A Microsoft operating system is working well when – and only when – it is not noticed at all. It must leave users to work without tripping over the interface or enduring a crash. It is a product that can be praised only in the absence of complaints. This is the price Microsoft pays for enjoying a natural monopoly. It is also at the heart of most of the complaints about the latest OS, Windows 8, officially released Thursday. Because it has been built to work on tablets and smartphones, it is very different from earlier versions. It must, by definition, fail at its primary duty, that of invisibility.
Microsoft had no choice. Old Windows was never going to work on touch screens, and touch screens are going to take share from traditional PCs. There are, then, two questions for investors. How well and how quickly will the company respond to the new system's initial problems and get a version out that users can get busy ignoring? And how much success or failure at this is already priced into the stock?
The first question is impossible to answer other than to note (as pundits will never tire of doing) Microsoft's mixed record with new products. The second question is easier. Microsoft shares, at $28 (U.S.), have a free cash flow yield of over 12 per cent and a dividend yield of well over 3 per cent. If investors thought the company could expand – even inorganically, using its $55-billion in net cash – they would pay a lot more for the shares. The market seems to think that a good outcome at Microsoft would be zero growth.
Windows 8 needs to preserve, not expand, Microsoft's empire. This may not be a low bar. Worldwide PC shipments were off 8 per cent in the third quarter. Both Windows and Microsoft's office software business depend on a successful shift to new platforms. This company must run to stand still.