Microsoft was built on operating systems: first DOS, and then Windows. But the company’s most recent earnings show that Windows is no longer its primary engine for growth. Because of that, it’s not clear what kind of company Microsoft will be several years from now.
Overall, Microsoft’s earnings for the first quarter of fiscal 2012 were solid. It reported a seven per cent increase in revenue and a six per cent rise in net income compared to what it reported a year earlier. Most companies would be more than happy with that kind of performance in a still-struggling economy. But a closer look at the earnings shows that Windows continues to lag. The Windows and Windows Live Division earned $4.87 billion in revenue for the quarter, an anemic two per cent increase compared to the previous year.
Yet even at that level, Windows sales were better than they’d been in a while. For several quarters, revenue had consistently fallen from the year prior.
The reasons for Windows’ decline are pretty clear. One is the weak economy and the resulting decrease in PC sales. But that’s only part of the story, and not even the most important part. The larger issue is the rise of tablets and smartphones , which are likely eating into PC demand. So even if the economy were stronger, it’s likely that Windows sales would still be anemic because of competition from mobile devices.
So if Windows sales have been weak, how did Microsoft turn in a solid quarter? Largely from several business divisions. The Microsoft Business Division, which handles Microsoft Office, earned $5.62 billion in revenue, up eight per cent from the year before. And the Server and Tools Division had an even bigger increase, with $4.25 billion in revenue for the quarter, a 10 per cent increase compared to last year.
That means Microsoft’s Windows division is its No. 2 revenue generator, with Server and Tools not far behind. A few more quarters like this one, and Windows will slip to No. 3 within Microsoft.
Microsoft should certainly take heart in the areas where it experienced strong growth, including its Entertainment and Devices Division, whose sales grew nine per cent compared to a year earlier, primarily due to the Xbox’s continuing popularity.
The last several quarters confirm, though, that Microsoft is in the midst of a dramatic shift away from a heavy reliance on operating systems and toward business software and tools. That shift should position Microsoft well for the future, especially since it’s gotten serious about moving some business software — notably Exchange, SharePoint and Lync — to the cloud , with the cloud-based Office 365.
The Web-based version of Office remains rather anemic, but expect that to change as Google Apps puts more pressure on Microsoft to get serious about moving its productivity suite to the cloud.
The real question is whether Microsoft will be able to break into high-growth areas, particularly mobile. So far, Windows Phone has been a failure and the few Windows-based tablets that are available aren’t attracting many buyers.
If Microsoft can’t manage to make Windows Phone a success, it will have to rely more heavily on business-focused software. In the past, when consumers interacted with computers, they did so via Windows. Today, increasingly, they do it via Android and iOS. Microsoft’s success with business software shows that it could continue to have solid quarters even if it lost its grip on consumers, but it would not see the breakout quarters it used to have whenever one of its technologies hit it big with consumers. many buyers.