Microsoft and Windows 8: The Doomsday Scenario

TheStreet.com

NEW YORK (TheStreet) -- Microsoft MSFT faces significant risks with the transition to Windows 8.

In case you miss the disclosure at the bottom, I am short Microsoft stock. That's because I think it's more likely than not that Microsoft will take a beating from Google GOOG and Apple AAPL in the wake of the Windows 8 launch.

That said, as a consumer who uses multiple Windows PCs and multiple Windows phones, I would like Microsoft to succeed, both for the sake of the products and as a check on the increasing competitive dominance of Google andApple.

First, let's look at the three versions of Windows 8 that Microsoftis expected to launch on or around Oct. 26:

1. Windows 8 for x86 computers: This is the traditional PC versionfor desktops, laptops and tablets. Intel is the main chip supplierhere, and AMD AMD presumably is the second source.

2. Windows 8 for ARM ARMH processors: This new version will look a lot like the x86 version and will initially be available for tablets, some of which will be "convertible" into laptop-style devices with detachable keyboards. In February Microsoft said it will make this version, which is known as "RT," available for traditional laptops and desktops, but it now appears that this iteration will come later than the initial launch. The chip vendors for this version are Nvidia NVDA , Qualcomm QCOM and Texas Instruments TXN .

3. Windows Phone 8: The first phones from Nokia NOK and Samsung were shown recently, although not with final or working software. The only chip vendor, at least initially, is Qualcomm, although one might surmise that Nvidia and Texas Instruments may be added in2013 or 2014.

I have a "backdrop" theory as to how the market is geared up forWindows 8.

I estimate there are close to 1 billion people aroundthe world who either have a Microsoft PC, a Microsoft phone or some other non-Google/Apple device. They're all potential future Microsoft customers.

Many of these people are frustrated users who have been watching friends, family and co-workers switch to Apple and Google products including Android smartphones, Chrome OS PCs, Apple Mac PCs and of course Apple iOS devices such as the iPhone and the iPad.

Many of them are now eagerly awaiting Windows 8, because they have held out for a long time and have great hopes for Windows 8. They really don't want to jump into the arms of Google and Apple. They will if they have to, but they arewaiting for Microsoft's final olive branch before deciding.

If Windows 8 gets rave reviews, these people will be relieved and may go all-in with Windows 8, from PC to phone to perhaps a tablet.

But if any or all parts of Windows 8 -- PC, tablet or phone -- getshaky reviews or the feedback from the early users is so-so or worse,the risk to Microsoft is tremendous.

You might say, "Well, isn't this self-evident? Wasn't this also the casewith Windows 7?"

No! When Windows 7 launched, the PC alternative was Mac, and Microsoftcontinued to lose (a little bit of) market share even though Windows 7was an excellent product. There was no Google in the PC space, noAndroid to any meaningful degree, no iOS, and no tablet market. Thephone competition came primarily from Research In Motion RIMM , Nokia and Palm -- companiesthat are now at or near 0% market share.

This time, Microsoft stands to lose it all if there is more than theslightest unhappiness with Windows 8. This was never the risk when itlaunched Windows 7.

So what are the pain points that could lead to bad reviews from journalists or negative customer feedback? Let's take the threemain versions of Windows 8 in turn:

1. Windows 8 for x86:

With the consumer market already flipping to various classes ofalternative operating systems or other kinds of "post-PC" devices,much of this market is enterprise. Enterprise users may not takekindly to the new "Metro" tiles-interface in Windows 8. Yes, I knowyou can click away from it and get into something that looks sort oflike the old Windows 7, but this could still annoy and confuse a lot ofpeople.

Some years ago, Microsoft basically tried to cram the desktopWindows XP into mobile and tablet devices, and usershated it. This time, the company has tried to do theopposite: Take Microsoft's excellent cell-phone interface and blow itup to fit PCs, which people use to do real work, usually involving multitasking. This has a major risk of becoming an epic disaster.

2. Windows RT for tablets: The main selling point for Win RT incomparison to, say, the iPad and Android tablets is that it runsMicrosoft Office. But there now are many programs for alternative tablets that allow you to view, reformat and, in some cases, edit Office documents. So that case for Microsoft Office is slipping away fast!

The real argument Microsoft does not mention, is that people who wantMicrosoft Office want it because of Outlook. Outlook hasfunctionality that Apple iOS and Google simply cannot match, and it'sa huge issue for many power users. But in a stroke of nonbrilliance,Microsoft decided that RT gets Office ... without Outlook! This will go down in history as one of technology's greatest fails.

3. Windows Phone 8: Almost everyone agrees that Microsoft is gettingthe Phone OS right. The problem here is that it is late to market,with far fewer apps than Android and iOS. There is significant applock-in with both Google and Apple, so it's not good enough forMicrosoft to be "just as good" as Android and the iPhone. Who wantsto bet that the buying public will deem the Windows Phone 8 notjust equal to the iPhone and Android, but also better?

Bottom line: The risk/reward for Microsoft in terms of its giganticthree-pronged Windows 8 launch is not positive, and disappointments could drive users into the arms of Google and Apple.

At the time of publication, Wahlman was long AAPL,GOOG, NVDA and QCOM, and short MSFT and AMD.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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