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More Bad Earnings for Microsoft

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Microsoft announced their quarter and year end financial numbers today (reported in detail in many other places). This is the first year ever that MS has reported a year over year decline. It’s easy to blame the economy for these numbers. Microsoft’s CFO compared them to how the economy was doing in general and how the IT sector was doing in particular; claiming that MS dropped by about the same amount as the economy and IT sector. However this strongly contrasts to the recent good earning reported by Apple and Google. In fact Apple claims they could have grown even more if they could just manufacture more iPhone GS’s. All this in spite of Microsoft’s monopoly on PC operating systems and office productivity software. These earnings also showed how badly MS’s on-line business is doing. As Google (only an on-line business) reported huge earnings gains and profits, MS reported their on-line business brought in under 1 billion in revenue, but lost almost 1 billion dollar last year. So for every dollar the on-line business brings in, MS spends 2 supporting it.

MS started as a small software company producing Basic interpreters for hardware manufacturers like Apple. Then they got the contract to develop the operating system for the original IBM PC (basically a CPM clone). MS was then able to re-invest the money from this and take over the office productivity space with Excel, Word, Powerpoint and Access. The problem is that since then they haven’t been able to produce another successful product. Basically they just keep making new versions of Windows and Office and milking these cash cows. They take all this money and throw it at other ventures like Zune, Bing, XBox, Dynamics, and such; but, keep losing huge amounts of money on all of these. This was all good fun when revenues from Windows and Office kept growing at phenomenal rates year after year. But what now?

It appears that sales of Windows and Office have peaked and are starting to decline. MS has no new business to replace them. Competitors smell the weakness and are attacking. Witness Google’s ChromeOS and online applications business. Apple is becoming more aggressive and taking away the high end of the market on one side with MacBooks and the low end on the other end with iPhones and iPods. It looks like the hardware companies are getting nervous and can’t afford to be afraid of MS anymore. More and more are offering Linux based computers and saving users the MS operating system tax.

Anyway, don’t take Microsoft’s dismal financial results as an indicator of the health of the high tech industry. Use more innovative and leading companies like Apple and Google to judge this health. We are basically seeing Microsoft undergo the same transformation IBM went through from a products company to a services company. Microsoft products will stay in use for many years to come and Microsoft can make quite a bit of money offering consulting services to these products. But the days of Microsoft compounding huge growth off product sales are gone.

Written by smist08

July 24, 2009 at 3:33 am