Microsoft's Marriage Made in Dell - Wall Street Journal

By ROLFE WINKLER Give Microsoft credit for improvisation. Its $2 billion investment to finance the Dell buyout is yet another way to support the suffering PC ecosystem. Before long, though, the software giant may have to give ground on some of its profits, too. For years, Microsoft (along with Intel) has generated huge profits from the software (and chips) packaged in PCs. Meanwhile, manufacturing partners were happy with scraps from the table in the form of a few percentage points of operating-profit margin. They made up for low profits in volume. Reuters Computers packed into boxes are transported on a conveyor belt at a Dell factory in India in 2011. Then Apple ushered in the mobile-device revolution. Next, Google joined the party with its Android mobile-operating system. The PC ecosystem was caught flat-footed. Seeing that its manufacturing partners aren't good at delivering leading-edge hardware, Microsoft decided to compete directly with those partners, launching its Surface tablet in 2012. Its role is getting even more complicated with the money it is lending Michael Dell to help take his company private. Mr. Dell, along with private-equity firm Silver Lake Partners, proposed Tuesday a $24.4 billion buyout. Despite its participation, Microsoft isn't getting board seats or operational control. What it is getting, apparently, is a wink and a nod that Dell won't start shipping equipment running Android, for instance. Unlike Lenovo, say, which has hedged its bets and built a thriving Android mobile-devices business in China, Dell will remain a loyal Microsoft shop. The danger there is that, by limiting its technology options, Microsoft's involvement ultimately damages Dell's long-term prospects. In fact, Mr. Dell might actually use the money to take the fight back to Lenovo, which has supplanted Dell as the No. 2 PC player by market share, behind Hewlett-Packard, thanks to its dominant position in fast-growing China. Conventional wisdom is that Mr. Dell needs to take the company private so the grindingly slow process of transitioning away from low-margin PCs to higher-margin software and services can be done without so much public scrutiny. However, another possible strategy is to double down on PCs, attacking emerging markets where growth potential is more immediate. Naturally, Microsoft describes its debt investment in Dell as "passive." It doesn't want partners to view it for what it truly is: sponsorship of a rival. Indeed, this investment in Dell, like the launch of the Surface, and even the subsidy Microsoft is paying Nokia, all represent investments in hardware. While tactically that might make sense and the amount involved is small for Microsoft, it is deploying cash into a lower-return business. Lenovo says it wants to beat its rivals in the market. But how can it do that when they have Microsoft's financial support? It makes sense that Lenovo is selling mobile devices primarily running Google's free Android operating system and that PC-maker Acer is pushing new low-end laptops running Google's free Chrome operating system. Microsoft software remains relatively expensive. Ultimately, all these investments in hardware and in support of partners are to help preserve an ecosystem that, in time, may need to see Microsoft share more of the spoils. Write to Rolfe Winkler at rolfe.winkler@wsj.com via Technology - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNGZI5c88e4kipvL1NtPulYCfZV5CQ&url=http://online.wsj.com/article/SB10001424127887324761004578286474054154466.html

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