On the eve of the Windows 8 launch, Microsoft’s core product line suddenly isn’t doing so well: The one-time software giant announced a profit of $4.47 billion on revenues of $16 billion. Both figures represent significant drops from the same quarter a year earlier, but it was the profit that most rankled Wall Street: It dropped a whopping 22 percent year over year.
Microsoft explained the shortfall with two factors: a drop-off in PC sales ahead of the launch of Windows 8 and a one-time deferral of $1.36 billion due to pre-release offers for Windows 8 and Office 2013.
“The launch of Windows 8 is the beginning of a new era at Microsoft,” Microsoft CEO Steve Ballmer said. “Investments we’ve made over a number of years are now coming together to create a future of exceptional devices and services, with tremendous opportunity for our customers, developers, and partners.”
Mr. Ballmer might see nothing but success in the years ahead, but the current quarter is a cause for concern, especially for Windows. Revenues from the Windows division dropped an alarming 33 percent year-over-year to $3.24 billion; it's the only part of Microsoft’s business that experienced a sharp drop-off. Business units such as Entertainment and Devices (Xbox) and Business (Office) were roughly even year-over-year, while Server and the Online Services division experienced small jumps in revenue.
Microsoft noted that the Xbox 360 continues to be the top-selling console in the United States, where it now has 49 market share.
The most interesting trend, however, is the widening gap between Office, which is actually Microsoft’s biggest business, and Windows, which most view as the soul of the company. But Windows isn’t even number two anymore: The Business division that sells Office contributed $5.5 billion in revenues to the quarter, far above the Windows figure. And even Server & Tools outperformed Windows, raking in $4.5 billion in revenues.
These figures make one wonder why the Windows division is given such control within the company. After all, both Server and Office were prepping major updates in the previous quarter, too. But both of those businesses continued to perform strongly.
It will be interesting to see whether Windows 8 and Windows RT can help the division gain back its losses. Microsoft says it has certified more than 1,000 Windows 8 devices, “ranging from the smallest tablets and convertibles to touch-enabled Ultrabooks and all-in-ones to the most powerful desktop computers.” This, combined with the pre-sales excitement around Microsoft’s own Surface devices, could go a long way toward making that happen.