Too Soon to Write Off Microsoft

My colleague Michael Hickins seems ready to consign Microsoft to the dust heap. He’s certainly right that the last quarter was grim and that Microsoft has some serious problems, including the long over reliance on Windows and Office as its cash cows. But it’s easy to over react to the latest earnings announcement, and I think that an announcement of Microsoft’s decline is still a bit premature.

Although Michael’s comparison of Microsoft to Apple, Google, and Amazon might be apt, all these companies are in significantly different businesses. Apple might be the closest comparison, especially given that both companies have successfully moved into different areas of consumer electronics. The big difference is that Apple has shifted its center of gravity to consumer electronics, while Microsoft, with all of its sales of games consoles and, yes, even handset operating systems, is still largely tied to the PC industry.

In its last quarter, the evidence of Microsoft’s dependence on Windows in particular has been amply evident. Of course sales have dropped, because PC unit sales have dipped significantly. The debacle called Vista didn’t help, as many people and companies foregoing an upgrade from XP. To have seen anything but a significant drop in the company’s sales would have been a preposterous expectation. Furthermore, as Michael pointed out, companies have not been adding products or license seats as they typically do, which was a double whammy.

But to cease examination at that point is to prematurely write off Microsoft — always a dangerous act. The big change could come with the release of Windows 7 this coming week to developers, with public distribution starting May 5.

One of the interesting features, at least in the professional version, is the XP mode, and a smart move it is. By providing a compatibility capability, Microsoft is helping users keep the current XP software they have alive and kicking, rather than forcing businesses and consumers to invest in all new versions of everything. If a company was interested in moving to Windows 7 then this will be a clever way to get more people into the upper end of the offerings, as the economic trade-off would be significant. And the number of companies planning on upgrading could take everyone by surprise:

• One study by Dimension Research suggests that 80 percent of the IT professionals it surveyed planned to move their companies to Windows 7 within 36 months. That would be an amazingly quick shift, compared to upgrade patterns of previous versions of Windows.
• Investment bank Pacific Crest Securities polled 80 IT decision makers at companies with more than 1,000 employees. Yes, a smaller sample than you’d like, but significant companies. Half planned to upgrade to Windows 7 immediately, 46 percent were going to upgrade before the end of 2009, and 55 percent of respondents were going to do company-wide upgrades rather than rely on new PC purchases to make the change.

If these studies are at all representative of reality, this could be a corporate shift to an operating system that6 is pretty well unprecedented in its speed and size.

In short, people are voting with their dollars — not just customers, but the market, when Microsoft stock jumped by ten percent last Friday after the disappointing earnings and announcement of cost cutting measures. Does Microsoft face significant challenges in its business model and does it need to broaden its revenue source reliance? Absolutely. But predicting the end of the company’s relevance is like predicting the end of the relevance of the PC. People have been doing it for years, but reality seems unwilling to step in time with prognostication.