Will Microsoft struggle after Q4 debacle and new strategies?

Microsoft CFO Amy Hood may be confident in saying it will manage the IT growth opportunities to become strong after a flop Q4.

But the reality is that Microsoft has been slow to respond to several IT market predictions that consumer PC will face downturn and there will be slowdown in IT spend by enterprises.

Windows Business

In fiscal 2014 (July 2013 to June 2014), Microsoft expects that Windows revenue will be negatively impacted by the decline in the consumer x86 PC market.

Way back in 2010, market intelligence firm IDC said consumer sales of PCs would slow in the second half of 2010 after strong first two quarters.

There were other indications as well. Intel had downgraded its Q3 2010 forecasts, pointing to a softening of consumer PC demand. In addition, Gartner lowered its PC sales growth for 2010, lowering by 2 percent to 15.3 percent.

“We are working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs,” said Steve Ballmer, chief executive officer at Microsoft.

Microsoft says OEM revenue will account for approximately 65 percent of the division’s revenue, and should decline mid-teens, while non-OEM revenue will account for approximately 35 percent of the division’s revenue, primarily reflecting revenue from volume licensing and Surface, including Surface RT at its new price point.

With the ongoing shift to subscriptions, consumer revenue will lag the x86 consumer PC market by approximately five percentage points, even as attach continues to grow, said Microsoft.

Tablet a big lost opportunity for Microsoft

On 20 May 2010, IDC shared a conservative prediction. It said worldwide media tablet shipments will grow from 7.6 million units in 2010 to more than 46 million units in 2014, representing a compound annual growth rate (CAGR) of 57.4 percent. In comparison, IDC expects 398 million portable PCs will be shipped in 2014.

Despite increasing retail distribution in Q4 and reach to 29 markets and more than 10,000 retail locations, Surface suffered. Price reduction by $150 to $349 per device did not assist Microsoft. The write off will be $900 million.

ABI Research recently said more than 39 million tablets shipped worldwide during the first calendar quarter of 2013, representing the second largest volume of shipments to date. ABI Research says tablets will be a lucrative market for the three largest world regions — North America, Western Europe, and Asia-Pacific’s Japan and South Korea — for consumer electronics and computer adoption.

These 3 regions are expected to yield 97 percent of tablet revenues in 2013. But Microsoft is yet to expand tablets business significantly. The new strategy is aimed at focusing more on devices as a One Microsoft.

Less encouraging enterprise IT spending

Gartner says IT spending to reach $3.7 trillion in 2013, up 2 percent increase from 2012 spending of $3.6 trillion. Microsoft needs to relay on this forecast for enterprise IT revenue for the next 6 months.

Within Server and Tools, product revenue, including transactional and multi-year licensing, was about 80 percent of the division’s total, while enterprise services is the remaining 20 percent. Microsoft expects product and enterprise services revenue to grow high single-digits.

In the Microsoft Business Division, Microsoft expects business revenue to account for approximately 85 percent of the division’s total, while consumer revenue should account for the remaining 15 percent. Business revenue will grow mid single-digits, reflecting low double-digit growth in annuity revenue, and the shift from transaction licensing to cloud services.

In 2010, the global IT market grew by 8 percent year over year to more than $1.5 trillion. IDC earlier said that Some of the growth was just a bounce back from the declines of 2009, when the market declined by 4 percent, but there was also a very real surge of demand as businesses around the world continue to deal with the issue of managing, storing, securing, and analyzing the increasing flood of digital information that is resulting from the proliferation of mobile devices and embedded computing platforms.

Economy is in bad shape. Forecasts are strong. Gartner says tablet revenue will grow 2.8 percent in 2013. Mobile phone revenue is projected to increase 7.4 percent this year.

Is Microsoft’s new strategy considering low IT spend by enterprises and hire spending on mobile phones. Not really. See the strategies here ( Steve Ballmer’s letter to Microsoft employees on One Microsoft )

What Happened in Q4

Microsoft’s Q4 revenue rose 3 percent to $19.2 billion and operating income declined 11 percent to $6.2 billion. Microsoft net income will be impacted by goodwill impairment charge of $6.2 billion related to the write-off of its 2007 acquisition of aQuantive.

Also, Microsoft is taking a $900 million hit on Surface RT inventory adjustments.

Windows Division revenue declined 5 percent this quarter.

The consumer x86 PC market declined as users prioritize devices with touch and mobility. Touch and mobility will be a top priority of Microsoft as per its new strategies.

Windows business declined as the device market continued to evolve beyond the traditional PC.

In June, Microsoft released the public preview of Windows 8.1. It will be a free update to existing Windows 8 users, and will be made available to OEMs in August, less than one year since launch.

With over 1.5 billion Windows users around the world, a transition of this magnitude takes time, said Microsoft.

Microsoft added 25 percent more Enterprise customers this quarter and now over 50 percent of the Fortune 500 are using Windows Azure.

Microsoft’s Future

Microsoft COO Kevin Turner’s R&D strategy is different from One Microsoft strategy announced by CEO Steve Balmer ( With $10.1 billion in R&D, Microsoft’s Kevin Turner shares strategies ).

Windows 8 customers — Nokia, HTC, etc — are not doing well. Its own tablets have flopped. IT spending will grow after the global economy revival. Small rivals are eating into Microsoft’s market share.

Baburajan K
[email protected]