Strong sales of netbook computers, combined with plummeting sales of Microsoft Office to consumers, hurt Microsoft Corp.'s otherwise-strong first-quarter 2010 results reported today. At least one analyst expects the trend to continue, even with the release of a netbook-friendly Windows 7 and a free Web version of Office for consumers.
Microsoft is trying to entice netbook makers to switch to the relatively streamlined Windows 7, especially the low-end Windows 7 Starter. Microsoft did not say how many netbooks this quarter shipped with Windows 7 instead of XP. According to Rob Helm, an analyst with the independent Directions on Microsoft, Windows 7 Starter costs OEMs about twice as much as XP. For most netbooks, that will be too high, he said. As a result, he doesn't expect most OEMs to switch off XP until it is phased out next fall.
Netbooks made up about 12 percent of total Windows shipments in the first quarter, said Bill Koefoed, Microsoft's general manager for investor relations, in a conference call after the earnings release. And netbook shipments are likely to keep growing faster than the rest of the market, acknowledged Chief Financial Officer Chris Liddell.
Due to Vista's bloated operating system, which takes more hard drive space and processing power, those netbooks almost all run Windows XP. Microsoft reportedly earns about $15 for every copy of Windows XP sold to a PC maker, or original equipment manufacturer (OEM), compared with $50 to $60 for every copy of Vista, and now, Windows 7, sold to PC makers.
As a result, OEM revenue was down 6 percent year-over-year, despite Microsoft's selling an unspecified "record number of Windows licenses" this quarter due to the release of Windows 7 to OEMs in July. Total Windows revenue of $4.1 billion was down 4 percent from a year ago.
Meanwhile, Microsoft Business Division (MBD) revenue fell 11 percent year-on-year to $4.4 billion, dragged down by a 34 percent year-over-year decline in consumer sales. That mirrors a 30 percent annual drop in the prior quarter. Sales to consumers make up about a quarter of MBD's total revenue. They come mostly from retail sales of Microsoft Office.
Microsoft has juiced Office sales in the last several years through heavy promotions for students, military personnel, retirees and other groups. That has come back to bite Microsoft, Helm said, by "hurting their [year-over-year revenue] comparables." Strong sales of netbooks, which are often too lightweight to run the full Office suite, has hurt, too, he said.