M$ has been living off its desktop OS and office suite cows for more than a decade. The desktop OS cash cow has dried up considerably. Indeed, “Further down in its 10-K filing, Redmond reports that it upped its sales and marketing budget for the Windows Division in 2013 by a jaw-dropping $1bn, which included an $898m increase in advertising costs "associated primarily with Windows 8 and Surface."Got that? Microsoft spent more in a single year advertising the Windows 8 and Surface launches than it took in from Surface sales that same year.”
From the 10-K: “Windows Division revenue increased $839 million. Surface revenue was $853 million. Revenue from commercial licensing of Windows increased $487 million, while unearned revenue from commercial licensing also increased, reflecting continued support of our platform. In addition, we recognized $540 million of previously deferred revenue related to the expiration of the Windows Upgrade Offer. Partially offsetting these increases was a decrease in OEM revenue.
OEM revenue decreased 3%. Excluding the impact of the Windows Upgrade Offer, OEM revenue decreased 10%. This decrease primarily reflects the impact on revenue of the decline in the x86 PC market, which we estimate declined approximately 9%.”
Of course, M$ blames the market instead of its product but fails to mention the Android/Linux on ARM market is booming (Android/Linux smartphones up 52.3% year over year and Android/Linux tablets up 247.5% year over year)… End of an era, I’d say. Wintel just cannot compete on price/performance. Even WARM can’t compete on price/performance when M$ doesn’t have to pay itself licensing fees. How are OEMs and retailers supposed to sell that?
Even M$ admits this risk: “We derive substantial revenue from licenses of Windows operating systems on personal computers. We face substantial competitive challenges from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users are increasingly turning to these devices to perform functions that would have been performed by personal computers in the past. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract applications developers to our platforms. In addition, Surface competes with products made by our OEM partners, which may affect their commitment to our platform.”
The only questions remaining is will the reorganization increase sales or will it just hide the continuing debacle and, will the SEC punish MSFT for leading on investors? After all, investors were shocked to learn Surface was not selling despite Ballmer’s ravings.