Microsoft's Terrible, but Productive, Quarter

Carl Weinschenk

For anyone who has been around the telecom and IT worlds for a long time, the spectacle of Microsoft fighting for relevancy — survival still is guaranteed — is pretty breathtaking.

The drama has been rolling out during the past couple of years. The introduction of Windows Phone — initially Windows Phone 7 — and the deal with Nokia to load it onto the manufacturer’s devices was one act. The unavoidable conclusion is that while the jury still may be out, results to this point are not encouraging. That’s so because of the miniscule sales of Windows Phone and the fact that the initiative doesn’t seem to be in the news.

The next great opportunity to save the company seems to be coalescing around the releases of its Surface tablet and Windows 8.

From the Microsoft point of view, whatever is next better come quickly. Last week, the company announced that it lost $492 million in its fourth quarter, which is its first loss ever. A loss is a loss and clearly is bad news. The commentary around the report, however, cites two reasons that the results should be seen in a quasi-positive or even neutral light.

Both are suggested by eWeek’s Wayne Rash. He wrote that the size of the loss was due to a write-down of the aQuantive acquisition in 2007. Thus, part of the loss was simply paying the piper for an old mistake. Rash also said that another element of the slump is a slowdown in sales of Windows 7. That would be bad news if there were no reason. But the looming presence of Windows 8 — which is set for launch in October — makes a slowdown in sales of the older product reasonable. Writes Rash:

So how can these losses be good news? If you take out the aQuantive loss and the deferred revenues, Microsoft would have reported a profit for the quarter. In other words, it’s a paper loss. Microsoft is still making plenty of money. The even more important factor is that people are waiting for Windows 8 and analysts are expecting a strong demand when the OS ships in October.

Even if it is assumed that the loss announced last week is, well, as good news as a loss of $492 million can be, the reality still is that the company must come up with products that people buy. In other words, whatever the spin is on the recently announced losses won't matter unless something emerges to reverse the momentum.

Surface is one of those potential game changers. Analyst Tim Bajarin is not sold on the device because of how Microsoft is interacting with its OEM partners and some built-in limitations concerning third-party suppliers. It also is reasonable to ask the meta question: Is Apple’s lead so large and its ownership of the tablet category so complete that it is unreasonable to expect Surface to significantly shift Microsoft’s fortunes, even if it is seen as a good device? In other words, all the reviews of Windows Phone are positive. Users and reviewers love it. But its market share still is miniscule.

The key question may be whether Microsoft — or, more specifically, CEO Steve Ballmer — recognizes that Windows is not the company’s future. Indeed, the underlying buzz has been that Ballmer is part of the problem and that Microsoft has many valuable pieces that could be knit together more effectively — or spun out as separate companies. Computerworld contributing editor Preston Galla suggests that Microsoft's most valuable asset is Office and, perhaps, the slogan should be changed from "Windows Everywhere" to "Office Everywhere."

The sense is that the direction of Microsoft, which has hung in the balance ever since the focus started shifting from the desktop, will be decided relatively soon.

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