Wall & Main


My perspectives as an investor and consumer

Mr. Softy’s becoming a retailer?

apple_store_smallMicrosoft is pursuing its ambitions in retail by planning store operations of its own.  It has hired David Porter to spearhead its efforts.  Mr. Porter was most recently the head of worldwide distribution for DreamWorks Animation SKG.  He also brings 25 years of experience from Wal-Mart.

Critics are already shoveling dirt over the perceived grave of said effort.  I’m withholding  judgment till I see it played out.  Their reasoning behind such a push is really what piques my interest.  As you may recall, Microsoft had once ventured down this path in 1999 through a large store in the Metreon center in San Francisco.  The doors were quietly shuttered within two years.

Fast forward ten years and we have another effort by Microsoft to operate its own stores.  Why does a company that has 90+% of the worldwide PC market need to enter into the brick-and-mortar retailing business?  How much more can it gain through sales at these stores?

I think discussions around marketshare miss the point.  The real issue is consumer mindshare.  Although Microsoft has tried to expand into areas such as search, gaming, music, mapping, etc., its cash cow still remains the operating system and Office suite of applications.  The latest incarnation of its operating system, Vista, has not received the acceptance that Microsoft had hoped.  When it comes to innovation, companies like Apple and Google are capturing consumers’ attention.  Microsoft, although ubiquitous, finds itself falling off consumers’ radar.

Here are a couple of charts to illustrate my point:

The first chart was produced using Google Trends.  aaplvmsft_search_volumeYou can use their tool to compare the frequency of occurrence of your term/s relative to the total number of Google searches.  The results are expressed as “Sales Volume Index” which is the volume of your search term relative to total search volume.  Although these results would not pass the test of scientific rigor, they do provide interesting insight.

I compared the terms “Apple” and “Microsoft.”  The green line represents Microsoft while the orange line represents Apple.  The chart shows results of  searches conducted worldwide over the past five years.  Of interest here is the steady loss of mindshare, expressed through search, that Microsoft has suffered relative to Apple.

Now take a look at the second chart which compares the relative market cap of the two companies.  aaplvmsft_mkt_capThe numbers are normalized to Apple’s market cap in January 2004 of $8.4 billion.  Microsoft’s market cap in 2004 was 36x that of Apple’s.  You’ll notice that the general trend since then has been similar to that of the Sales Volume Index.  While Apple’s market cap has increased 1000% in the past five years, Microsoft’s relative market cap has seen a 50% decline.  One of the reasons for the decline is the steady erosion of Microsoft’s traction with the consumer.

With the next version of its operating system, Windows 7, Microsoft wants, and needs, to prove to the consumer that they can have a better experience with its products than they do with Apple or Google.  Maybe getting them into a  vertically integrated store is the solution.  Microsoft would control all aspects of the store and the experience.

Whether successful or not, Microsoft feels that it needs to try because consumer confidence, once lost, is enormously difficult to regain.  Just ask the Big Three auto makers.


Filed under: Business, Technology, , ,