Glaser: At least initially, the Google OS is going to be targeted towards netbooks, which are lightweight notebooks with smaller screens, maybe 7-inch or 10-inch screens. This has been a really fast-growing area. Do you think that in targeting this area they could be depriving Microsoft of an ability to expand?
Larson: Microsoft has actually given up the extreme low-end for some time. There are Linux netbooks out right now. Right now, Microsoft has a market share in Windows of something close to 90%. So there is that other 10% of the market that that's been out there for some time. Just because you have another player in that 10%, I don't think it necessarily means that the big chunk of Microsoft's revenue, the corporate user, is really in threat.
Glaser: You mentioned earlier cloud computing, which is the idea that instead of running programs on a local machine, they can run on servers and you can connect them through a web browser. That seems to be one of the big tenets of Google OS, that instead of having you run the software, Google will run it for you. So if this takes off and we see all sorts of application being through a browser, it doesn't matter if you're running Windows or running Apple or Linux or Google. Is that going to erode the "super-moat" that Microsoft has right now by controlling the desktop?
Larson: I think you hit it right on the head. Cloud computing, we think software as a service - if you want to call it that - will indeed erode Microsoft's moat. But in my opinion, this is a moat that is merely going from a super-wide status to merely wide. Or from extremely dominant to merely very good in terms of business quality.
Glaser: You see Microsoft maybe recognizing this and moving into other areas. They recently launched Bing to compete against Google, and a few other initiatives. Do you think that they're going to be as successful there as they have been with their core desktop software?
Larson: I don't think you can get any more successful than Microsoft has been over the last 20 years. Whenever you have a 90%+ market share, the only way you can go is down from there. But I think the big picture here is that in the future Microsoft is going to look a whole lot more like Google in the future, with a lot more online applications. And Google is going to look a lot more Microsoft. So these two companies are really two behemoths heading for the same point in the future.
They're already bumping into each other a little bit, and I think we can only expect that bumping into each other to increase as we move forward.
Glaser: So, Paul, you own Microsoft in the Hare Portfolio right now. Would you consider adding to the position today at the current valuation?
Larson: Yeah. I think that there's a sufficient margin of safety in the stock to consider buying it today. In our $35 sure value investment for Microsoft, we do bake in the idea of cloud computing, and that Microsoft's profitability and growth are going to be lower than they were in recent history. But we still show the stock to be undervalued by a pretty significant margin today, and I'm comfortable to continue to hold it.
Glaser: That sounds great. Thanks for talking with me today, Paul.
Larson: Thanks for having me.
Glaser: I'm Jeremy Glaser with Morningstar. Thanks for watching.
