Oct 222012
Microsoft's big gamble with Windows 8

In New York on Thursday Microsoft will have a marathon launch of their Windows 8 system and the futures of many of their hardware partners lie on the success of the new system.

For Microsoft, Windows 8 could be the last throw of the dice for the desktop operating system that has sustained the company for thirty years.

The figures aren’t good for Windows as Microsoft’s 2012 profit and loss shows, here are the figures broken out by operating unit segment from the company’s annual report.

Year Ended June 30, 2012 2011 2010
Revenue  bn $  bn $  bn $
Windows & Windows Live Division 18,818 18,787 18,789
Operating Income (Loss)
Windows & Windows Live Division 11,908 11,971 12,193

The core Windows & Windows Live Division has stagnant revenues and a slowly declining profit margin. We’ll leave the huge losses in the online division for a future post.

Since the days of the first MS-DOS deal with IBM, Microsoft’s core business has been the licensing of operating systems to PC manufacturers and now that model is in trouble.

For instance Dell had an 8% drop in revenue resulting in a worrying 22% drop in operating profit, their PC dominated consumer division suffered a fat 22% drop in sales and recorded a miniscule .5% profit margin. Similarly Asus had 25% drop in sales to record a 2011 loss.

The pain being suffered by PC manufacturers’ sales and margins will almost certainly be shared by Microsoft as companies like Dell, HP and Asus simply can’t afford to pay the licensing fees which have sustained the Redmond business model for so long.

Microsoft and their partners hope – or pray – that the PC decline is a temporary hiccup in computer sales similar to the traditional lull seen before the release of a new system.

History’s not on their side with research company Asymco expecting sales of tablet computers to overtake PCs sometime in late 2013.

This is not a cyclical trend – the PC industry is in structural decline; the traditional Windows upgrade cycle is dead and Google are running interference with their Chromebook networked laptops.

Moving onto tablets and smartphones in this light makes sense for Microsoft and given the PC manufacturers have failed dismally to deliver decent tablet computers or phones over the last 15 years so it’s understandable the software giant wanted to develop their own hardware or team up with a struggling company like Nokia.

The declining margins in personal computers means we’re seeing the end of the Windows desktop ecosystem. With the rise of the web and cloud computing the type of operating system we use is like arguing between Toyota and BMW drivers; one might be more prestigious but both will get you where you want to go.

For Microsoft the challenge is to replace those Windows licensing rivers of gold with similar revenue streams through their phone and tablet products but with Apple and Google already dominating those fields, is it too late for the company that dominated personal computing? The next six months will tell us.

  One Response to “Can Microsoft beat the PC marketplace’s structural decline?”

  1. Recently, Ubuntu, a distribution of Linux, deliberately modified its user interface from a classic Gnome, which bore a strong resemblance to MS Windows XP, across to an interface called Unity. Unit is an interface that sits somewhere between Apple and Microsoft and, importantly, it is easy to fit to a mobile scenario such as a tablet or phone.

    Initially Unity caused a lot of angst to users used to Gnome but that is subsiding as users discover the benefits of Unity. One of them, and the reason for the change by Ubuntu, is revealed by its name, connoting unification. Ubuntu Linux will run on Servers, Desktops, Tablets and Smartphones. It underlines what you are talking about Paul.

    Microsoft has made an attempt to have a family of operating systems running from the Server to desktop to mobile device but these have been badly thought-out to say the least. For example, Microsoft’s mobile Windows operating system was hobbled with it came to sharing files around a network; something that is critical for a mobile device. After all, what’s the point of gathering that data on a mobile device in the workplace, if sending it to the server is limited to an FTP application which, with Windows Mobile 5 and 6, it was. Android, of course, being a Linux operating system, doesn’t suffer those limitations.

    So I think you are right. Microsoft is snookered by its history and its culture. Linux has caught up and Linux is not only technically far superior, it is free. That’s a hard price to beat!

    Where could Microsoft go? It could change its commercial model to that of being a service provider as IBM did when it moved from being a major supplier of hardware to, now, a major supplier of consultancy and bureau services.

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