Microsoft Corporation (MSFT) Has a New Path to Bigger Profits

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Under Bill Gates there was a clear line between hardware and Microsoft Corporation (NASDAQ:MSFT). It made sense because hardware was a capital-intensive business, it was highly competitive and MSFT's Windows operating system provided a moat around a monopolist's profit.

Under Satya Nadella everything, including hardware, is software. This also makes sense.

In today's cloud-and-device world, hardware is how you differentiate your software, and affording the capital expense of cloud data centers is what makes a company a player on the leading edge.

This insight has transformed MSFT stock and the company as a whole. It now has assembly and part contracts in China that are as large, and important to the suppliers, as those of Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Amazon.com, Inc. (NASDAQ:AMZN).

It has also transformed how investors should view Microsoft (and MSFT stock), and it has changed how the company develops software.

Microsoft's Open Source Transformation

Microsoft, which once shunned open source development as violations of its proprietary rights, now depends on it to keep its software stacks growing.

MSFT is now the largest corporate contributor to GitHub, the giant open source software repository. It has made its latest open source cloud design, dubbed Olympus, an open source project, through the Open Compute Project, which was founded by Facebook Inc (NASDAQ:FB).

Nadella believes that cloud mandates open source. The more eyes and hands you get on the code, the bigger and more stable it gets. It will now contribute hardware designs to open source projects when they are just half-done. Letting customers or competitors help define the hardware risks a loss of control, but the benefits are worth it, Microsoft has concluded.

MSFT is joining open source projects across its cloud platform and contributing code, allowing integration with things like the Kubernetes container management service, which treats code blocks the way railroads do shipping containers.

Software Defining Clients

Microsoft is also using hardware to guide and define its future software choices.

With Windows 10 it stopped delivering new operating systems and now only ships new versions or "builds" to clients. The latest adds a virtual trackpad, replacing a mouse with a tablet for remote control of monitors in meetings.

With its Surface line of tablet PCs, Microsoft has learned that software can even cure hardware problems. Its new Surface Studio is a $3,000 desktop replacement. It supports keypads, pens and a new Dial that can rest and move on the screen surface, delivering commands with an accurate twist rather than just a clunky click.

Suddenly, MSFT is going after not just Apple's iPad tablet business, but its Macintosh PC business as well, with a better mouse. By controlling the hardware creative people use, Microsoft can acclimate them toward its own software developments in artificial intelligence and bots, which again include an open source project.

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