Windows 7 Success Doesn't Lift Businesses, Wider Industry

Last week, Microsoft announced its earnings for the quarter ending December 31, 2009 and, for the first time in a long time, the results were spectacular. The company's overall earnings jumped a whopping 60 percent, year over year, with Microsoft bringing net income of $6.7 billion on revenues of $19 billion, the latter of which is an all-time record.

Speaking of records, Microsoft credited Windows 7 sales for the results: The software giant's latest OS sold an incredible 60 million+ units in its first quarter of availability, making it the fastest selling version of Windows ever introduced and thus the fastest selling OS in history.

Sounds like a breakthrough quarter, right? We must be on the cusp of some wonderful exodus from the economic malady that has floated like so much blight over the tech industry--and the entire world, really--for about a year and a half. Right?

Not so fast.

While Windows 7 is indeed off to a record start and providing a much-needed boost to Microsoft's bottom line, this isn't the holistic home run it could have been. Microsoft's other businesses were flat or down in the quarter, for starters. And while Windows 7 sold at a torrid pace, most of those sales were to consumers, not businesses. And because so many of these consumers were buying very low-end PCs--often netbooks running the ultra-cheap Windows 7 Starter--the wider PC industry didn't see much uplift.

[ Read more about Microsoft's blockbuster financial quarter. ]

Other business units continue to trail

Taking a quick look at Microsoft's earnings per business unit, we see lots of softness once we look past the Windows division, which saw revenues up 70 percent and income up almost 100 percent. (That's enough to exorcise the Vista demon, I think.)

Office revenues were down 3 percent to $4.7 billion, which many attribute to pending demand for Office 2010, a product that will become generally available in mid-June 2010 according to my sources. I'm not sure about that. Office 2010 is a fairly tepid upgrade aside from the Office Web Apps, which will be free, and Outlook, which is attractive mostly to businesses. Yes, there's been some nice fit and finish work otherwise, but Office is a mature product line. I think demand for the business versions of Office 2010 will be slower than many expect.

Server sales were soft and up just 2 percent to $3.8 billion in revenues, despite a major new product release in Windows Server 2008 R2. Of course, businesses rollout new server products on their own schedules. But I expected more from R2, given its incredible virtualization improvements. And most of the gain the unit did recognize was due to CAL subscriptions and SQL Server, not Windows Server.

Online services, arguably a main pillar of a future Microsoft, continue to lose money for the current company. Microsoft tried the "making lemonade" defense by noting that its Bing search service had actually picked up a few points of usage share during 2009, but let's face it, that's share that Live Search hemorrhaged previously, and Bing still trails Google by so wide a margin that they don't even directly compete. Entertainment and Devices, responsible for Xbox, Zune, and Windows Mobile, continues to struggle as well.

Businesses still not biting: What's up?

One of the big surprises in Microsoft's earnings, when you dig a bit deeper, is that business sales dramatically trailed those of consumer sales. So even though worldwide PC shipments grew about 16 percent in the quarter overall, businesses don't appear to be biting. Microsoft COO Kevin Turner offered some familiar language about business prospects, noting that its corporate customers have expressed some "enthusiasm" for Windows 7. But enthusiasm doesn't equate to sales, not yet, and it's unclear what it's going to take to get penny-pinching XP stalwarts to give up their aging OS and move into the 21st century.

Business spending recalcitrance didn't just affect Windows. Remember how Office was down 3 percent in the quarter? Consumer sales of Office--i.e. the low-cost Office Home and Student 2007--were actually up 12 percent. But business sales fell 6 percent, dragging down the overall business unit.

Consumers bought PCs, yes, but really cheap PCs

Netbooks are the big PC success story of the past 2-3 years, and Microsoft says that these low-end machines now account for 11 percent of all PCs sold. And Windows is installed on 90 percent of netbooks. But because netbooks are low-end machines with price tags to match, neither Microsoft nor its PC maker partners benefited much from this phenomenon.

Another oddity in the quarter is that a larger than usual percentage of consumers actually purchased Windows 7 in retail packaging, something that is usually done by less than 5 percent of Windows acquirers. This suggests that users were unusually unhappy with their existing OS--usually Windows Vista, I'd guess--but is also a testimony to the Windows 7 system requirements which were, in contrast to those of Vista, actually quite reasonable.

Now what?

I was hoping that Microsoft, a traditional tech industry bellwether, would offer up some hope for the IT future, but it seems that the Windows 7 surge in the previous quarter was more about consumers than businesses. Looking ahead, it's unclear when the spending chains are going to be lifted from most IT budgets. But I think there are some interesting opportunities in even a weak economy.

I'm thinking mostly of small businesses. The theory for years now has been that small businesses want the power of enterprise tools but in simpler, more digestible packages. There's some truth to that, but small businesses, even more than other business types, are cost restrained in ways that are central to that market. And cost is even more important than capabilities. If Microsoft doesn't retune its thinking to match this market, they're going to lose customers to Google Apps and other low-price and free alternatives. I firmly believe that customers that are not upgrading today are a huge risk for this future.

What Microsoft needs to do to avert this is to price and package small business solutions in ways that mirror how consumers, not enterprises, buy software solutions. This will require Small Business Pack versions of Windows and Office that bundle 5, 10, and 15 copies of the OS and productivity suite into low-cost packages. A much less expensive version of the Business Productivity Online Suite (BPOS) tailored to small businesses that matches Google's pricing. And so on.

I think of this plan as a technology stimulus package for small businesses, the part of the market that was growing faster than any other when this recession came crashing down. It's something that can't wait for the next generation of the company's products.

An edited version of this article appeared in the February 2, 2010 issue of Windows IT Pro UPDATE. --Paul