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Microsoft shifts retail strategy and shares a number of risk factors going forward

Microsoft announced “a strategic change in its retail operations,” that will include Microsoft store physical locations.

Today in a blog post, Microsoft announced major changes to their retail strategy that involves investing in “Microsoft Experience Centers” and closing retails store locations that will “result in a pre-tax charge of approximately $450M.”

What might be fueling this new strategy

Microsoft sites a few key points for this shift in strategy:

  • First, the company says, “their product portfolio has evolved to largely digital offerings, and our talented team has proven success serving customers beyond any physical location,” said Microsoft’s VP David Porter. Second, the company sites Coronavirus related effects and that their retail teams successfully helped small businesses and education customers “digitally transform.”
  • The company says they have trained hundreds of customers for remote work and education. Their teams have also support communities with 14,000 online workshops, summer camps and 3,000 virtual graduations. The company likely needed to tighten its belt after the Coronavirus lockdown’s effect on the economy and chose its retail stores and all its employees as the sacrificial lamb.
  • Third, Microsoft sites its growth in its digital storefronts that include the Microsoft Store on Windows 10 and Xbox.

The effects of Coronavirus on society will have long lasting effects in the economy, people’s behavior will now have many people simply avoiding large gatherings over the fear of getting infected. So, a physical retail store is likely to be less attractive for many businesses with other revenue streams. We will likely see more of this in the months ahead, unfortunately.

In the same blog post, under the heading “Forward-Looking Statements,” Microsoft calls out a number of current trends that could affect Microsoft’s business.

  • intense competition in all of our markets that may lead to lower revenue or operating margins;
    • It is true that Microsoft is seeing intense competition in almost every corner of its business portfolio. We welcome competition, we as consumers benefit greatly when companies compete. To name a few areas of increased competition:
      • Video Chat business, Microsoft Teams and Skype: Zoom, Google Meet, Group Facetime
      • PC Gaming, Microsoft Store: Microsoft is facing intense competition from digital game storefronts like Steam and Epic Games
      • Console Gaming: Microsoft will be releasing its Xbox Series X and the more affordable Xbox Series S this holiday season at the same time Sony releases its PlayStation 5.
      • Cloud Services: Microsoft is in a major two-way batter for Cloud supremacy with Amazon’s AWS.
  • increasing focus on cloud-based services presenting execution and competitive risks;
    • This is the one I mentioned above about the two-way battle with Amazon’s AWS
    • Any services that rely heavily on their cloud infrastructure like XCloud, Microsoft t365 and so on.
  • Significant investments in products and services that may not achieve expected returns;
    • Perhaps the most relevant current investment gone awry is Microsoft’s game streaming service, Mixer. The company just announced that it would be shutting down Mixer in favor of Facebook Gaming integration.
    • We hope David Porter is not alluding to Microsoft’s Surface line of business, but he could. In all companies that build hardware and software, the software folks often do not see the need for the company to build its own hardware and David Porter could be one of them. Let’s just hope that Microsoft is still committed to Surface going forward.
  • acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business;
  • impairment of goodwill or amortizable intangible assets causing a significant charge to earnings;
  • cyberattacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;
  • disclosure and misuse of personal data that could cause liability and harm to our reputation;
  • the possibility that we may not be able to protect information stored in our products and services from use by others;
  • abuse of our advertising or social platforms that may harm our reputation or user engagement;
  • the development of the internet of things presenting security, privacy, and execution risks;
  • issues about the use of artificial intelligence in our offerings that may result in competitive harm, legal liability, or reputational harm;
    • Microsoft seeing their work in AI as a possible liability is an interesting omission.
  • excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure;
  • quality or supply problems;
  • the possibility that we may fail to protect our source code;
  • legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property;
  • claims that Microsoft has infringed the intellectual property rights of others;
  • claims against us that may result in adverse outcomes in legal disputes;
  • government litigation and regulatory activity relating to competition rules that may limit how we design and market our products;
    • So far most high-profile claims have been made against the other Trillion Dollar Goliaths but Microsoft should tread lightly and it seems like they are acknowledging that.
  • potential liability under trade protection, anti-corruption, and other laws resulting from our global operations;
  • laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, fines, or reputational damage;
    • It is no secret that the public now accepts what the public once mocked as a conspiracy theory, governments spy on its own citizens, your ISP spies on you and technology companies spy on you.
    • Now that the public is aware, there is a great market desire to use technology products and services that protect privacy.
  • additional tax liabilities;
  • damage to our reputation or our brands that may harm our business and operating results;
  • exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange;
    • The global economy is hurting, the federal debt is rising, people are losing their jobs, this creates uncertainty.
    • The U.S. federal government is looking to move production of many things modern society depends on state-side. Things like microprocessors foundries and most other manufacturing. We have seen thus far that China or any other country can no longer be trusted with what has amounted to American economic security.
  • uncertainties relating to our business with government customers;
    • The fight with Amazon over the “Jedi” contract is on hold right now, there is $10 Billion at stake.
  • adverse economic or market conditions that may harm our business;
    • Coronavirus lockdown
  • catastrophic events or geo-political conditions, such as the COVID-19 pandemic, that may disrupt our business; and
    • Coronavirus lockdown
  • the dependence of our business on our ability to attract and retain talented employees
    • This is a corporate culture problem, otherwise known as a people problem. Some of the people currently working at Microsoft are causing the retention problem. Attracting talent is another thing entirely, perhaps offering more remote work will broaden the talent pool.
    • We recently reported on a very talented Industrial Designer’s vision for the next Surface Book, in which he created a concept that addressed many of the recent criticisms of the current design limiting the potential power the current Surface Book design has, why not start there and hire him? In looking at the rest of his work, he created the first example of a folding Surface phone design called “Surface Note,” an intriguing ergonomic keyboard design, a cool tablet design called “Alpha Pad,” an ingenious laptop design called “Alpha Laptop,”

Conclusion

The economy is hurting, people are out of work created by the Coronavirus lockdown and it will have long lasting effects. China will most likely have to answer for this in some way and it will probably come in the form of fewer businesses relying on companies within China for manufacturing.

The Trillion Dollar Goliaths will also face increased scrutiny as Apple, Amazon, Google and Facebook are currently in hot water over antitrust concerns. Will Microsoft be subject to any antitrust probes? Depending on what comes out of the Antitrust probe against Apple’s App Store, the Microsoft Store digital storefront made need to change as well.

What do our reader think of Microsoft’s new retail strategy and their “Forward-Looking Statements?” Let us know below in the comments.

A former industry insider and tech industry enthusiast.

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