Microsoft knows Windows and Office can't deliver growth

Stan Beer
Saturday, 29 April 2006 18:10

Opinion and Analysis

It does not take the skills of a high powered business analyst to understand the figures clearly displayed on Microsoft's own website. Other than the business segments containing Windows and Office, Microsoft only has two other business segments of any size - Server and Tools and MSN. While Server and Tools is travelling nicely, with good growth, MSN, which includes Microsoft's search engine business, is in a sick state. MSN revenue has actually declined by nearly 2% in the first three quarters, while earnings dropped by nearly 64%, which included a loss in the 3rd quarter.

The conclusions are inescapable. Microsoft desperately needs to boost sales of Windows and Office and, up until now has pinned its hopes on the release of Windows Vista and Office 2007. However, both products are at least 8 months away and, when they do hit the market, there is no guarantee that their appearance will generate increased sales growth. Like Windows XP, Vista will mainly be sold pre-loaded on PCs, and will be limited to the growth of that market. In order to get into growth markets like China, Microsoft will also be forced to drastically pare its Windows margins.

While Windows will likely continue to chug along with single digit growth rates after Vista is launched, however, Office 2007 will be a much tougher sell. There is little incentive for people to upgrade from what they already have and compatible free open source products are now available. Promises of a slicker interface and more powerful features are unlikely to convince existing users or new users to part with their money and swap from what they already use, especially if there is a leaning curve involved.

Microsoft knows all this of course, which is what the conference call on 27 April was all about - spending money on finding new technology growth areas for the company. The problem is that, given the track record of Home Entertainment and MSN, the market is unconvinced that Microsoft has the ability to find and develop new areas outside its traditional software heartland which will deliver the much needed growth. As a result, today Microsoft shares are 11% cheaper than they were yesterday.