struggles and the floundering PC market have finally begun to hurt Microsoft's bottom line. With the company undergoing a major reorganization, the outlook could get tougher before it gets better.
What's challenging for Microsoft could be great for its customers, however. Faced with a more competitive landscape and less leverage than it's accustomed to, the company has already begun to offer more appealing prices and licensing terms to consumers. If Microsoft's hand is pushed further, businesses could begin to see benefits as well.
Although Microsoft is showing weakness on the consumer front, the company is still the top player in the enterprise market. But the aggressive moves the company is making to win back consumers might suggest forthcoming moves to retain its hold on corporate IT departments.
If you were considering a $500 Surface RT, for instance, Microsoft's recent price cuts have saved you $150. The device's dismal sales suggest there weren't many people debating such a purchase -- but the more that Microsoft struggles, the more this kind of strategy will affect the overall Microsoft ecosystem.
[ Windows 8 gadgets just don't quite hang together. Read Windows 8 Tablets' Big Flaw: Hardware Compromise. ]
Office 365 is another example. It's been a great deal for many businesses, but its appeal to consumers is less obvious. Microsoft's response has been to not only offer an Office iOS app for Office 365 users, but also -- in a rather strange pairing -- to bundle a one-year subscription to Xbox Live Gold with Office 365.
How much of this strategy will extend to the enterprise? That depends on a number of variables. CEO Steve Ballmer wants the company's various assets to connect with and enhance one another; that is, he wants the company to function as "one Microsoft" rather than a collection of autonomous silos. But Windows 8 is positioned as a foundation for many of Microsoft's other offerings. The company's diverse portfolio includes other marquee products that can thrive independently of Windows, such as Azure -- but to a large extent, as Windows goes, so goes Microsoft.
Windows 8 isn't doing well, and though the company is generating lots of revenue as Windows XP enterprise users migrate to Windows 7, many businesses face a variety of obstacles leaving XP. The plan is to stop supporting the OS in less than a year, but more than 150 million business users have yet to migrate, implying that even on Microsoft's home turf -- the enterprise market -- the company is not exerting the influence it once did.
This effect is also evident in Microsoft's relationship with its OEMs. Nokia VP Bryan Biniak recently said that Windows Phone 8 lacks the apps to attract users. The remarks echo a litany of OEM complaints about Windows 8. Most OEMs used to focus on Windows devices, but companies such as HP and Asus are now producing Android and Chrome devices with equal, and sometimes greater, emphasis.
To refocus OEM efforts, Microsoft is bundling Microsoft Office onto any Windows 8.1 tablet with a screen smaller than 10 inches. This deal was announced following rumors that Microsoft was offering discounted Office licenses in an attempt to persuade OEMs to invest in Windows 8 tablets. The subtext is that Microsoft -- like the OEMs themselves -- isn't making as much money on device sales as it used to.
For years, Microsoft got computer makers to install Windows on all of its machines, letting OEMs deal with the challenge of making a profit in the highly competitive hardware marketplace. That let Microsoft keep a large chunk of the PC industry's profits for itself. However, as more users began using smartphones and tablets, the PC industry started selling fewer full-fledged computers -- it has posted five quarter of declining sales. Microsoft still makes billions from PC software, and with its Surface line, it ultimately aspires toward Apple's relatively high-margin device model. But the company faces short-term challenges caused by cheaper devices, discounted product bundles and more attractive licensing agreements.
The main goal is to boost sales volume, and to do that it needs to increase Windows 8 adoption, because Steve Ballmer's vision can't come to fruition without a viable centerpiece. Cheaper, more powerful devices, Windows 8.1 and attractive product bundles -- all of which are coming by this fall -- could do the trick.
Microsoft has a mountain of cash in the bank, so it has plenty of time let its strategy play out. Even its disappointing quarterly earnings included billions of dollars in profit.
But given that enterprise sales have continued to perform well, it's hard to know if businesses will start to see real benefits. If you're Microsoft, why put something on sale if it's already selling?
In an interview, Forrester analyst David Johnson alluded to this question, stating that Microsoft is struggling with devices but remains strong in data center and cloud products.
In personal computing, Microsoft has suffered "diminishing leverage on the desktop OS," he said, but enterprise products "will continue to support high price points."
He said enterprises could still see some favorable changes, however, noting that Google Docs and non-Windows OSes are slowly threatening Microsoft's traditional enterprise sales strengths.