Microsoft’s Great Isn’t Good Enough.

Microsoft announced their earnings for their Q3 2011, which for the rest of us is the first quarter of this year.  The results were a 13 percent jump in revenue, a 31 percent jump in net earnings, and clearly exceeded analyst’s expectations of the quarter.  Yet their stock dived after the announcement.

The reasons given were worries about the future.  That seems strange because the worries, and the facts behind them, were all well known before the announcement.  By comparison the new news was actually good.

Lets look at the breakdown

Revenue 2011   2010 Change
Windows & Windows Live Division $       4,445   $    4,650 -4.41%
Server and Tools 4,104   3,706 10.74%
Online Services Division 648   566 14.49%
Microsoft Business Division 5,252   4,341 20.99%
Entertainment and Devices Division 1,935   1,210 59.92%
Unallocated and other 44   30 46.67%
Consolidated $     16,428   $   14,503 13.27%

The ‘trouble’ that the soothsayers saw was in the first line.  Windows Revenue down four percent.  All of the decline was in the consumer segment.  Business sales increased as companies started to purchase, coming a little bit out of the recession.  Analysts noted that (i) the average replacement time of a business computer increased from 40 to 45 months, and (ii) even the most cautious of IT departments are now feeling safe with Windows 7, after having skipping Vista and now wanting to get rid of their outdated XP systems.

But there are problems in the consumer market.  In the slow economy, consumers are putting their money into phones first, then tablets, and making do with their existing PCs.  That is all well known.  The doubt is how long will they continue to postpone upgrading their PCs and whether the answer to that might be…never?  Microsoft won’t have any real penetration into the phone market until the Nokia deal comes to fruition, and they have pretty much said that Microsoft’s play into the tablet space will essentially be Windows 8 (Although don’t be surprised if it won’t be called Windows 7 Portable).

Some say that will be ‘too late’.  However smartphones have an average lifespan of two years.  Provide something really astounding and there is a constant supply of trade-up customers.  Microsoft had both smartphones and tablets before Apple.  But they were immature technologies that Apple found a way to create something compelling and get consumer’s attention.  But does that mean that the possibility of somebody else doing the same in the future has been precluded?

The other parts of Microsoft all showed excellent returns for a down environment.  Server and Tools were up just under eleven percent.  The Business Division (Office and similar productivity software) was up over twenty percent and the Entertainment and Devices Division (Xbox and Kinect) shot up nearly sixty percent.

Online Services showed a 14 percent growth in revenue, but that is deceiving because this is still a mone- losing operation for Microsoft.  The division showed an operating loss of $726 million.  But the rate of increase in the loss is less than the rate of increase in the revenue, so the possibility of Microsoft’s chasing Google might someday be making money is still there.

What are Microsoft’s choices on the home front?

One possibility would be to just accept that they are going to get their money from consumers through game consoles and a third place showing in phones with Nokia and possibly a similar share of tablets.  Then just let the era of the Home PC decline while they make money on the enterprise and Internet services.

The other possibility is to re-answer the question that they had to first answer years ago:  For what do ordinary families need the processing power of a PC?  The processing power needed for games has been transferred to the console, from which Microsoft makes a lot of money.  And the processing power of many web sites has been transferred to the servers.  If all that is left is web browsing, chat, messaging and e-mail, then those things can perhaps be handled by a gadget’s processing power.

It isn’t as though Microsoft hasn’t been dancing around what might be the components of that new processing power inside the home…Surface and Kinect and biometric recognition and large multi touch screens.  What they haven’t done recently, except for the Kinect, is to put it together into a compelling consumer story.

Permanent link to this article:


  1. howdy, fantastic article, and a fairly good understand! at least one for my favorites.

    • Oboe Kopfhoerer on June 25, 2011 at 4:13 PM
    • Reply

    Ideal posting, We are viewing back again often to find fresh news.

    • armani kids on October 10, 2011 at 2:18 AM
    • Reply

    Its just like you read my mind! You manage to know so much related to this, really like you wrote the book in it or something. It is my opinion that you could do with some pics to drive your message home a little, but aside from that, surely stellar blog..

Leave a Reply

Your email address will not be published.