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Microsoft's (Mis)Adventures in Hardware

Strategic changes may allow for reduced direct investment in hardware.

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Caught flat-footed during the surge in popularity of smartphones and tablets,  Microsoft (MSFT) was forced to play catch-up as it entered the hardware business, trying to maintain the network effects and switching costs that had bound consumers and enterprises to its products. Due to a combination of unforced errors and bad circumstances, Microsoft's hardware strategies have historically been unprofitable and have represented departures from the firm's usual strategy of spurring license and services sales, despite the strategic importance of each product. We believe recent changes in Microsoft's overall strategy could lead to the company reducing or ending its direct investment in hardware, without ending its larger strategy of expanding the Microsoft platform and productivity ecosystem.

Hardware, a Necessary Evil
In 2013, Microsoft sought to remake itself into a devices and services company, embarking on designing, manufacturing, and selling smartphones and tablets in addition to its Xbox gaming console. With new CEO Satya Nadella taking the helm earlier this year, the company's strategy shifted slightly to "mobile first, cloud first," although the previous "devices and services" strategy was already being executed. The abrupt change in leadership has resulted in several hardware projects being set in motion, which may not have been approved by Nadella. Nevertheless, he is now in charge, and he is, for better or worse, responsible for the success or failure of these projects.

Norman Young does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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