When I reported that Microsoft was internally disappointed in initial sales of Windows 8, I got an interesting warning from a different source at the firm: "Wait until you see the numbers." And those numbers—40 million licenses sold in just one month—are indeed impressive, at first. But a growing dissatisfaction is starting to chip away at the notion that the Windows 8 launch was successful. And there are now many sources both inside and outside the company claiming otherwise.
Windows 8 Launch Disappointment
What’s most interesting, perhaps, is that Microsoft’s own executives have done the most damage to the perception that Windows 8 is off to a strong start. In recent public appearances, these executives have couched their ebullience over the launch with language that suggests what really happened.
Speaking at a Credit Suisse annual tech conference earlier this week, Microsoft’s Tami Reller noted the “tremendous buzz and interest” in Windows 8 up front but then corroborated my earlier reports—"Windows 8 Sales Well Below Projections, Plenty of Blame to Go Around" and "Dialing Back the Crazy on Windows 8"—which stated that Microsoft was in fact internally disappointed by the launch because of PC makers, which didn’t show up in retail with the volume of devices they had previously announced.
“If you go into retail today, you will see some great touch devices, whether it's touch laptops, or whether it's a tablet or two with Windows 8 or Windows RT,” she said. “It's not enough, in our opinion. … Some [devices] you'll see in December, some will take longer. But I think it's good, but not great, in terms of the full touch assortment.”
Reller was also broadly misquoted as stating that initial Windows 8 license sales were ahead of those of Windows 7 during the same launch-month time frame. What she actually said was that Windows 8 sales were “roughly in line with [those of] Windows 7.” You might recall that Windows 7 sold 60 million units in its first two months in the market in 2009 and then settled into a regular (almost too regular, one might say) pace in which it consistently sold about 20 million units per month for three straight years. That number—20 million per month—is the figure we need to use to compare Windows 8 sales and determine, over time, whether this release is more or less successful than its predecessor.
Microsoft's Stagnant Stock Price
Meanwhile, at its annual shareholder meeting on Wednesday, a glum-looking group of senior Microsoft executives—CEO Steve Ballmer, Chairman Bill Gates, Chief Financial Officer Peter Klein, and General Counsel Brad Smith—answered sometimes hysterical questions from a group of folks who are getting an understandably suspicious about Microsoft’s stagnant stock price in the wake of Apple’s meteoric rise.
There were lots of big numbers tossed out during the meeting—$31.6 billion in cash flow during the past fiscal year, Windows Phone 8 handset sales up by a factor of four when compared with last year (though it’s unclear what the original figure was), 750,000 Xbox 360 consoles sold over Black Friday weekend, and so on—but the executives were often on the defensive.
Despite having fast-tracked its own Tablet PC initiative over a decade ago, that effort failed miserably and Apple created a new market for simpler, non-PC tablets with its iPad. Ballmer admitted that Microsoft responded to this change too slowly. “Maybe we should have … innovated on the seam between software and hardware … earlier,” he admitted. Microsoft hasn't revealed sales figures for its new Surface tablet, which runs Windows RT (not Windows 8) and is sold only through its own “modest” collection of retail stores and online.
"We see nothing but a sea of upside," he noted of the tablet market, which is another way of saying that Microsoft has no market share today at all and is clawing back from behind.
Claims About Windows 8 Customer Reactions
As for Windows 8, Ballmer claimed that people understood and liked the strange new OS, which straddles the line between mobile devices and traditional PCs by offering two completely different and separate user interfaces in the same system. “We know for sure that people get it, and like it,” he said, an allusion, I assume, to data that shows that over 90 percent of people using Windows 8 were able to find the hidden Charms menu on the first day of using the product, while 85 percent were able to find the legacy Windows desktop. (It’s like a video game with hidden treasures: Perhaps Microsoft could add Xbox LIVE achievements.)
“Customers are exploring, and they're learning Windows 8 on their very first day of usage,” Reller explained earlier in the week. “They're using new features, they're visiting the store, and they're getting apps.”
At the shareholder meeting, Ballmer also reiterated a now-discredited claim that PC makers would sell “400 million” PCs in the coming year, a figure that suggested an “unprecedented opportunity.” But few analysts believe the PC market will exceed the roughly 360 million PCs that will be sold this year in the coming year. That 400 million figure is out of date.
Responding to complaints about Microsoft’s stock price, which certainly hasn’t exploded in the wake of the Windows 8 launch, Ballmer said that the stock market was “a funny thing.” And that while the stock price doesn’t reflect the company’s gains over the past few year, Microsoft has in fact returned $10 billion to shareholders through stock buybacks and dividends. The company not coincidentally announced a quarterly dividend of 23 cents per share on Wednesday as well. That will be payable in March 14 to shareholders of record on February 21, Microsoft noted.
Windows 8's Future
But back to Windows 8. Despite contrary reports and opinions, two facts emerge, both of which raise questions for the future.
First, I’m surprised no one else has questioned why launch-month license sales of Windows 8 weren’t higher than 40 million units. That figure is double the normal sales rate for Windows—remember, Windows 7 sold about 20 million licenses a month for three years straight—but, looked at another way, it’s only double the normal sales rate of Windows. How is it not more than double? Windows 8 is the least expensive version of Windows that Microsoft has ever sold, and the company is practically giving it away via upgrade programs for Windows 7 PC buyers (with a $15 upgrade) and a web-based upgrader for Windows XP, Windows Vista, and Windows 7 that costs just $40. Even the retail version of Windows 8 Pro, at $70, is significantly less expensive than the retail version of its closest predecessor, Windows 7 Professional, which cost $200, normally, though during a special promotion for that OS, it was briefly $100. So the cheapest Windows 7 Pro upgrade, back then, was $60 more expensive than the cheapest you can get today. Why haven’t more people upgraded?
Second, Windows 8 license sales during the initial launch month are in line with—not greater than—those for Windows 7. But Windows 8 targets a broader market of both tablets and PCs than did Windows 7, which served only the PC market. When we look at Windows 8 sales going forward, that 20-million-per-month figure is an absolute minimum for this OS to be successful. But as tablet sales rises, so should Windows 8 sales, when compared with its predecessor. Going forward, 20 million per month won't be enough for Windows to maintain its current market position.
Solid but Not Spectacular Windows 8 Start
We’ll see what happens. But my take on this is that 40 million seems like a big number until you really look at the big picture. Today, Windows 8 has gotten off to a solid but not spectacular start. But it is the future—the next quarter, the next year—that will tell the real story.