Windows 7 misses Microsoft's summit of success
Beware the false bottom
Microsoft has reversed the blow to its business wrought by the recessionary end of 2008, announcing second-quarter results more in-line with its standard performance.
On Thursday, the company boasted the demand for Windows 7, launched in October, had propelled it towards record second-quarter revenue and profit. The comparable period a year ago was a miserable and painful experience that saw Microsoft miss analyst expectations and cut 5,000 staff
But contrary to what Microsoft believes, Windows 7 had very little to do with anybody rushing out to buy new PCs in the last three months of 2009. The bet you can say is that consumers - the engine for PC sales, with businesses still not buying - bought $500m worth of boxed copies of Windows 7.
For its fiscal second-quarter of 2009, Microsoft reported a 59 per cent increase in income to $6.6bn and an 18 per cent jump in revenue to $19bn. Earnings per diluted share were $0.75, up from $0.47. The Windows and Windows Live division, home to Windows 7, saw an increase in income of 98 per cent to $5.3bn on revenue that also grew 69 per cent to $6.9bn.
Now the context.
These numbers compare to the same period in 2008 when overall income dropped 11.3 per cent as revenue fell 1.6 per cent. Zeroing in on the Windows business, income from sales of Windows fell 12 per cent in Q4 2008 while revenue dropped eight per cent.
The same quarter a year ago is a bad period to compare against for Microsoft.
The numbers Microsoft announced Thursday, meanwhile, also include $1.74bn in deferred revenue from sales of Windows 7 earlier in 2009, from the various offers to consumers that could not be accounted for until the second quarter. These take some of the growth off of Microsoft's numbers.
If you're generous and include the deferred revenue in those overall numbers, then Microsoft's second quarter was a respectable performance. However, it was lower than the last, good second-quarter - the final three months of 2007 before the sub-prime bubble burst - when the Windows unit grew 67 per cent while corporate revenue jumped 30 per cent.
The numbers for the last three months of 2009 would also cast doubt on Microsoft's claim of "exceptional" demand for Windows 7. That means it was more like business usual.
Gartner said recently the Widows 7 launch did not create additional PC demand, but that it was a good "market tool". In other words, people were already in the market, and retailers and OEMs used the new operating system to close the deal. The main selling point was price.
For all it's issues in this latest quarter, Microsoft does have one reason to be grateful for Windows 7. Income from Windows dominated Microsoft's business for the period, accounting for 80 per cent of all the money Microsoft made.
Revenue for Server and Tools grew 3.4 per cent to $3.8bn, with income at $1.4bn, and the Business Division - home to Office - fell 2.7 per cent to $4.74bn. with income of $3bn.
Revenue for Microsoft's Online Business - home to Bing - fell 4.5 per cent to $581m, increasing its loss, while the Xbox and Windows Mobile stable of Entertainment and Devices division saw revenue drop 10 per cent to $2.9bn, while income popped up 188 per cent to $375m. ®
You can do better:
"The bet you can say is that "
"That means it was more like business usual."
Yes, but now...
...everybody will believe that Windows 7 reduces your laptop's battery life. Redmond should have to find an other name than Windows 8 or 9 or more. (Should they choose "Windows X" ?)
It's all downhill from here
Microsoft's profits can only go downhill in the years ahead.
It's latest profit depended almost entirely on consumers buying Windows 7. But consumers are going to move to more mobile devices. In a few years, the touch-screen phone will be the #1 client for accessing the net.
It's also very possible that tablet / slate devices will become very popular as personal computers for the average consumer. The smartphone / smartbook / slate market is out of Microsoft's reach. The company made catastrophic decisions 5 years ago that made it miss the bus in mobile.
Microsoft will not be able to get back into the consumer mobile game. You can't be 5 years too late and then come to market with a nice copy-cat product. Windows Mobile 7 is going to be another disaster, just like Zune.
Because Microsoft has ceded the next generation of computing to Apple and Google, its profits can only go downhill from here.