The single greatest criticism of Microsoft (NASDAQ: MSFT) CEO Steven Ballmer is that the company’s shares have not gained during his tenure as head of the company. The attack is not entirely fair. The firm pays a dividend and issued a large special dividend in 2004. But shares did trade for $30 in March 2002. Now they trade for $32, which is near a 52-week high and up from a bottom of $23.65 over that same period. Windows 8, which comes out this fall according to many reports, may be the catalyst that finally helps boost Ballmer’s image.
Microsoft’s most recent quarterly report shows how much Windows 7 has aged. Sales from the Servers & Tools, Business and Entertainment Devices divisions surged. Sales from the Windows division fell from $5 billion to $4.7 billion. Operating income fell from $3.1 billion to $2.8 billion for the same quarter compared to last year’s. The margins for the Windows division are wildly high compared to most other widely distributed software products, but they do not match those of the periods immediately after the launch of Windows 7.
As Microsoft looks forward, its Entertainment division is unlikely to produce much in the way of profits, at least compared to other segments of the company. It made only $530 million last quarter. Online operations, which includes search, lost $455 million, in essence offsetting any gains in the Entertainment operation, which is driven mostly by Xbox sales.
Microsoft’s Business and Servers & Tools operations increasingly are under siege by Oracle (NASDAQ: ORCL), SAP (NYSE: SAP) and other large companies that want to take enterprise software from Microsoft. As these enterprise software products move to the cloud, Microsoft’s margins on them could shrink.
The risk that Windows 8 faces as it launches is that much of PC computing has moved to the cloud as well. And other PC-like activities already have begun a migration to portable devices such as smartphones, a sector in which Microsoft has been bested by Apple (NASDAQ: AAPL) and Google’s (NASDAQ: GOOG) Android mobile OS. But a huge portion of the hundreds of millions of PCs around the world still will upgrade to Windows 8, as their owners have upgraded to earlier versions of Windows. The product remains the backbone of PC productivity and entertainment activity.
Windows 8 may be the final generation of the product that has tremendous sales. By the time Windows 9 launches, a very many PC and portable devices will run on the cloud. And PCs may have been largely replaced by tablets and smartphones, most of which run non-Microsoft operating systems.
Microsoft can still take advantage of the final years of the PC age. Ballmer may get his stock price improvement yet.
Douglas A. McIntyre