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Friday, July 24, 2009

Microsoft earnings report - bad for tech or bad for Microsoft?

Microsoft (MSFT) reported a decline in revenue in the most recent quarter. Is that a bad omen for the whole tech sector?

First, a quick look at the numbers. For the fourth quarter, Microsoft reported net income of $3.05 billion, or 34 cents a share, on revenue of $13.10 billion, down 17 percent from a year ago. Expectations were for earnings of 36 cents a share on revenue of $14.37 billion.

Here are a few quick thoughts on three of Microsoft's business segments.

Microsoft Office software product line --

As good as Microsoft's suite of Office productivity software is, there is no compelling reason for current users to upgrade if they haven't done so already. The next iteration is not due until next year.

Given the cost of Office and the fact that even old versions are packed with plenty of features that most people never even use, it is no surprise to see sales stagnating.

There are also much less expensive alternatives to the pricey Microsoft products. Both Google and Zoho offer quite decent alternatives for costs that range from free to reasonably cheap. These two have not yet claimed any kind of huge market share yet but their mere existence might be enough to cause current Microsoft customers to hold off upgrading and potential new customers to try the products from these two competitors first.

Operating Systems for PCs --

Second verse, same as the first.

The Windows operating system for PCs also suffers from the situation where there is no compelling reason to perform an upgrade, especially to the much-maligned Vista.

Microsoft, like Dell, was also hit by declining PC sales due to the economic downturn.

Extending the theme described above, there are more alternatives to Windows than ever before. With the surge in sales of netbooks, we see that Windows isn't always the first choice for installation. There are various versions of the open-source Linux operating system that are often chosen both for being cheaper and more light-weight than Windows.

Another alternative that is slowly gaining popularity is cloud computing. With everything hosted in a browser, there is no need for an operating system as powerful and resource-hungry as Windows.

Again, the alternatives to Windows still have very modest market share but it shows that competitors can successfully chip away at Microsoft's dominance of the desktop.

Server software --

This category consists of the heavy duty Windows operating system software used on servers and associated products like SQL Server, Microsoft's database software that competes with Oracle, MySQL and others.

For the most part, this segment held it's own with income nearly flat year-over-year. This is despite the fact that Linux is considered a credible competitor to Windows and MySQL is considered a credible competitor to SQL Server.

Online division --

This is where Microsoft lost the most money. Losses actually exceeded revenues.

Again, Microsoft is trying to battle tough competitors and users have plenty of choice. Need to do a search? Google and Yahoo can do the job as well as Bing if not better. Need to check on the stock market? Google and Yahoo can just as easily provide the information. Checking on the day's news? A plethora of alternative web sites exist.

You get the picture. Microsoft is doing what so many others are also doing. No wonder they are having a tough time making money.

Conclusion --

Where Microsoft really provides value is in the server software segment. Here it has a product line that is robust and reasonably cost effective. And we can see the market has rewarded the company accordingly.

In its Office and Windows PC segments, the company has often been charged with offering bloated, overly complicated products that are too expensive. There is some truth to that accusation. So when purse strings are tightened in economic bad times like we see today, these kinds of products become nice to have rather than necessities.

Microsoft's results do not so much provide a bad omen for the tech sector in general as they provide a bad omen for Microsoft itself. The theme that has repeated itself in the paragraphs above is that there are increasingly compelling alternatives to Microsoft's products and web sites.

To me, that bodes well for the tech sector and for customers. Competition and new products are what makes the tech sector exciting. Seeing Microsoft begin to loose their dominance is not a sign of decline but, under these circumstances, a sign that the tech sector remains healthy.

Disclosure: no positions

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