of overall PC sales as the market heads toward mobile devices such as smartphones and tablets. While not an imperative concern today, this trend is worthy of attention when looking at the future of the company. Senior Management sees an opportunity for growth under the Entertainment & Devices division, since it has steadily increased its revenue output over the course of its inception. With the release of the Lumia smartphones and Surface tablet coming in Q2 of this year, Senior Management looks to gain ground in each device’s respective market share. In order to increase sales, management proposes that Microsoft conduct a feasibility study on its Windows App Marketplace, currently ranked last behind its primary competitors. With an improved Marketplace, Windows-operated handheld mobile devices may see an increase in sales, which could garner Microsoft a greater market share in smartphone and tablet mobile devices.

Purpose Statement
The purpose of this presentation is to propose a recommendation of a new focus for Microsoft, aligned with the company’s current paths and goals. By demonstrating current industry trends, juxtaposed with Microsoft’s recent three-year fiscal pattern, this report will detail the need to bolster the Windows App Marketplace to improve user experience on Microsoft’s upcoming line of mobile phones and tablets due out in the Q2 of this fiscal year. This, in turn, would improve the devices’ sales figures. With this enhancement, it is projected that Microsoft will gain market share from its competitors and positively affect public opinion on its handheld mobile devices.

Business Highlights
On August 23, 2012, Microsoft unveiled its new company logo. This rebranding marked the first change in Microsoft’s emblem after 25 years. The company is about to unveil a wave of new imaginative releases of its most popular products, ushering in a new era for Microsoft.
“From Windows 8 to Windows Phone 8 to Xbox services to the next version of Office, you will see a common look and feel across these products providing a familiar and seamless experience on PCs, phones, tablets and TVs.”
- Jeffrey Hansen, General Manager of Brand Strategy

The new product line debuting in Q2 of this year is: * Windows 8 operating system (OS) - Oct 26, 2012 * Nokia Windows 8 Lumia 920 & 820 mobile phone - TBA November * Microsoft Windows 8 Surface tablet - TBA December

Windows Marketplace
Although Windows operating systems are Microsoft’s main source of revenue, there is an overall decline of Windows PC sales this year. This is due to the smartphone and tablet markets gradually growing each year (Shah, 2012). Microsoft is making advances to directly address this issue by releasing Windows 8, which will have touch capabilities, but ultimately should seek to address this issue with a more specific focus (Arthur, 2012). With the industry’s current target market quickly transitioning to the Millennial consumer, an audience that relies on being connected, increasing the sales of tablets and mobile devices using Windows OS should be priority. In order to make Windows tablets and smartphones more marketable, Windows Marketplace should be improved. Other companies, such as Motorola Mobility, have recognized the consumers’ desire for more apps (Crothers, 2012).

Competitive Marketplace
Microsoft should address the consumers’ application demand quickly in order to indirectly increase their Entertainment and Devices market shares. Increasing the amount of apps in the Windows Marketplace will promote growth in sales of Windows tablets and smartphones, which will ultimately grow the company’s market shares.
The mobile entertainment devices operating system sector is one area that is becoming increasingly congested. There are a few players, such as Apple and Google Android, in the market that currently have a majority of the market share. Apple owns a market share of 21% for its Smartphone and Tablets. Google’s Android has about 61% of the market share for its tablets and smartphones. Microsoft currently has a market share of 5% each in the tablet and smartphone market. (Figure 1) One primary reason for the dominance of these players is that both Apple and Google have over half a million apps in their respective app stores. There seems to be a strong correlation between the number of apps available and the success of a tablet or smartphone. The following graph compares the number of apps across three different app stores:

Figure 1. The figure above displays the number of apps in Apple, Google, and Microsoft’s individual app stores over a two-year period

Microsoft has started to increase its collection of apps in its app store. A statistic as of June 5th 2012 shows that “More than 100,000 apps have now been published in the Windows Phone Marketplace and new content is currently being added at the rate of 313 apps per day” (Blandford, 2012). Microsoft has a set of products, including the Windows 8 OS, Surface tablet and Nokia Lumia smartphone lined up for release in Q2 of the current fiscal year. This clearly indicates the progress that Microsoft is making towards gaining a stronger footprint in the tablet and smartphone sector.
Another interesting statistic shows the average time taken by each of major player to reach its first 100,000 published app mark (Figure 2). This figure depicts that Microsoft ranked second in being the quickest to reach the 100,000 apps milestone. This is notable because it demonstrates the likelihood of future positive performance.

Findings
Revenue of the Entertainment and Devices division has steadily increased since 2009. It currently holds 14% of Microsoft’s revenue produced. The gradual trend of decreasing PC sales due to the increasing sales of tablets and smartphones has created a concern for Microsoft. The Windows and Windows Live Division, which houses the operating system, has seen a slow decline in revenues generated. This decline correlates with the decline of PC sales. The decrease in sales of PCs in Q2 2012 comparing to Q2 2011 equal to approximately -7%. This fact partly explains the -2.4% and -3.4% decrease in revenue of “Windows & Windows Live” division during 2011 and 2012, consequently.

Recommendations
In Senior Management’s attempt to comprehend what factors drive sales of Windows mobile phones and tablets, the team proposes to initiate a feasibility study that addresses the same. Although it was observed that an increased market share in the mobile OS market was in conjunction with an increased number of applications on Windows Marketplace, it is uncertain if the two are positively correlated. Senor Management intends to undertake a study for an initial phase starting next quarter for 3 months that would cost approximately $480,000. During this period, it will be determined if the two occurrence are correlated. Regardless of the result, the next step ensures further research.
From the first phase, if it is determined that more applications correlate with greater sales, Senior Management will move into the next phase to increase investments aimed at continuing, or perhaps even accelerating the growth of applications in the Windows Marketplace. On the other hand, if no such correlation exists, the focus will be on ascertaining which important factors influence people’s decision to purchase smartphones, and then move forward appropriately.
Based on current market trends, an independent analyst estimates that in the next four years, Microsoft’s market share in handheld mobile OS will be enhanced from 5% at the end of 2012 to 19% in 2016 (IDC, 2012). Also, going by current growth of applications in Windows Marketplace, it is projected that the number of applications will increase to 334,000 (Blandford, 2012). During our feasibility study, it will be determined whether such an increase actually correlates with a gain in market share as focus is continued to further narrow the gap of market share between Microsoft’s major competitors, Android and iOS.
Conclusion
Overall, the current trend of declining PCs will continue to impact Microsoft’s Windows OS revenue and place the company in a more vulnerable position in the long run. It cannot be determined how many years, or even decades, into the future the demand for PCs will reach a point where it will render the Windows OS irrelevant. In order to stay relevant and keep revenues consistent, perhaps even improving them, Microsoft should increase focus on improving marketability of Windows tablets and smartphones. To increase marketability, this team suggests conducting a feasibility study on the impact of applications available in the Windows Marketplace to the sales of Windows devices. If the findings of the report coincide with what is happening with the current trend in the handheld mobile industry, then further initiatives will be undertaken.

Appendix 1: Microsoft’s Revenue Change by Division from 2010 - 2012

Appendix 2: Duration to Reach Milestone of 100,000 Apps

References
Arthur, C. (2012, September 13). Intel faces tough year as analysts forecast fall in PC sales | Technology | guardian.co.uk . Latest US news, world news, sport and comment from the Guardian | guardiannews.com | The Guardian . Retrieved September 19, 2012, from http://www.guardian.co.uk/technology/2012/sep/13/intel-tough-year-fall-pc-sales

Barton, C., Fromm, J., & Egan, C. (n.d.). The Millennial Consumer. Debunking Stereotypes. Retrieved September 17, 2012, from www.brandchannel.com/images/papers/536_BCG_The_Millennial_Consumer_Apr_2012%20(3)_tcm80-103894.pdf

Bill, D. (2012, March 28). Tablet Buying Guide: Operating systems- CNET Reviews - CNET Reviews. Product reviews - Electronics reviews, computer reviews & more - CNET Reviews. Retrieved September 19, 2012, from http://reviews.cnet.com/2719-3126_7-1045-3.html

Blandford, R. (2012, June 5). 100,000 apps published to Windows Phone Marketplace. All About Windows Phone. Retrieved September 19, 2012, from http://allaboutwindowsphone.com/news/item/14960_100000_apps_published_to_Windo.php

Crothers, B. (2012, May 14). Nvidia CEO: Why Android tablets aren't selling | Nanotech - The Circuits Blog - CNET News. Technology News - CNET News. Retrieved September 19, 2012, from http://news.cnet.com/8301-13924_3-20062940-64.html

Moe, J. (2012, September 5). Why is the Windows Phone always an afterthought? | Marketplace.org. Marketplace from American Public Media: Business, The Economy, Personal Finance, Wall Street and World News. Retrieved September 19, 2012, from http://www.marketplace.org/topics/tech/why-windows-phone-always-afterthought

Shah, A. (2012, July 11). Tablets, Smartphones Dent PC Shipments in Second Quarter | PCWorld. PCWorld helps you navigate the PC ecosystem. Retrieved September 19, 2012, from http://www.pcworld.com/article/259122/tablets_smartphones_dent_pc_shipments_in_second_quarter.html

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