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.