Tablets & Microsoft: More Pundits Finally Catch On To Microsoft's Decline

Looks like reality may finally be catching up to more observers' views of Microsoft after this quarter's results were announced last week.

An article in the Wall Street Journal's weekend edition even suggested Ballmer finally step down.

If I heard reports on Bloomberg and CNBC correctly, Apple, for the first time, out-earned Microsoft in a quarter. The nearby chart displays the price moves of Microsoft, Apple, and Google since inception, along with the S&P500 Index.

It's clear that Apple is the rarity among technology stocks, having been able to regain its meteoric trajectory. Ballmer's Microsoft, on the other hand, has never returned from the drubbing it took in the 2000 bubble-burst, while Gates still ran the show.

The Journal article, and other sources, all largely credit tablets, led by Apple's product, with hurting sales of Windows and Office, due to their dependency on PC platforms.

But I noticed this interesting passage in the Journal article,

"Spending 14% to 15% of revenues on research and development, which Microsoft has done for years, looks extravagant given Microsoft's new product history. Apple, for example, spends less than 3%....some of (Microsoft's) new products, like Windows Vista or the Zune music player, have been duds."

This reinforces something I've observed for years. It's not how much money is spent on research, per se, but how good the research is. Sounds tautological and obvious, but look at those numbers again while considering the new product torrent flowing from Apple since the introduction of the iPod.

Somehow, you get the feeling that Apple's environment is both more attractive and conducive to creative techies, while Microsoft probably resembles some sort of software factory. Its hardware releases have been few and poor, except for the Xbox. But that's something more like an Apple device- it isn't so totally restricted to computing.

However, it makes the point that with an activity like R&D, quality matters more than quantity.

Microsoft looks like it has finally had its growth crimped for good by technological evolution. Tablets are on the rise, while desktops are nearly gone, and laptops are suffering attrition from the tablets.

A product that didn't exist, what, two years ago, has now torn a hole in Microsoft's vaunted cash machines.

Of course, if the firm had split itself up into several homogeneous pieces several years ago, such as Windows, Online, Office, and Gaming, then tablets wouldn't have damaged all four. But, as it is, all must suffer as one equity.

Perhaps, now, even the staid portfolio managers who feel Microsoft is a safe tech stock will see that it is far more vulnerable and risky than they dared imagine.