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 When Nadella hosts his first major press conference this week, he's
likely to describe — if not officially launch — versions of Word,
Excel and PowerPoint designed for Apple Inc's iPad, looking to cash
in on a market worth up to $7 billion a year, according to Wall
Street analysts.
The technology behind the software is not ground-breaking, but the
strategy is: It puts Office at the heart of the company's push to
become a leading services company across a variety of platforms — possibly at the expense of Windows and its own Surface tablet.
That perceived willingness to break with the Windows tradition,
which remains co-founder Bill Gates' most enduring legacy, has
helped spur Microsoft shares to $40-plus levels not seen since the
dotcom boom of 2000.
Wall Street is now guardedly optimistic on a company that, while
still garnering billions of dollars in annual profit, risks gradual
obsolescence in a mobile-powered tech industry.
"The fact that Nadella is going to pull the trigger (on Office)
shows he's not just an insider that's going to continue the status
quo. Right now, it's a blank sheet of paper," said Daniel Ives, an
analyst at FBR Capital Markets.
Depending what Microsoft charges for Office on the iPad, and how
many of the scores of millions — and rising — iPad users adopt it,
it could rake in anywhere between $840 million to $6.7 billion a
year in revenue, estimates Raimo Lenschow, an analyst at Barclays.
Rick Sherlund, an analyst at Nomura who has urged Microsoft to put
its most lucrative franchise on the iPad for some time, welcomed the
idea but was more cautious on the rewards. He estimates that an iPad
Office would generate only $1 billion or so in new revenue a year,
as many potential users will already have corporate licenses that
can be converted to the new product.
And it's unclear how much of its revenue will be surrendered to
Apple, which generally takes a 30 percent cut of app sales through
its store. Microsoft and Apple declined comment.
OPTIMISM BOOSTS SHARES
The anticipation of Nadella's mobile-centric strategy has pushed
Microsoft shares up 11 percent in the seven weeks since he took the
helm, and they are now rolling along at 14-year highs.
On Thursday, Nadella is officially slated to talk about mobile and
cloud strategies. But investors and industry executives will be just
as attuned to any signals from the new CEO on whether he's willing
to take Microsoft in a radically different direction.
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To some investors, steering a new course for such a massive entity — Microsoft is the second-largest U.S. tech company by market value — is a daunting task. And some, who would rather have seen an
energetic outsider like Ford Motor Co's Alan Mulally get the job,
are yet to be convinced Nadella has the leverage to make the
necessary change.
But bold moves with Office, and signifying a renewed drive to
conquer the mobile arena and 'cloud' computing after years of
shackling its best products to PC-centric Windows, are seen as a
promising start.
"This is something that should have happened a few years ago," said
J.P. Gownder, an analyst at tech research firm Forrester. "Holding
Office for iPad as a hostage in the tablet war didn't work out well
for them. They have to start to undo this negative behavior."
Nadella has more work to do as well on the devices side of
Microsoft's business plan. Windows-powered phones are well reviewed
but held only 3 percent of the global smartphone market last year.
Its Surface tablet, an iPad competitor, had 2 percent of the tablet
market, according to tech research firm Gartner.
Microsoft's $7.2 billion deal to buy the handset unit of Nokia, now
delayed in closing, is unpopular with many investors who view it as
a doomed defensive play to curb Google Inc's Android's dominance in
the smartphone market.
It is "an acquisition not even a mother could love," according to
Nomura's Sherlund.
Wall Street will be listening for Nadella's thoughts on the Xbox,
the subject of renewed spin-off talk recently, and his willingness
to buy his way into cloud-based computing services exploited by
growing startups such as Dropbox and Evernote.
"M&A specifically on cloud is going to be key, around big data,
cybersecurity, software-centric deals," said Ives at FBR. "Give
investors a bone, and they will believe."
(Reporting by Bill Rigby; editing by Bernard Orr)
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