Microsoft sales slump - the fall of a tech giant?
Updated on 24 July 2009
As Microsoft announces a 17 per cent revenue drop Benjamin Cohen finds the technology giant is struggling to find and end to the economic gloom.
Late last night, Microsoft revealed that revenue has dropped by 17 per cent between April and June. This is a higher drop than was expected by analysts and coincides with the first ever drop in annualised sales for its iconic Windows operating system.
In the last quarter Microsoft's net profit was $3.1bn (just under £2bn), down a whopping 29 per cent on the same period last year. Profits dropped across the business from Windows, to Xbox to online advertising.
The only positive thing to come out of the results is that the company's cost cutting measures are beginning to take effect. In January, the company announced its first ever mass redundancies. "In light of the environment, it was an excellent achievement to deliver over $750m of operational savings compared with the prior year quarter," said Chris Liddell, Microsoft's Chief Financial Officer.
Microsoft is suffering for a number of reasons, some of which are pretty obvious. The recession means less people are working in offices and therefore there are fewer computers running Microsoft's expensive operating systems. Until the job market picks up, companies need fewer computers and the recession means they're not as likely to upgrade them to new PCs complete with a shiny new license for Microsoft Windows.
There's another problem. Open source office suites like Open Office, a free piece of software that nicely replicates Microsoft Word, Excel and Powerpoint are a tempting alternative to shelling out for an expensive license for Microsoft Office. I'm typing this article from home where I've used Open Office for about six years.
The growth of netbooks, slimmed down laptops, has also helped contribute to Microsoft's problems. They now account for around 20-25 per cent of new PC sales and many include free operating systems based on Linux rather than the more expensive Microsoft Windows systems. Those that do have Windows use the older, lighter and cheaper Windows XP rather than Windows Vista.
The announcement earlier this month that Google is developing a free operating system called Chrome OS will hardly help Microsoft.
Other Google innovations aren't helping either. They offer online word processors, spreadsheets and other applications for free hosted in the "cloud" meaning storage and processing takes place on Google's web servers. These products which will eventually contain advertising have prompted Microsoft to develop similar web based office suites although at the moment you can only view files already created rather than edit them.
The only glimmer of hope for Microsoft is its new search engine Bing.com. Rated highly by critics (including yours truly), for the first time there is someone with technology to rival Google. But unfortunately it managed to gain a tiny percentage of new users.
Microsoft's results come just days after rival Apple posted their best ever (non-Christmas) quarterly results with record sales. Last week, Google posted results that out performed analyst expectations. Google is making serious money from online advertising unlike Microsoft whose sales declined. Chip maker Intel also recently posted positive results.
In fact the only technology company with as bleak sales results as Microsoft is Yahoo who on Tuesday night revealed that while profits had increased due to cost cutting, sales slid 13 per cent and search advertising (the money spinner for Google) slid by 15 per cent.
Ironic isn't it that Microsoft and Yahoo are expected to sign a sort of pre-nuptial agreement in the next week or so that will inextricably link the two companies? These two fallen tech giants are likely to come to an arrangement that will push Yahoo's remaining search users towards Microsoft's Bing search technology.
While Google has around 90 per cent market share for search in the UK, in the US they are less popular with around 60 per cent of the market. Yahoo occupies around 20 per cent of the market and so it could deliver Microsoft with a reasonable sized audience. The deal is thought to also involve Yahoo selling advertising space on behalf of Microsoft.
Interesting yes, market changing just a maybe.
It's certainly nothing like the audacious offer of $46.6bn Microsoft made to purchase Yahoo last year. Since then Yahoo has to almost halved in value $24.23bn. After the then Yahoo CEO Jerry Yang tried in a failed attempt to secure a rescue deal from Google (which was banned by competition authorities), he was dumped and replaced by a new chief Carol Bartz, who has indicated she would be keen for Microsoft to make a new offer to by the company.
The problem for Yahoo is that Microsoft's CEO Steve Balmer has made it plain that he no longer wants to buy Yahoo outright, instead go for a deal like the one I've discussed above. It's certainly a canny move, something that may win approval and will probably net the same results for Microsoft as if they had actually have bought Yahoo last year.
Except they'll probably save around $45bn, money they'll keep aside for a rainy day or two as the whole technology industry awaits yet more turbulence in its first major recession.
