Microsoft’s Problems Mount

July 19th, 2007

On the surface, if you’re a Microsoft stockholder, you’ll probably be reasonably pleased with their latest quarterly results, where higher revenue and profits were reported. All this despite the fact that they’re taking a $1 billion charge to cover the costs of fixing defective Xbox 360 consoles.

But it’s clear to me that the Redmond gorilla isn’t doing as well as they hoped. For one thing, they didn’t meet their goal of selling 12 million Xbox 360’s by the end of June. If you own one of these gadgets, you have to be concerned whether yours is going to fail next. No, this is not like some of the extended warranty programs Apple has had on note-books and other products. We’re talking here of dedicating roughly $100 in repair costs for each unit on a product that costs just a few hundred dollars. That’s one huge deal.

At the same time, the head of the Xbox division is taking a walk. Sure, it’s couched in the usual excuses that the executive, Peter Moore, is pursuing a more lucrative opportunity at Electronic Arts and wants to be closer to his family. But someone surely had to take a hit for the failures at Microsoft’s Interactive Entertainment Business division, and I can see where the buck has to stop somewhere.

Of course, you can’t expect a company, except in special circumstances, to admit that someone is being fired for being a screw-up. It just doesn’t happen very often.

Indeed, Microsoft has other issues that are threatening its dominance. Internet Explorer 7 debuted last fall as a “mandatory” upgrade to Windows XP users. It is the default, system-based browser for Windows Vista. Despite that, Mozilla’s Firefox continues to gain market share, especially in Europe. According to current estimates, in fact, Firefox is getting almost half the market in some countries.

Naturally, Microsoft will put the usual spin on the quality of its product and the value it offers to customers. But other than sites that require Internet Explorer to work properly, because of Microsoft’s proprietary components, just what value does Internet Explorer offer anyone? The ability to download malware without your permission?

I haven’t even added Apple’s Safari to the equation, because few are guessing just how well it’ll do on the Windows platform once the beta period is over. For now, it’s still a shaky release with enough bugs to put the kibosh on using it for regular browsing, and that’s not something only a Windows user is apt to say. I’ve tried the updated 3.0.2 version under Windows Vista  and I wasn’t overwhelmed. It’ll get there, but not yet.

Regardless, I am thinking that one solution to Microsoft’s problems may well be what TidBITS’ publisher Adam Engst suggested on this week’s episode of The Tech Night Owl LIVE, and that is that Microsoft might do well to spin off all but its core software business into separate companies. That would make it easier for them to jettison a division if its products didn’t succeed.

As it is, Microsoft rarely gives up anything. If something, such as the MSN online service, fails, they simply rename it to, say, Windows Live, develop a new marketing scheme, and continue to throw money at it.

Now, I can see the wisdom in nurturing a product in the hope that it will eventually become successful. Once the hardware defects are behind it, for example, the Xbox might become fairly profitable. It is, after all, a pretty good game console, according to most reviews.

The jury is still out on the potential for the Zune music player, however. Microsoft hasn’t said much about it lately, and one would think it would be time for a version 2.0 or some other variant to gain additional market share. At the same time, though, it would seem that whatever prospects the Zune might have are based on stealing sales from some of Microsoft’s PlaysForSure partners. I’m sure they aren’t pleased, but I can’t see that any of those companies would make a public break with Microsoft. They’ll either find new partners or put their best face forward and hope the Zune eventually goes away.

The same can’t be said for Dell, which has done a couple of things that cannot please Steve Ballmer and the rest of the crew at Microsoft. One was to once again offer a few models preloaded with Linux and the other was to allow customers to configure their new PCs with Windows XP rather than Windows Vista.

To be sure, aside from being bundled with most new PCs, it doesn’t seem that Vista has been the smashing success Microsoft hoped it would be.

This is not to say that Microsoft is a doomed company. It remains hugely profitable, but it also means they’ve got a lot of serious problems ahead that might some day change the financial picture considerably.

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12 Responses to “Microsoft’s Problems Mount”

  1. Michael says:

    “According to current estimates, in fact, Firefox is getting almost half the market in some countries.”

    There’s a claim from Rob Enderle that Firefox may be doing better in some countries because more people in those countries have either old or pirated versions of Windows.

    I guess there may be a smidgin of truth here since someone buying Windows new will encounter a more adequate version of IE and, on Vista, something that, AFAIK, has extra functionality and a new appearance that matches the OS.

    Still, in the main this sounds like an excuse to me. It smacks less of analysis and explanation and more of a desperate attempt to find reasons bolster MS’s reputation. Not surprising coming from Rob Enderle perhaps.

  2. On an unrelated note, thank you for changing your css text color from gray to black : )

  3. On an unrelated note, thank you for changing your css text color from gray to black : )

    You’re welcome. Our Webmaster took a one-month vacation in January and never returned. So I’ve had to learn a lot of stuff that I had hoped I wouldn’t have to deal with. But I did fix a few issues and hope to do more one of these days. Meantime, I do welcome volunteers who are adept at PHP and CSS to make suggestions and perhaps help me with coding. 🙂


  4. Chuck says:

    I just wanted to say I always enjoy reading your articles. They are easy to follow and they don’t bad-mouth people on a personal level. They are well written, objective and professional. What a breath of fresh air when the norm in the blogosphere is trash talk, misinformation and horrible writing.


  5. Gene,
    I just wanted to say I always enjoy reading your articles. They are easy to follow and they don’t bad-mouth people on a personal level. They are well written, objective and professional. What a breath of fresh air when the norm in the blogosphere is trash talk, misinformation and horrible writing.


    Why thank you 🙂


  6. Andrew says:

    I’ve never used an XBox360 and yes, $100 to fix each and every $400 console is a big hit, but if they clean things up then the product may become a hit. The original XBox got raves, and the 360’s reviews for the most part indicate a superior gaming console (I’ll buy one when LucasArts releases “Force Unleashed”).

    Vista hasn’t sold so well as upgrades, but then again, no OS since Windows 95 has made its money in upgrades. Whether you are talking about any version of Mac OS or Windows, the vast majority of sales come from preinstalled copies on new computers. Enthusiasts buy a new operating system, normal folks use what the computer came with until it is time for a new computer.

    As far as Vista specifically, I don’t see what all of the fuss is about. I remember back in 1999 when I moved my PCs from Windows 98 to Windows 2000, or in 2001 when I moved to Windows XP. The experience was much the same as my recent move to Vista. Most commercial applications continued to work just fine, but there were issues with device drivers and some, mostly free applications not behaving properly. I also needed to either upgrade or buy all new utility programs for things like Defrag, antivirus and various system enhancements. Vista has actually been a smoother transition for me than XP was, and in my experience has been quite stable.

    Various Mac OS versions have had much the same experience when moving from an older version. Utility applications and repair tools (Disk Warrior and the like) require either patches or entire new versions, and while most mainstream applications continue to work just fine, the little (mostly free) applications and some device drivers take a while to catch up to the new OS. It took about 4 months for Brother to release a driver for the scanner portion of my multifunction printer that worked in Tiger, while everything was roses in Panther.

    For what its worth, I NEVER upgrade an OS, but always delete my partition and perform a clean install onto a freshly formatted and newly created partition, created and formatted by the OS installer’s own utility.

    So what does this have to do with Microsoft’s fortunes? Simply, you can’t just say Vista is a dud because upgrade sales are slow. If one measured an OS’ success on upgrades alone, then we’d have to say that Apple was in trouble as well because Tiger sales were underwhelming. We all know that is not the case, but most of those installed copies of Tiger out there did not come from a retail box, just as most copies of Vista come bundled on a new PC.

  7. Isn’t Microsoft already losing money on each Xbox sold? What’s another hundred bucks? 🙂

  8. jbelkin says:

    What should be mentioned is that MS has spent about $21 BILLION on the Xbox and made about $6 BILLION. That is a HORRIBLE way to do business anyway you slice it. THeir shareholders don’t seem to notice or don’t care because the the OS, Server & Office division deliver about $13 billion in cash a year. Basically, corporations and shareholders wildly overpay so MS can throw away $15 billion over the last 6 years on Xbox and that’s NOT including the latest $1.3 BILLION on the pseudo recall.

    There is no way to spin off the company because who would want a company so far underwater? The Xbox numbers were built with it selling in the 80 million range like the PS2 but the Xbox is really just a squat PC for PC gamers tired of driver & virus issues – beyond that core audioence, no one really cares – and now especially – what consumer is going to risk money on a box most likely to fail and with indication of whch is the new version and which are the old likely to break versions?

    MS has failed with every consumer venture since 1995 (Who spends $4 BILLION and loses to AOL as MSN did?) WAtch OS, Zune (outsold in 4 days by the iphone and MS is only announcing 1 million units shipped?

    People panicked when AppleTV “only” made Apple 20% profit … MS’ goals are simple – they only want the XBox division to be profitable for a year period … so far, zero for 7 in that effort, in fact, the XBox division hasn’t had a year in which they haven’t lost LESS than a BILLION dollars – Bill Gates, smart when it comes to corporate servers & software – completely clueless when it comes to consumers.

  9. Well, I suppose I can remind you readers that I once wrote an article suggesting that Microsoft’s stockholders might think about asking the company for a refund 🙂


  10. John Davis says:

    There was a time when the enemy was IBM and Microsoft was just a software company. At that time they made some pretty good software too. I used Word right up till version 5.1 before it went lulu.

    I wonder what went wrong?

    John Davis

  11. I wonder if we’ll see Zune version 2 in time for the Christmas buying season? The reports haven’t been all that great for Microsoft though — up to 70% of buyers are thinking of switching.

  12. steve says:

    Microsoft stock price has been relatively flat for several years.

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