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April 23, 2012 at 21:37 PM EDT
The Slow Decay Of The Microsoft Consumer
Five years ago, Microsoft reported revenue of $14.398 billion. They reported a profit of $6.589 billion. Last week, for the same quarter , Microsoft's revenue was $17.407 billion. Their profit was $6.374 billion. The company is still growing, but not fast. And they're actually making less money. Compare that with Apple. Five years ago , revenue was $7.1 billion. Profit was $1.0 billion — the first quarter with a billion dollar profit in company history. Last quarter, the company reported $47 billion in revenue. And they recorded $13 billion in profit. On the surface, an apples-to-oranges comparison, perhaps. But it points to something that has happened. Apple has completely taken over the consumer market, while most of Microsoft's growth these days comes from the enterprise side of things. Apple has destroyed Microsoft as a consumer technology company.
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Five years ago, Microsoft reported revenue of $14.398 billion. They reported a profit of $6.589 billion. Last week, for the same quarter, Microsoft’s revenue was $17.407 billion. Their profit was $6.374 billion. The company is still growing, but not fast. And they’re actually making less money.

Compare that with Apple. Five years ago, revenue was $7.1 billion. Profit was $1.0 billion — the first quarter with a billion dollar profit in company history. Last quarter, the company reported $47 billion in revenue. And they recorded $13 billion in profit.

On the surface, an apples-to-oranges comparison, perhaps. But it points to something that has happened. Apple has completely taken over the consumer market, while most of Microsoft’s growth these days comes from the enterprise side of things. Apple has destroyed Microsoft as a consumer technology company.

Sure, Microsoft is still making plenty of money — billions — off of their consumer goods. But the decent quarterly numbers they reported last week in some ways mask what is really happening: Microsoft is slowing morphing into a full-on enterprise company.

Everyone got all excited that the Windows division actually managed to grow last quarter. Because the broader PC market has been stagnant and Windows 8 is in testing mode, expectations were extremely low. 4 percent growth was considered a big win.

But Microsoft as a whole saw 6 percent growth year-to-year when it came to revenue. It wasn’t Windows driving it, it was the Business Division (9 percent growth) and the Servers & Tools Division (14 percent growth). Again, the enterprise side of things.

The Business Division is now by far the largest Microsoft division in terms of revenue. Meanwhile, Servers & Tools almost surpassed the Windows Division this past quarter. The last time that happened was the tail end of the Vista nightmare. It’s going to happen again. Microsoft’s two biggest businesses will be their enterprise businesses.

Even on the Windows side of the equation, this was the key statement in the earnings release:

Strong Windows 7 adoption continued with enterprise desktops on Windows 7 now up to 40% worldwide.

Nothing about the consumer side of Windows, just the enterprise side. That’s what led to the 4 percent growth surprise.

Windows 8 is due out at the end of the year, and I’m sure the Windows Division revenue numbers will jump as a result. But as these charts by Horace Dediu show, the jump is likely to be short-lived. Microsoft saw a huge revenue (and profit) spike when Windows 7 was released, then it immediately dropped and plateaued. It was back to the revenue grind and the profit stagnation.

Windows 8 could be better for the company, or it could be worse. The world is drastically different than it was even just three years ago. The iPad exists, for one. While Microsoft is going all-in (or at least half-in) on their tablet strategy with Windows 8, there’s no indication it will actually work. If it doesn’t that could significantly hurt the Windows Divisions’ numbers.

Another key difference over the past five years is, of course, the iPhone. Five years ago, no consumer had one. Microsoft controlled nearly 35 percent of the U.S. smartphone market. It was going to be a huge business for them. Today, that percentage stands at roughly 5. And even with Windows Phone, it’s shrinking, as Dan Frommer points out today.

Microsoft’s last-ditch attempt insert themselves into the mobile picture isn’t working. At least not yet.

And that matters because again, that’s where consumers are today. Smartphones. Tablets. The PC business is going nowhere. Let’s just admit it: that’s not going to change.

The wildcard is the living room. This is the one consumer space where Microsoft has done better than Apple over the past 5 years. The Xbox 360 has been a big hit, and accessories like the Kinect have moved the market forward. Apple’s first Apple TV was largely a dud. The second one is much better and seems to be selling well, but it’s not a consumer hit in the same way the Xbox is.

But last quarter, a funny thing happened: Microsoft’s Entertainment and Devices Division actually lost money. That had not happened since 2009. And it was the worst loss since 2007 — again, five years ago.

Since Microsoft reports Windows Phone numbers under E&D, some assumed the poor numbers were a result of things like Microsoft’s Nokia payout dragging the division down. But Microsoft themselves noted that the 16 percent decrease in revenue was the result of “a soft gaming console market”. This was later backed up by more numbers. The drop in revenue and the swing to a loss was all about Xbox demand evaporating.

Now, obviously, the Xbox is old — some may say “ancient” by gaming console standards. And a new one isn’t due until next year. That device will undoubtedly do well, but you have to wonder if Microsoft wasn’t surprised by this swift drop to a loss for the division. If they weren’t, why not aim for a new console this year? It sure seems like they were counting on things like the Kinect to extend the life of the device, and that worked for a while, then collapsed.

Meanwhile, gaming on iOS continues to grow. Anyone who doesn’t view the iPad as a legitimate living room gaming contender now is simply fooling themselves. And it’s a device that’s refreshed with the lastest hardware once a year. The Xbox is coming in three, four, or even five year intervals. That simply cannot compete given the rate of change we’re seeing.

Microsoft is smart to move more into the broader entertainment space, securing content deals for the Xbox. But again, Apple will be there as well. At first through the existing Apple TV (with a killer assist from the AirPlay functionality). Down the road, perhaps with their own actual television.

To me right now, Microsoft’s consumer business feels like Nokia’s smartphone business a few years ago: the numbers look fine, and in some cases even good, but the world is quickly changing. If you just look at the past five years of what Apple has done versus what Microsoft has done, it’s not hard to imagine Microsoft’s business being completely dominated by the enterprise side of the equation in another five years. That will still make for a great business, but it’s not the Microsoft that many of us have known.



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