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7/19/2013
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Microsoft's Struggles Grow: 9 Key Points

Redmond, we have a problem. Microsoft's $900 million Surface RT write-down was not the only troubling sign in the company's rough earnings report.

8 Free, Must-Have Windows 8 Apps
8 Free, Must-Have Windows 8 Apps
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4. Enterprise business performed well -- but still below expectations.

Hood attributed poor Windows sales to the ongoing PC slump, but she noted that Microsoft's enterprise products continue to generate high demand. The Business Division grew 14% relative to Q4 of last year, thanks to strong Office 365 and server product sales. But this growth included deferred revenue from an Office Upgrade Offer. With that sum omitted, the division's revenue grew by only 2%.

The Server & Tools division, meanwhile, grew 9%, thanks to strong performances from SQL Server and System Center products. Wall Street analysts had expected the division to grow by 12%, however, showing that in this quarter, even Microsoft's victories are tinged with disappointment.

[ Will price cuts make a big difference? Read Microsoft's Cheaper Surface Tablet: 8 Key Facts. ]

On the bright side, Microsoft recently announced that its data centers include more than 1 million servers, demonstrating that the company is willing to take on all comers in the cloud market.

5. Office 365 is doing great, but the larger Office business is a mixed bag.

When Microsoft announced Q3 results a few months ago, the company said Office 365 was on track to generate $1 billion annually. On Thursday, Microsoft said that its cloud-oriented, subscription-based version of Office is now on pace for revenue of $1.5 billion per year. The rapid growth represents fantastic progress, especially since recurring subscriptions will positively influence Microsoft's bottom line for years to come.

That said, Hood noted that the depressed PC market is hurting Office sales. As mentioned above, the productivity suite's revenues were somewhat inflated due to sales carried over from an Office Upgrade Offer. If this value, which totals almost $800 million, had been excluded from Thursday's report, per-share earnings would have dropped by 7 cents to 52 cents.

6. Microsoft is generating money from mobile phones -- but maybe not Windows phones.

Nokia, the primary maker of Windows Phone 8 devices, continues to lose money, but its recent earnings were still better than expected because of the strong performance of its Lumia handsets, which run Microsoft's smartphone OS.

As a result, Windows Phone revenue increased $222 million during the fourth quarter, though it's not clear how much of that is related to patent royalties Microsoft receives for Android devices. Even so, Microsoft has eclipsed BlackBerry as the third largest smartphone player. It's a long way behind Android and iOS, but Microsoft still has a foundation to build from.

7. Microsoft's OEM relationships are a mess.

Microsoft's OEM relationships have been strained since at least last year. Some partners didn't appreciate when Microsoft entered the hardware game with its Surface tablets. Almost all of them have abandoned Windows RT.

Shortly before Microsoft announced its earnings, Lenovo become the newest Win RT defector. The company's Yoga 11 laptop, which runs Windows RT and can switch between laptop and tablet modes, has been discounted. The company will continue to sell its Yoga 11s, a similar model that runs the full version of Windows 8. Companies including Samsung and Asus, meanwhile, are releasing Win8 devices that shift to Android when in tablet mode -- a clear sign that these OEMs have little faith in the Modern UI's current state.

8. Windows 8.1 needs to succeed.

Enterprise sales guarantee that Windows will continue to generate billions in revenue, but Microsoft needs consumers if it is going to maintain its industry-dominating stature. As a company, Microsoft has the resources to recover from rough quarters -- but on the consumer front, another holiday season of consumer indifference will really hurt.

It was always important that Windows 8.1 succeed -- but now that the Windows division's rocky quarter has been disclosed, it's clear that the stakes are even higher than previously thought.

Intel CEO Brian Krzanich said during his company's Wednesday earnings call that the PC market could pick up thanks to low-cost devices with Intel's new chips. Between the new products and Windows 8.1, Microsoft has a chance to rebound. If not, Steve Ballmer will be under more pressure than ever.

9. At least Microsoft has good company.

Yes, Microsoft's quarter was disappointing. But many other major tech companies are also struggling to adjust to the evolving mobile market.

On Thursday, Google announced profits of $9.7 billion, a 16% year-over-year increase, but still fell short of analyst projections. The company underperformed because more of its revenue is coming from mobile advertisements, which are cheaper and require Google to sell ads in greater volume. Apple, meanwhile, is contending with a saturated smartphone market, which might result in the release of a low-cost iPhone model, and the continued invasion of Android tablets into the iPad's market.

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sjacks98202
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sjacks98202,
User Rank: Apprentice
7/20/2013 | 3:11:08 AM
re: Microsoft's Struggles Grow: 9 Key Points
* RT stands for "Run Time" (like as in as in Java Run Time) that sits atop an Operating system; like Dalvik (JME clone) is a Presentation Interface for the Linux Kernel in Android. There is no "native mode" Win8 that runs on ARM. Handset mfgs have free Android but have to make own OS and then buy RT. "Wintel" (Microsoft, Intel, AMD?) together has only 1/5 the capitalization of Apple. MS could have joined Oracle and supported JME against Android instead of reinventing the wheel.

* Windows code used to be portable running on Itanium, PowerPC, MIPS, Alpha, could have been recompiled for ARM. Now x86 (and AMD64 if you don't count incompatibilities) only. Note that Windows 7 Embedded can be trimmed to run on 1 GB flash (and Windows Compact Edition even less).

* Note new Intel LP CPUs are 32 bit only like ARM. MIPS (not Apple controlled), gaining popularity in China and India, has a low power 64-bit implementation.
sjacks98202
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sjacks98202,
User Rank: Apprentice
7/20/2013 | 2:34:19 AM
re: Microsoft's Struggles Grow: 9 Key Points
1. Microsoft remains a very profitable company.
(Ballmer was a Pepsi exec during its decline.) Not as profitable as it should be. Pepsi was still profitable as it lost market share to Coke.
2. Windows has never been this vulnerable.
Per those fools at Gartner et al that can't explain why XP still has 40%? Yes Tablets have grown, but unit numbers of Basic Desktops/Laptops are up slightly as is 1% US economic growth. Total expenditure of Tablet+PC approximates PC only spending a few years back. Real Estate agents have a Tablet and Smartphone but use Laptop to show Multiple Listing Service to customers, & use a desktop in the Office. Brokers & Bank Execs still do paperwork on PC. Doctors carry around a Tablet but enter patient notes on a PC. Would you want your MD to make a surgical decision based on Xrays he viewed on a Tablet? Macs, Linux, et al are not a threat to Windows, Microsoft is.
3. The Surface RT is an epic flop.
MS Usability group usually has a strong influence on MS direction. Apparently ignored to "be like Apple" & misunderstanding Apple's key metrics. Surface is a Device; RT is a "Metro" presentation interface: IOS has Cocoa, & Android has Dalvik (java micro edition clone).
4. Enterprise business performed well -- but still below expectations
Ballmer's previous reorgs failed. The current reorg seems aimed at help Ballmer's clueless outside management hires control the company.
5. Office 365 is doing great, but the larger Office business is a mixed bag. Office365 eats into not only on premise Office sales but also "Office Servers" sales. Office365 popularity is due to its lower cost (& saves businesses money on infrastructure), & MS loses money on its almost break-even pricing. Office is no longer the cash cow that bouys up MS.
6. Microsoft is generating money from mobile phones -- but maybe not Windows phones. Yet Apple owns 35% of ARM holdings & makes money from licensing of CPU in MS phones. The key to Mobile success is wireless providers that promote & discount the phones; both Allen & Gates own big stakes in Telecom. Handset manufacturers use Android because: has small footprint, it is "free", and has drivers for Telecom RTOS requirements. Windows Phone is NOT free, larger hardware footprint, and handset/tablet makers need their own Hardware Abstraction Layer for Windows.
7. Microsoft's OEM relationships are a mess.
Perhaps the commoditization of hardware has something to do with it? Microsoft used to depend on partners evangelizing their products, now MS *THINKS* they understand their OEMs' customers better than they do.
8. Windows 8.1 needs to succeed.
Lack of acknowledgement of the empiric upgrade cycle (5-7 years). Previous Ballmer reorgs screwed the OS: previously OS (Server+Desktop) was 45% of cost & 25% income (vs Office 20% of costs & 50% of income).(MS no longer breaks out this cost information externally), NT6 codebase is longest running in MS history, Vista 6.0, Win7 6.1, Win8 6.2, & issues in the KB as "to be fixed in 6.0" are still broken in Win8. This OS code stagnation lowers internal OS costs, offers no value to users.
9. At least Microsoft has good company.
Most are Microsoft partners, but countries Worldwide are in financial turmoil. This epidemic of bad decisions seems to stem from stockholders (esp Fund managers) that vote with management e.g. Microsoft stock would surge if the board kicked Ballmer out.
rradina
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rradina,
User Rank: Ninja
7/19/2013 | 11:19:11 PM
re: Microsoft's Struggles Grow: 9 Key Points
While I've now grown used to Windows 8 and don't think it's that bad, plenty disagree with me. I think Microsoft has some simple solutions. Although the PC market is shrinking, people seem to love Windows 7. Job 1 -- make sure Windows 7 users love Windows 8 and flock to it. If that means brining back the Start Menu and Aero, do it and make sure enterprises follow. Job 2 -- provide a touch environment as just another expression of Windows 8. Leave everything Windows 8 offers (including all the management, AD and VPN features enterprises love) and add to it. Job 3 -- make sure the touch environment is drop-dead intuitive, slick, fancy and engaging. Perhaps it's just me but I've yet to see a really outstanding modern app. At first even the simplest of all apps (the modern mail app) baffled me as to what I was supposed to do after I started a new message. Job 4 -- make damn sure your developers have a clear path forward on both the desktop and whatever expression you build for tablets. Job 5 -- you need WAY, WAY quicker update cycles. As soon as problems surfaced for the Surface, you should have been rolling out a Start Button/Start Menu/Start WHATEVER to stop the bitching, moaning and complaining! Job 6 -- hand out humility pills to the staff. Point out today's 11% stock drop, take their bonuses away and tell them they have limited time to fix the problem or they are fired. Maybe fire them now and figure out way to hire some folks from Google or Apple (if they'll even entertain it) and get some fresh blood pumping through those veins. Job 7 -- this one is for the board. See Job 6 and make sure Balmer understands it also applies to him.
Mark532010
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Mark532010,
User Rank: Apprentice
7/19/2013 | 8:21:53 PM
re: Microsoft's Struggles Grow: 9 Key Points
hmmm... 2 versions- RT which is being abandoned by vendors and Win8 which has not been very favorably received. I do not think the strategy is sound, If you want to expand into a new market you usually try not to alienate your existing market to do it.

The metro/Modern environment is the right answer for Microsoft. It gives them a good player in the tablet space. Altering the desktop OS to be primarily tablet-focused and eliminating development of desktop apps is not.

Saying they are at the "mercy" of their OEM's and thus needed to secretly develop a competing platform and then spring it as a surprise is not going to garner any points either.

You asked what would I do? I would have made the Metro/Modern environment an addon for desktop users - if you want to easily install Angry Birds from the appstore you could. You can argue that is the way it is now, but the point of this article is that the customers are not buying that argument or the products either
akirilin986
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akirilin986,
User Rank: Apprentice
7/19/2013 | 6:59:32 PM
re: Microsoft's Struggles Grow: 9 Key Points
Agree. It's been MS strategy for some time to deliver raw (read "unfinished") product and address the biggest complaints later (ignoring many important, but "low-priority" items). No wonder if flops so often.
AustinIT, don't ask me for a solution to MS problems - ask Gartner.
AustinIT
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AustinIT,
User Rank: Apprentice
7/19/2013 | 5:20:17 PM
re: Microsoft's Struggles Grow: 9 Key Points
Patience Grasshopper... so tell us your solution to what MS should do? Split Win 8 into two OS's? Oh wait, there already ARE two versions. RT for mobile/touch and Win8 for desktop/mobile/touch. Should they just abandon the mobile and touch device OS altogether? Not going to happen. So, again, tell us how YOU would approach creating an OS that can charge forward into the future of mobile and touch and still maintain compatibility with the legacy apps that billions use every day. And, do it without having to create and maintain multiple OS's, versions of the same apps, etc.
I think the strategy is sound. What they need are compelling hardware devices and mobile apps (that can compete with the iOS and Android library). This takes time and developer buy in. As MS has pointed out, they are largely at the mercy of OEM's to move the platform forward. Thus, the need to create Surface to get it going in the direction they need it to. And, to run the full package, you need low power high performance chips. We'll see how Haswell plays out in this regard.
Mark532010
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Mark532010,
User Rank: Apprentice
7/19/2013 | 4:38:23 PM
re: Microsoft's Struggles Grow: 9 Key Points
hmmm... alienate existing desktop customers, alienate existing corporate customers, alienate existing hardware partners, put out overpriced hardware incompatible with apps used by 99.9% of the world....then be surprised when sales/profits fall.
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