Microsoft Earnings Report Highlights Market Challenges

By | Aug 3, 2012

Microsoft continues to generate record revenue and issued a positive outlook for its upcoming product launches. Windows 8, Windows Phone 8, the Surface tablet, Office 2013, and, possibly, a new XBox are waiting in the wings. Profits before the one-time write-down for aQuantive were up substantially. But looking behind the headline figures at the details of the Microsoft earnings report reveals market and product challenges that are likely to impact future performance.

InfoWorld looks at the performance of the online and phone units. Bing has increased search market share but at a cost. The InfoWorld analysis calculates that, if the unit's operating losses are distributed over the increased volume of searches, Microsoft paid about $5 for each search that it gained. The Windows phones are not doing any better. InfoWorld estimates that Microsoft's partners sold about 1 million Windows phones in the quarter and that Microsoft spent about $450 per phone in advertising and payments to get Windows software on the phones. The two areas where Microsoft could expect future profits in expanding markets are not generating real growth despite major investment.

That leaves the Windows and Office units that sell the products of particular interest to business IT departments. The Microsoft earnings report shows that these products continue to do well, but they depend on a PC market, which will not grow as rapidly as in the past due to the increasing use of mobile technology. This is where the action will be in the short-term. If Windows 8, Office 2013, and Office 365 are successful on tablets, the money should keep rolling in.

The challenge here is product-related. Windows 8 is not just an improved Windows 7 that can run on tablets. With the Windows tiled look, Microsoft has introduced a user interface that looks the same on phones, tablets, and desktops. It's the key to Microsoft continuing to be successful with these products.

From the point of view of business IT departments, the market is at an inflection point. Many midsize businesses are still running Windows XP and most of the rest are running Windows 7. Microsoft wants them to take the plunge and upgrade to Windows 8 quickly, subscribe to Office 365, and get Office 2013 when it comes out. The company believes that the convenience of having access to data from tablets and smartphones through the same interface will encourage IT departments to upgrade and make Windows 8 tablets and phones the favored mobile counterparts to the Windows desktop.

The advantages for the IT departments of midsize businesses of postponing the decision to jump to Windows 8 and Office 2013 are cost and risk avoidance. There is a substantial cost to changing despite inexpensive upgrade options. The tiled interface may require training and may slow productivity on desktop computers. The integration with Office 365 requires further training and the development of new policies and procedures. There is the risk that the tile concept may not catch on and Microsoft may have to reverse course.

This means that it makes sense for IT departments to stay with what they have and eventually upgrade to Windows 7 as XP support runs out. Such a strategy is good for at least several years. During this time, they can see whether the new Windows interface is a hit and figure out whether they really need Windows and Office on every PC. They can evaluate BYOD issues and get a better picture of how mobile devices are evolving.

In this scenario, there are a lot of Apple, Android, and Chrome OS traditional icon interfaces with very few new Windows tiles. The problem for Microsoft will be that the revenues from the Windows and Office business units will be down and the online and phone units won't be ready to make up the difference. IT departments that opted for Windows 8 early will have sunk a lot of money, time, and effort into a failed model.

This post was written as part of the IBM for Midsize Business program, which provides midsize businesses with the tools, expertise and solutions they need to become engines of a smarter planet. Like us on Facebook. Follow us on Twitter.

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