Microsoft’s big risks: building Surface, people ditching Windows, lawsuits, & more

Microsoft faces an incredible number of risk factors in the next year, including alienating OEM partners with its Surface tablet, the company admitted in its annual report filed with the SEC.

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The company is in the midst of a ton of product changes. The next 12 months will see full releases of Windows 8, Office 2013, Windows Phone 8 for smartphones, Xbox 360′s ambitious SmartGlass software, an updated Windows Azure with IaaS support, and more. Along with these big product updates, the company faces a level of competition it hasn’t seen before from Apple, Google, Amazon, and other players. But Microsoft does appear to realize how tough the landscape is, according to the annual report.

Starting on page 14 of the report, Microsoft outlines every risk it can think of over eight pages. Here are five of the biggest risks the company outlines:

Risk 1: As we’ve written before, the Surface tablet could alienate the hell of out of its manufacturing partners. The company writes:

In addition, our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform.

Risk 2: We’re beginning to see a world with fewer Windows machines, with people relying increasingly on smartphones and tablets rather than computers. The company writes:

We derive substantial revenue from licenses of Windows operating systems on personal computers. The proliferation of alternative devices and form factors, in particular mobile devices such as smartphones and tablet computers, creates challenges from competing software platforms. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users may increasingly turn to these devices to perform functions that would have been performed by personal computers in the past. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract applications developers to our platforms.

Risk 3: The company has been hounded with lawsuits from the U.S. Justice Department and the European Commission, and that probably will continue. Microsoft writes:

We are subject to a variety of claims and lawsuits. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. Although management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial statements, the litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

Risk 4: Microsoft is making huge investments in new products and services that may not make any cash. It writes:

Our growth depends on our ability to create new and higher value product and service offerings. … In June 2012, we announced the Surface line of Microsoft-designed and manufactured devices. We will also continue to invest in new software and hardware products, services, and technologies. … Our degree of success with Windows Phone, for example, will impact our ability to grow our share of the smartphone operating system market. It will also be an important factor in supporting our strategy of delivering value to end users seamlessly over a variety of form factors including PC, phone, and TV device classes. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new software products or upgrades, unfavorably impacting revenue. We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically.

Risk 5: It’s getting increasingly hard to attract talented employees, especially in light of tight immigration laws. (This is a problem for most U.S. tech companies today.) Microsoft writes:

Our business is based on successfully attracting and retaining talented employees. The market for highly skilled workers and leaders in our industry is extremely competitive. We are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.

What do you think is Microsoft’s biggest risk during the next year?

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Photo: VentureBeat