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Bet on Microsoft’s rich history of buy-outs, remakes and knock-offs

Microsoft CEO Steve Ballmer, left, and Nokia president and CEO Stephen Elop unveil the Nokia Lumia 920 and Nokia Lumia 820 in New York, Sept. 5, 2012.

Diane Bondareff/AP

Mobile computing is the biggest challenge Microsoft is facing today. Although it is late, it is trying to address that challenge with the $7.2-billion Nokia acquisition.

While Microsoft may have misjudged the transition from PC computers to mobile devices, even when it is late to market, Microsoft has traditionally had the size and power to catch up and overtake its competition.

Right from its very beginnings, Microsoft has been the master of buyouts, remakes and knock-offs. Even MS-DOS, the product that launched the company's dominance, didn't originate in the Microsoft labs. IBM wanted a way for non-engineers to run the recently conceived personal computers without having to learn technical programming languages. In 1981, to accommodate its hardware partner, Microsoft bought the rights to Quick-and-Dirty Operating System from a company called Seattle Computer Products for $75,000 and modified and refined it.

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Windows, Microsoft's graphical interface operating system, was actually invented by Apple for its Macintosh computers. Apple sued Microsoft for copyright infringement and to settle the lawsuit, Microsoft licensed Apple's patents.

The popular Word, Excel and PowerPoint programs as part of Microsoft's Office suite were also Johnny-Come-Latelys. WordStar and WordPerfect preceded MS Word as the dominant word processor. Excel followed Lotus 1-2-3 as the killer spreadsheet app before Microsoft put it out of business. PowerPoint, originally Presenter, was designed by Forethought Inc. for the Macintosh computer. Microsoft bought Forethought for $14-million.

That is not to say that Microsoft simply poached these products without any input into their success. Microsoft refined and developed them until they became the best in their class. They also marketed them very astutely. Windows maintains about 90 per cent of the operating market for PCs. By bundling its other products along with Windows, Microsoft has an overwhelming advantage.

Moreover, the Nokia purchase doesn't represent a significant risk for a company that has $77-billion in cash and equivalents in its coffers; $7.2-billion pocket change. In 2011, Google paid $12.5-billion for Motorola Mobility and Microsoft bought Skype, the voice over Internet service, for $8.5-billion.

Even with this venture into mobile computing, Microsoft is not substantially changing its business model, though there is more of a focus on its enterprise business. Its last earnings report in July showed healthy increases in revenues and profits over the previous year for its business and servers units.

It brought in close to $5-billion in revenues in the last quarter, compared to $3.2-billion for Google and lagging Apple by $1.9-billion. This year, it is estimated that more than 300 million personal computers, (desktop and laptop) will be sold globally. With the Windows operating system, Microsoft maintains a virtual monopoly in desktop computing.

While revenues for the Windows division fell from the previous year, support for Windows XP (a program businesses use) expires next year. This will spur many IT support departments to recommend that their companies upgrade.

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An aggressive push into cloud computing is strengthening Microsoft's position as a provider of software services. The company is prepared for next generation data centres with hyperscale servers and converged infrastructures for cloud computing.

For investors, Microsoft can be characterized as a mature growth company. It is not growing by leaps and bounds as it did in its early days. But it still takes in steady assured revenues and offers a 3.6 per cent yield.

Microsoft has become too big to be nimble, and will probably be late to the table again the next time technology evolves. But Microsoft's heft and clout should give its investors a reasonable return as it digests the change.

Edward Trapunski is the author of The Secrets of Investing in Technology Stocks.

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