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7/22/2011
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Microsoft Windows Sales Stall In Tablet Headwinds

Quarterly revenue from flagship OS sags as computer users embrace Apple iPads.

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Slideshow: Lenovo Takes On 7 Rivals: Tablet Faceoff
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Sales of Microsoft's Windows operating system were off in the company's fiscal fourth quarter as an increasing number of consumers and business professionals chose tablets over PCs for their computing and Web browsing needs. In most cases, those tablets were powered by software from Redmond rival Apple.

Microsoft on Thursday reported that Windows sales fell 1%, year over year, in the last quarter, to $4.74 billion. For the full year, Windows sales were down 2%, to $19.02 billion.

There's little mystery to what's ailing the Windows franchise. Tablets are displacing as many as one in three Windows PC sales, according to research by Goldman Sachs. The trend isn't just hitting Microsoft. Chipmaker Intel this week said sales from its PC Client group fell 3% in the last quarter.

The chief beneficiary from the move to tablets is, of course, Apple. The company on Tuesday reported that iPad sales jumped 183% year-over-year in the past quarter. The iPad's popularity appears to be spilling over to the desktop. Apple said Mac sales were up 14% during the quarter.

Windows sales were also hit by the fact that many computer users in emerging markets opted for low-cost, non-Windows machines, such as those running the open source Linux operating system. Software piracy is also rampant in some developing markets, such as China. Many users in those areas are running Windows-based systems for which Microsoft has not received payment.

Microsoft officials said the lower "attach rates" for Windows in emerging markets is partly why Windows sales lagged behind the overall PC market, which grew between 1% and 3%, during the quarter, according to the company.

"The more future growth there is in emerging markets relative to developed is more headwind for Windows growth relative to the overall PC market," said Microsoft CFO Peter Klein, on a conference call with financial analysts, after Microsoft reported earnings.

Still, some analysts believe it's not too late for Microsoft to become a player in tablets. The Windows 8 family, which will most likely ship sometime next year, will include a version designed designed to run on tablets powered by ARM's system-on-a-chip architecture. It will also feature an interface that can display full-screen, touchable apps.

"We believe Microsoft will be a major player, with its partners, in the tablet space, particularly when they come out with Windows 8," said Ticonderoga Securities analyst Neil Herman, in an interview on CNBC. "Don't give up on Microsoft.

Windows also remains strong in the enterprise, where sales were up 8% in the quarter. Klein said 25% of the enterprise market has now upgraded to Windows 7, while 90% are committed to doing so.

Overall, Microsoft reported that fourth-quarter operating income rose 4% year-over-year, to $6.17 billion on revenue of $17.37 billion. Earnings per share (EPS) came in at 69 cents. They beat Wall Street analysts' expectations of 58 cents EPS and revenue of $17.25 billion.

Microsoft shares were off 0.92% in pre-market trading Friday.

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