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Windows 10's upgrade model temporarily wipes US$1.6 billion from Microsoft's books

Gregg Keizer | April 25, 2016
Company defers Windows 10 revenue for two to four years because of free upgrades and updates.

MPC revenue increased in the first quarter, a change from recent reporting periods, which have seen declines: Revenue was $9.5 billion, up almost 1% from the same period in 2015. But Windows revenue was down.

Sales of licenses to OEMs (original equipment manufacturers) -- the bulk of Windows revenue -- declined 2% year over year, with what Microsoft dubs "Pro" licenses, the more expensive versions of Windows aimed at businesses, down 11%.

As it has for years, Microsoft again blamed the struggling PC business for the decline in Windows revenue. Chief Financial Officer Amy Hood called the PC market's March quarter "weaker than we expected" during yesterday's call with Wall Street.

PC shipments in 2016's first quarter declined by 11.5%, researcher IDC said last week. Rival Gartner pegged the downturn at 9.6%.

Hood attributed the 11% drop in OEM Pro revenue to "higher inventory levels" in the December quarter. Translation: Computer makers stuffed the channel with PCs late last year, then sold fewer than they had expected, leaving too many on shelves and in warehouses with licenses paid for in 2015.

Ironically, sales of consumer-grade licenses to OEMs increased by 15%, Hood said, crediting a "higher-than-expected mix of premium devices" for the upturn. She presumably meant the more expensive -- and larger -- tablets and 2-in-1s, and the pricier PCs. Both IDC and Gartner have repeatedly said that consumer PC sales have tanked because people aren't replacing their aged systems after shifting much of their time on PCs to smartphones, and to a lesser degree, tablets.

Microsoft does not share the specific revenue figures for Pro and "non-Pro" license sales -- the latter represent the consumer-quality versions -- but the former again brought in more money than the latter during the quarter.

That will continue, Hood said as she issued her forecast for the quarter ending June 30, Microsoft's final for its 2016 fiscal year. "In Windows, we expect our OEM Pro revenue to be largely in line with the commercial PC market," she said, referring to the continuing decline now expected. "Our non-Pro revenue is expected to be above the consumer PC market, similar to what we saw in [the March quarter]."

 

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