Brace Yourself for New Windows for PCs and Servers--Or Not

Published: August 3, 2009

by Timothy Prickett Morgan

As July was coming to a close, Microsoft was ramping up the production engine for its Windows 7 desktop and Windows Server 2008 R2 server operating systems just as it was reporting the first decline in annual sales in Microsoft's history as a publicly traded company.

Welcome to the wonderful world of being a legacy platform, Windows. Fun, ain't it?

So much fun that Microsoft has to deploy a virtual machine hypervisor inside of Windows 7 to give something akin to a Windows XP compatibility mode (which won't work perfectly and certainly not on all hardware, which will cause so much confusion). So much fun that Microsoft is actually thinking about distributing versions of Windows in Europe with browsers other than Internet Explorer so it can get the European Union antitrust authorities off its back. So much fun that Bill Gates, as smart as he always is, got out of the company last year before the slide really got going in earnest. So much fun that in the fiscal fourth quarter ended June 30, Microsoft's sales slid by 17 percent to $13.1 billion and net income fell by 29 percent to $3.05 billion; for the full fiscal 2009 year, Microsoft's sales fell by 3 percent to $58.4 billion and net income fell by 18 percent to $14.6 billion.

With the PC business in a serious slump and Windows 7 on the horizon (and $276 million in revenues already booked and deferred for this operating system), Microsoft's client software business shrunk by 28.7 percent to $3.11 billion. Its server and tools business fared better, especially considering the cratering in the server racket so far this year, with sales declining only 5.7 percent to $3.51 billion, and more importantly, operating income for server and tools was only off 1.5 percent to $1.35 billion; operating income for the client software division at Microsoft fell by 33 percent to $2.17 billion. The interesting bit, as far as I am concerned, is that the Windows desktop monopoly is not delivering profits like it did a year ago in terms of operating profit divided by revenue. A year ago, 74.6 percent of client software revenues at Microsoft fell to the middle line (before sales and other costs were attributed to the products), but this time around, only 69.7 percent fell down to operating income.

The equally interesting bit of data is that for servers and tools, where Microsoft has dominant market share but not a monopoly, only 36.8 percent of its revenues came down to operating profits in the fourth quarter a year ago, but as it has increased its hold over the server racket, it was able to boost that ratio to 38.4 percent in this year's fourth quarter. And perhaps most importantly, Microsoft's margins for servers are a lot, lot lower than for clients, which is exactly backward to what you might expect. Windows clients have been propping up Microsoft's assault on the data center since 1994, and are still doing it.

To try to get some good news out there, Microsoft said on July 22 that it had released Windows 7 and Windows Server 2008 R2 to manufacturing. Windows 7 will be generally available on October 22, and Windows Server 2008 R2 is expected to GA either on or before that date. (Microsoft was intentionally vague.) While these programs have interesting features, customers are going to be very hesitant to get involved with a Windows 7 upgrade cycle in a down economy; they were not exactly thrilled with a Windows Vista upgrade when the economy was good. (OK, so it really wasn't, since December 2007, but the economists tried hard not to cop to it.)

If Microsoft thinks it is going to see a big bump in sales for these new Windows platforms, it is in for a big surprise. There has to be a truly compelling reason to upgrade anything right now, and this will be particularly true among the privately held small and midrange i shops out there that are trying to stay in business. Even the grief of application certification on Windows 7 or Windows Server 2008 R2 is a cost that companies don't want to bear, unless there is a good technical reason to use it. And from what I have seen, neither version of Windows is worth the grief of certification apps for them and then upgrading to them. It would be far more fruitful for companies to focus on how to provide new applications or preserve revenue or take some downtime to keep their heads in the game than to do a Windows upgrade that, more than anything else, just helps Microsoft make its numbers.

Make your own numbers. Bill Gates has enough money, and Steve Ballmer could use a little more humbling. Maybe a lot.

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