Microsoft in Retreat
by Mark W. Hibben
Falling Back and Regrouping
It wasn’t merely the sequential decline in revenue and income than caused investors to flee en masse after Microsoft’s fiscal Q3 results came out on Thursday 4/28/11. Such declines from the holiday buying season were to be expected. It wasn’t even the relatively tepid 10% year-over-year income growth, although one would have hoped for better coming out of a recession. The really bad news was the year over year revenue decline in the Windows and Windows Live Division (WWLD) of 4%, and the reported declines of Consumer PC sales (8%) overall with a 40 % decline in netbooks. Although Microsoft and Intel don’t provide specifics on unit deliveries the way Apple does, it really does appear that Mac and iPad are beginning to eat into Microsoft’s consumer market share. On top of that, Microsoft had little to say about Windows 7 Phone other than to talk up the importance of the alliance with Nokia, and here, no news is bad news. Unit deliveries of Win7 Phones must be too embarrassing to talk about. And Microsoft execs would say nothing about ARM based tablets and other devices. Both the Nokia Win7 phone strategy and the Windows on ARM strategy amount to falling back and regrouping in the War for Mobile Internet Supremacy (WMIS). Microsoft management realized that their phones and netbooks were no longer competitive, and that new strategies were needed.
Not All Doom and Gloom
Fortunately for Microsoft, just about everything else is going well. Business PC sales are up 9% as the corporate PC refresh cycle continues, which Microsoft expects to continue for another year. Without business PCs, the WWLD decline would surely have been far worse. The Business Division, which includes products such as Office and Exchange saw a healthy 21% year-over-year increase. Server and Tools Division, home of Windows Server and SQL Server saw an 11% year-over-year increase, a not great result that was at least better than a decline. The Online Services Division, which includes Bing and Bing/Yahoo! marketplace saw a 14% year-over-year revenue increase, helped by a 17% online advertising revenue increase. Bing search market share has now grown to 13.9%. Entertainment and Devices revenue grew by 60% year-over-year, fueled by Xbox Kinect. Here, Microsoft was more than happy to supply unit delivery numbers, with 2.4 M Kinect sensors and 2.7 M Xbox consoles sold in the latest quarter.
Where the Problems Are
The detailed information in the Federally required Form 10Q showed where Microsoft’s current problems are, as well as indicating future problems. Microsoft provided a breakdown by division of Revenue and Operating Income, as summarized in the table below:
|Division||Revenue||Operating Income||“Gross Profitability”|
|Windows and Windows Live||4.39E+09||2.71E+09||61.6%|
|Server and Tools||4.11E+09||1.39E+09||33.7%|
|Entertainment and Devices||1.90E+09||1.87E+08||9.9%|
Here, I’ve included “Gross Profitability” which is just the Operating Income/Revenue as a per cent. This is not quite the same thing as gross margin, which I can’t calculate since Microsoft didn’t provide a breakdown of costs by Division. Windows and Office are the cash cows of Microsoft, which is why a decline in Windows revenue is so alarming. Online services (Bing/Yahoo!) is bleeding profusely, which Microsoft execs acknowledge they need to fix. Entertainment and Devices barely broke even, despite the good consumer reception of Xbox Kinect, probably because of Windows Phone.
Time Waits for No Corporation
Microsoft’s fallbacks in Windows Phone and tablets were really the only things they could do, under the circumstances. The problem is how long it may take Microsoft to launch counter attacks in these crucial theaters of the WMIS. It appears that neither the Nokia, nor the Windows on ARM initiatives will bear fruit before early 2012. By then, Apple and Android may have amassed leads that are simply insurmountable. Microsoft have scheduled their fiscal 2012 FAM for September rather than at the beginning of the fiscal year in July. This may be so that the FAM can showcase new Nokia Win 7 Phones and new Windows on ARM devices, even if these aren’t ready for consumers until 2012.
Microsoft, like Apple, is also sitting on a huge pile of cash, over US$50 B, and we can probably expect that some of that will be used to mobilize product development R&D, which has stayed more or less flat for the past four quarters. Whether any amount of cash can buy Microsoft the time it needs is another matter.