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Microsoft posts second straight double-digit downturn in Windows OEM revenue

Gregg Keizer | April 28, 2015
Can Redmond make enough from consumers in services to offset the decline in OS revenue?

Both Hood and CEO Satya Nadella spun the decrease in consumer OEM licensing as less about the loss of revenue and more about the opportunities ahead, especially for the upcoming Windows 10.

"We're also transforming the consumer Windows business to adapt to the changing market dynamics, including lower price point devices," said Nadella in the same conference call last week. "This quarter, while non-Pro revenue declined, activations were up. Importantly, we are now at a place where we can start to see early signs of how usage increases in services like search and gaming can drive new monetization opportunities over the lifetime of a Windows consumer device."

That's Microsoft's new strategy, best evidenced by Microsoft's decision to give away Windows 10 to consumers running Windows 7 and Windows 8.1. Previously, Nadella and others have dubbed that "Windows as a service," although executives have been coy about what that actually means other than an attempt to convince people to pay for add-ons like OneDrive and Office 365.

Evaluating that switch won't be easy, said Jan Dawson, chief analyst at Jackdaw Research. "There are so many different moving parts moving in many directions," Dawson said in an interview when asked whether growth in other areas, particularly its cloud-based businesses such as Azure, were making up for the drop-off in revenue from the company's long-time powerhouses, Windows and Office. "I think it will take two to three years to get a better sense of where this will end up," Dawson predicted.

That's an eternity for a publicly traded company like Microsoft, whose financials are examined by investors with short attention spans and less patience.

Dawson wasn't optimistic that Microsoft would pull it off. "Long term, Windows revenue will continue to decline," he said, and it remained unclear how Microsoft could replace the billions with service income. Dawson and other analysts have repeatedly pointed out the difficulty any vendor, even Microsoft, faces in making money from an operating system in a world where OSes are handed out free, as is Google's Android, or packaged with proprietary hardware, as is Apple's OS X and iOS.

"What's the new level of total revenue for Microsoft?" Dawson asked. "They bought the [Nokia] phone business, but the underlying trend is that they're losing far more on the hardware and on the consumer side than they will make up on the cloud and commercial. That's a fundamental problem."

Microsoft did increase revenue for the quarter — sales were up 6% over the same period in 2014 — and earnings beat Wall Street estimates, which has fueled a 10.5% jump in the stock price since the firm released its financials Thursday. But Microsoft's operating income — also called "operating profit" — dipped 5% as the higher costs and lower margins of hardware hit home, due, said Hood, to ongoing restructuring and Nokia integration costs as well as the strong dollar, which has affected foreign sales.

 

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