Netbooks hammer Windows revenues for second straight quarter

Cheaper XP Home on the increasingly popular netbooks means less money in Microsoft's pocket

Netbooks, the small, cheap laptops that are gaining popularity, hurt Microsoft's Windows revenues for the second quarter in a row, company executives said Thursday.

Revenues for the Windows Client division were down 16 percent in the first calendar quarter of 2009 compared to the same period last year, Microsoft said -- in part because of the continued growth in netbook sales, which accounted for 10 percent of all PC shipments in the quarter, according to Bill Koefoed, Microsoft's general manager investor relations. Profits for the company's Office suite also fell.

[ Apple, which reported profits this week, has been vocal in dismissing the netbook trend. | Keep up on the day's tech news headlines with InfoWorld's Today's Headlines: First Look newsletter and InfoWorld Daily podcast. ]

A second indicator of netbooks' impact was another fall-off in what Microsoft calls the "premium mix," or the percentage of Windows sales attributed to the higher-priced and higher-margin editions, such as Vista Home Premium, Vista Business, Vista Ultimate, and Windows XP Professional. During the first quarter, the premium mix fell by 14 percentage points year-over-year, from 76 percent to 62 percent.

This was the second quarter in a row that the Windows premium mix drop was in double digits: In January, Microsoft confirmed an 11 percentage point drop, from 75 percent to 64 percent year-to-year, for the fourth quarter of 2008. At the same time, the company noted that Windows revenues had slumped 8 percent.

Netbooks affect Windows revenues because most come with Windows XP Home, a version that costs computer makers much less than, for example, Vista Home Premium. Reportedly, Microsoft sells copies of Windows XP Home to netbook makers for as little as $15, but charges $50 to $60 more for a Vista "premium" edition.

For every netbook sold, Microsoft settles for less revenue, and in the end, less profit.

Microsoft may not have pointed out the specific difference that netbooks made to its Windows business last quarter, but the numbers were there. "We found a continued deterioration in the PC market," said Koefoed, who added that by Microsoft's estimates, global PC sales declined between 7 and 9 percent. Its unit sales for Windows tracked that closely -- down 6 percent, said Koefoed -- not surprising, since most machines sold come with Windows preinstalled.

In pre-netbook days, Microsoft's Windows revenues were more or less in sync with PC sales, Chris Liddell, the company's chief financial officer, noted as he answered a question later in the earnings call on Thursday. In other words, if PC sales rose 8 percent during a quarter, Windows revenues grew by about the same amount. But netbooks have thrown a wrench into that calculation, Liddell acknowledged, making it difficult to predict future Windows revenues.

Allan Krans, an analyst with Technology Business Research Inc., put it more bluntly. "That's what got Microsoft from the 6 percent decline [in Windows unit sales] to the 15 percent to 16 percent decline in Windows revenues," said Krans. "Netbooks are a growing impact on Microsoft's bottom line."

Netbooks can't take all the blame for the drop in Windows revenues, Krans cautioned -- the larger issue is the slide in computer sales -- but they exacerbate Microsoft's problem. And it's not going to get better overnight, if ever.

"Netbooks, and lower-priced PCs in general, show a fundamental shift in buying," Krans argued. "It's not something that will go back to the way it was any time soon. The shift is away from bigger and better toward simplicity and ease-of-use." The latter, he said, was one reason that Apple continues to do relatively well, even though its Macs are premium-priced. "People want something that's easy to use, not heavy and complex," said Krans, referring to operating systems.

The launch of Windows 7, which most analysts believe will happen in the second half of this year, may not put an end to the netbook revenue problem for Microsoft. The company has said it will sell Windows 7 Starter, the lowest-priced version, to netbook makers.

"Netbooks will have a long-term impact on Microsoft," Krans warned.

This story, "Netbooks hammer Windows revenues for second straight quarter" was originally published by Computerworld.

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