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Microsoft records first ever revenue drop

Netbooks a mixed blessing

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Microsoft's reported its first ever drop in year-on-year revenue thanks to a combination of deteriorating PC sales and increased uptake of cheap netbooks.

Revenue for its third fiscal quarter fell six per cent to $13.65bn, the company said Thursday, while net income plummeted 32 per cent to $2.98 bn. Earnings per share dropped 30 per cent to $0.33.

Microsoft's client business took its biggest hit of all the groups - server and tools saw the only growth - with revenue dropping 16 per cent to $3.4bn and operating income dropping 19 per cent to $2.5bn. Revenue from OEMs fell 14 per cent as companies steered away from pricier versions of Windows Vista and shipped the growing netbook category of PCs with cheap versions of Windows XP. Netbooks remained at 10 per cent of total PC shipments for the quarter, while sales of non-netbook PCs fell between 15 and 17 per cent.

And while Microsoft was not predicting a recovery this calendar year, it insisted that a planned wave of software updates would help Microsoft "out perform" once the economy does rebound. Microsoft doesn't see business improving until at least the start of 2010, which covers the end of its fiscal 2009 and the start of fiscal 2010.

Chief financial officer Chris Liddell told Wall St during a conference call it's "absolutely the right thing" to release Windows 7, Office 2010, and the Azure Services Platform during the next 12 months even though Microsoft expects demand will - initially - be soft.

"Once we start to get economic pick up, we think we will out perform that economic pick up. We will be going into that growth pick up with a very, very good set of products," Liddlel said.

Liddell has little option but to say this as delivery dates were locked in a while back. As for helping turbo-charge Microsoft's recovery based on best of breed, Microsoft also believed Windows Vista would work some magic on the numbers in 2006 and 2007. Only quarterly and annual sales were broadly in line with any other Microsoft year.

It'll also be difficult to see why customers and OEMs who've had a taste of cheap and perfectly functional netbooks in the lean times should want to then pay more for a fatter PC running a more expensive operating system that does more or less the same thing.

Unless, of course, Microsoft forces the market into accepting a cut-down version of Windows for netbooks, thereby forcing customers on to more expensive machines.

Which it's trying to do. The Windows 7 Starter edition planned for netbooks will only run three applications simultaneously and will not include Windows Media Center, the Aero interface, or the ability to create multiple networks. Microsoft said it believes users will want this on a notebook running Windows 7 Home Premium.

Liddell, meanwhile, added that Windows Azure would help change Microsoft's business model in 2011 and 2012, as it delivered online versions of its products. He didn't name names, but an online version of Office is coming called Office Web applications. ®

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