Microsoft’s (MSFT) Good News: It Is No Longer Just Software

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Analysts hung crepe for hours after Microsoft (MSFT) announced it quarterly results. Revenue did not grow enough and earnings were light. Sales were actually down at the company’s three huge divisions: client, servers, and business. Most investors did take heart in the company’s 2009 forecasts of better days.

What may have been lost in the mayhem is that Redmond has two emerging business, both of which they have been in for years, which are starting to show promise. Just as important, neither is directly related to software.

After half a decade and billions of dollars in losses, Microsoft’s game division, driven by the Xbox 360 and Halo 3 video game, posted an $89 million profit on almost $1.6 billion in revenue. Sales were up by 68%. A year ago the unit lost money. The revenue makes the "device" operation almost half the size of the company’s server business and it is growing much faster.

Almost all Wall St. observers denigrate Microsoft’s online business where the revenue comes mostly from MSN. The operation still loses a lot of money, but its revenue grew 40% year-over-year. That is at a rate close to Google’s (GOOG) and one which is much better than Yahoo!’s (YHOO). Steve Ballmer has threatened to walk away from the Microsoft bid for Yahoo!. He says that his company can get along without the portal. The revenue from the MSFT online division don’t prove that, but it at least gives the statement some credibility.

Everyone who understands Microsoft knows that it cannot live off of pre-packed software forever. There is, now, some glimmer of hope that it has a device business which could be very successful and an online business with an impressive growth rate.

Wall St. says that Microsoft cannot "go it alone" online. That is exactly what they said when the Xbox went up against the Sony (SNE) Playstation earlier in the decade.

Douglas A. McIntyre