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Microsoft Office, Server Sales Fuel Strong Earnings

Microsoft's financials showed a strong, diversified company. Windows 8 concerns aren't going away, though, and neither are questions about the company's long-term influence.

As a slew of 7-inch tablets might suggest, Microsoft knows that Windows 8 adoption will be driven more by tablets than traditional PCs. Klein frequently alluded to as much, mentioning that "consumers and businesses are increasingly shifting their focus to touch and mobility" and want "devices that are ultrathin, lightweight and have long battery life."

Gartner's David Cearley cautioned, however, that the tablet's rise doesn't mean that PCs are going extinct, or that Microsoft will stop making money from traditional computers. "Microsoft will continue to be an important anchor point," he said. He added, however, that Microsoft continues to struggle in the smartphone and pure tablet space, meaning that even if Redmond remains a dominant force in desktops and laptops, it could lose influence overall.

Though none of Microsoft's representatives acknowledged skepticism about Windows 8, Klein emphasized that the OS is a "complicated" transition and implied that its journey is far from complete. He optimistically referenced Windows Blue and its accelerated update pace as engines that will drive progress, but it's implicit in his forward-looking words that Microsoft knows it has ground to make up.

Redmond CEO Steve Ballmer was likewise focused on the future, pointing out that "bold bets" have positioned Microsoft for long-term growth. Redmond is clearly aware of shifting dynamics in the marketplace, and of uncertainty surrounding the future -- but what's less clear is where the company will stand once those shifts have played out.

In an interview conducted prior to the earnings announcement, Gartner analyst Stephen Kleynhans expressed confidence that "Microsoft understands the magnitude of the problems" Windows 8 faces. "They are a bunch of very smart people who have good ideas," he said but countered, "They also have this enormous install base they have to keep supporting which makes them slow to get new and interesting stuff into the market." He said the company needs to implement truly innovative ideas into its forthcoming products, even as it manages people who "don't want to leave their comfort zones."

In a blog post, Forrester analyst David Johnson said that though Microsoft is in "the throes of a market misfire with Windows 8," the company is diversified enough to "get through it." Indeed, Microsoft posted gains across all its divisions. The company's profitability is not at risk. But if Windows 8 fails to catch on, Microsoft's influence will be relegated to the enterprise, leaving it without a hold in the consumer market and the bring-your-own-device movement.

Cearley said the days of Microsoft controlling 90% of the computing market are over. Still, he said this shift shouldn't be viewed as a Redmond failure, but rather a natural progression toward heterogeneous environments. Enterprises will have to deal with Microsoft, Google and Apple, he explained, and IT departments are already adjusting to this sort of multi-platform support. Indeed, Cearley said that though Office remains a remarkably strong performer, it has lost ground to Google Apps. With consumers even more likely to own computing devices from many vendors, Microsoft's share of the overall computing pie can still be considerable -- but not as massive as before.

"It's not that Microsoft becomes irrelevant," Cearley said. "It's still very much a driving force, but it's not going to have the monopolistic and dominant position it once did."

To maximize its prospects, Microsoft will need to make progress with Windows 8. Dave Johnson noted the platform needs a stronger app library, and that Microsoft needs to better understand how consumer and workplace preferences differ. Offering a similar note, Forrester's J.P. Gownder, also writing in the aforementioned blog, pointed out that Windows 8's hybrid personality might be too compromised to succeed. He suggested Microsoft should offer one version of the OS for PCs and another for tablets. He said each could include both the desktop and Modern UIs but would be tailored to the specific device on which it runs -- e.g., booting to the Explorer interface on a PC while "keeping interoperability where it makes sense."

Whether Windows Blue adopts such thinking will become clear in coming months. Whatever the case, it's clear the update will play an important role in not only Windows 8's short-term growth but also Microsoft's long-term consumer mindshare.

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Michael Endler
Michael Endler,
User Rank: Author
4/19/2013 | 8:18:10 PM
re: Microsoft Office, Server Sales Fuel Strong Earnings
Thanks for reading, jabberwolf.

Apple's actually an interesting case. IDC pegged Mac sales as down, whereas Gartner said Apple actually increased sales in the US market. Cupertino took the unusual step of slashing prices on the 13-inch Retina MacBook Pro, which suggests sales aren't where the company wants them-- but it also looks like Apple is outperforming the Windows-centric parts of the PC market. Apple also enjoys favorable margins on its computing products, somewhat insulating its Mac offerings from declining hardware sales. Throw in the fact that Apple's overall revenue is less tethered to OS X than Microsoft and its OEM partners' respective earnings are to Windows and you have a pretty solid outlook for Apple. Can it stave off Android? No, probably not, but if Apple really sells 75 million iPhones in developing markets once the rumored low-cost model hits, Cupertino could be sitting pretty.

As for the one device idea-- I think a lot of people would like one device that can do almost everything, but form factors (e.g. screen size, ease-of-use with legacy keyboard-and-mouse applications) still get in the way of a true "one-size fits all" solution. The first round of Windows 8 devices were too compromised to live up to this ideal, but If Windows Blue brings some unity to the two side of the OS, Microsoft could make up some ground. Even so, many people will require more than one device simply because no one has found a way to make one form factor that adequately addresses all major use cases.

Also, while some people would value an all-in-one device, there's also evidence that consumers actually prefer the mutli-screen experience. Microsoft would still be wise to cram as much functionality into its tablets as it can, if for no other reason than to carve out an identity that offers value not found in iOS or Android. But it also needs a range of devices, from cheap (hopefully sub-$300) tablets to powerful Utralbooks and Surface models to giant 30-inch tablet/monitor hybrids designed to be communal household devices. I think a single form factor could come to be the most popular option but the market will nonetheless demand a variety of options, and, as the Forrester analysts predict, perhaps different versions of Windows tailored for each one. I see a lot of people continuing to haul around tablets and smartphones for certain use cases while turning to more traditional devices for others. Success will involve not only compromise-minimizing hybrid tablets but also software that embraces a multi-screen lifestyle, seamlessly moving online experiences from one device to the next.

A lot of this is reading into tea leaves, but one thing is clear: Windows 8 adoption is stagnant right now, meaning Microsoft faces two particularly important and foreseeable tests: 1) Windows Blue and the upcoming Intel chips (both Haswell and Bay Trail) need to deliver not only meaningful improvements but also branding differentiation that consumers care about; 2) As Windows 7 migrations concludes and businesses, probably between 2014 and 2016, start buying new computing products, Microsoft needs to find a way to both serve its install base while also making inroads with consumers. I think June should be a big month for Microsoft, with both the BUILD conference for developers and its TechEd conference in New Orleans. I've been told Redmond's evolving corporate strategy will be an emphasis in New Orleans, and BUILD seems like it has to be all about Windows Blue. So we'll have a better idea soon.

Michael Endler, IW Associate Editor
User Rank: Strategist
4/19/2013 | 4:00:35 PM
re: Microsoft Office, Server Sales Fuel Strong Earnings
Yup - that sums it up nicely. I have no problem with the OS on a desktop - I actually love it. The regular user and Enterprise usage won't be able to so easily adapt. The final goal of interoperability between all devices is the game changer here as far as the success that MS could achieve in the market.
User Rank: Apprentice
4/19/2013 | 2:44:55 PM
re: Microsoft Office, Server Sales Fuel Strong Earnings
As soon as MS puts the smart button back and a few other tweaks - they will have Windows 8 sales and tablets booming. Apple has shrinking sales because people cant afford all the difference devices. MS has an opportunity to do this right and show people they just need to purchase 1 device and thats all.
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