Gartner jumped on the post-PC bandwagon yesterday, predicting Microsoft's imminent slide to irrelevance as tablet and smartphone sales eclipse PC sales. Among other predictions, Gartner believes that tablets will outsell traditional PCs by a margin of more than 70 percent in just three years. The firm also notes that Android is way ahead of Windows in terms of units shipped per year -- in other words, Windows has already lost its dominance if you include smartphones in the mix of computing devices.
Many of us have been sounding this exact same alarm for several years now, and as Woody Leonhard points out at InfoWorld, analyst predictions are fickle and shouldn't be taken too seriously -- heck, just six months ago, Gartner was predicting that Windows Phone would soon be outselling the iPhone.
But this particular report is a little different. Gartner makes its living advising companies on their technology strategy and purchases. It talks to huge enterprises all the time. If Gartner actually starts shifting its practice toward the post-PC world, that adds yet another straw to the overloaded camel's back.
The sales data pointing to the post-PC world is unambiguous, but I'm increasingly hearing anecdotes that enterprises are reconsidering how much money they want to spend with Microsoft overall. One public example: Last December at the Fortune Financing Innovation conference, McKinsey director Eric Kutcher told a story of a major insurance company CIO who keeps a whiteboard in his office with a list of vendors he wants to reduce his spend on. All the big traditional vendors -- including Microsoft -- are on that list.
Is it really possible to imagine a day where Microsoft is less important in the enterprise than Apple? Or Google?
The answer matters for IT professionals. If Microsoft is actually running into serious trouble, that could affect its pricing and licensing strategy, the viability of the Microsoft partners who help sell and install and configure its partners, the availability of developers who are up to date on the latest Microsoft platforms, Microsoft's ability and willingness to support its products, and many other elements.
With that in mind, here are two points to keep a close watch on.
1. Is Office 365 driving enterprise upgrades?
Microsoft is in the middle of several major transitions. The one everybody focuses on is the shift from desktop and laptop PCs to more mobile devices, and the effect that this will have on Windows sales. But at least as important to Microsoft's business is the shift from business software to business services in the form of Office 365. As companies shift from perpetual license to subscription licensing, that gives Microsoft a lot more stability -- they won't have to go out every three years and try to sell the latest upgrade.
But is the shift happening? We know that about 25 percent of retail Office sales have already switched to Office 365 subscriptions, but most of Microsoft's business revenue comes from larger companies buying Office and related products on multiyear license agreements. The big question will be "are companies making the switch to subscriptions?" More important, is this switch helping Microsoft's business?
On Microsoft's earnings report, there's one pretty good proxy for sales of these agreements; it's called unearned revenue, and it measures money Microsoft has collected at the beginning of a payment period. (Importantly, this is money Microsoft already has in the bank, which Microsoft then recognizes as revenue over the course of the agreement -- not expected payments, which fall into another bucket called "contracted-not-billed.")
Microsoft's June quarter -- the end of its fiscal year -- is a big time for companies to renew these agreements. That means unearned revenue in the June quarter is usually a pretty good signal of whether companies are renewing these agreements and whether they're adding new products to them.
Last year in June, the unearned revenue balance for Microsoft's Business Division (Office, Exchange, SharePoint, and related products) was at $9 billion. Historically, in years where Microsoft puts out a new version of Office, this number jumps in the June quarter -- there's a helpful interactive chart on Microsoft's investor website that shows the trend.
If the unearned revenue balance for the Microsoft Business Division jumps in the June quarter, that's good news for Microsoft. That means companies see enough in Office 365 and Office 2013, and all the related products like Exchange and SharePoint, that they're willing to pay for them again. It means that, for Microsoft, no matter what the pundits say about mobile and tablets and Xbox, the enterprise train is still rolling.
If that balance drops significantly below $9 billion, that could be a sign of a derailment.