A Harsh Reality for Microsoft

January 22nd, 2009

In line with the expectations of the financial community, Microsoft’s earnings are slowing, and layoffs of 5,000 employees are in the offing. Can it get any worse for the world’s largest software maker?

In announcing the widely-expected decision, CEO Steve Ballmer blamed an 11% drop in quarterly profits on the tragic state of the PC industry. That, of course, is probably true as far as Windows is concerned. No doubt the current economic crisis contributed to Microsoft’s woes, but it’s also true that, despite dire predictions, Apple managed to hit record earnings during the last quarter.

While sales of Mac desktops were down, it simply meant that customers were choosing note-books instead. So overall Mac sales remained surprisingly high. Indeed, it does appear that Apple succeeded, in part, by taking away sales from Microsoft. That’s something that Ballmer is never going to admit.

Even worse for Microsoft, Apple didn’t succeed by undercutting PCs on price. In fact, Apple gets most of its Mac sales from products that cost well over a grand, which is certainly far above the sweet spot in PC pricing. So much for the claims that the alleged “Apple Tax” would ultimately do the company in.

Lest we forget, note-books are also more expensive than desktops, yet the former gets 71% of Mac sales. Imagine that!

It’s not that customers aren’t cutting back. It does appear that the cheaper iPods fared better during the holiday season, but when people want something for the long-term, such as a reliable personal computer, price isn’t always an object. And, yes, I maintain that the Mac is priced comparably to a name-brand PC with the same basic standard equipment.

What is also irking Microsoft is the fact that the clear failure of Windows Vista. Sure, Ballmer can point to the number of copies of Vista sold by dint of being bundled with new PCs. But lots of customers, particularly businesses, are busy dumping Vista and downgrading to XP. That has to hurt a lot.

Of course, Ballmer will put his best face forward, touting the great advantages of the forthcoming Windows 7, the operating system that will set the company free. Of course, he isn’t going to admit that the new version of Windows is just a warmed over version of Vista that, regardless, holds the promise of improved performance and offers some interesting interface changes.

Whether those changes are better or not is, I suppose, going to be decided as the public beta of Windows 7 is evaluated in the weeks to come. It’s telling, though, that the new taskbar is clearly ripped off from Apple’s Dock.

But what choice did they have? After all, Vista is a non-starter for businesses, and they would probably stick with XP indefinitely if Microsoft didn’t offer at least the promise of something better, even if the improvements are probably only incremental in nature. Yes, maybe Windows 7 will boot faster, sleep faster, and offer a decent performance boost over its predecessor. However, today’s PC hardware is also more powerful, so even Vista fares well nowadays, although running XP must seem akin to adding a much faster processor.

This doesn’t mean Apple is home free and eventually destined to supplant Microsoft. Even in a slimmed down form, Microsoft is still a formidable competitor. Despite the reality about Windows 7, Microsoft will probably spend huge amounts of marketing dollars to convey the opposite impression. What’s more, the early reviews seem quite favorable. Then again, the Vista beta got pretty good marks. It was only when the final versions were installed on regular PC hardware — not souped up boxes supplied by Microsoft — that its severe limitations were revealed.

So far as Apple is concerned, 2009 is surely going to be a rough year. It’s not just growing in a stagnant market, but convincing customers, the media and Wall Street that they’re perfectly capable of hitting home runs even though Steve Jobs remains on sick leave.

To be sure, Apple’s stock price is on the upswing once again, but it’ll take a long time for it to approach the record levels it achieved long before the morbid Steve Jobs death watch began, amid concerns about the state of his health.

As I said a few weeks ago, I think Microsoft’s long-term prospects don’t look too favorable. It doesn’t mean that the initial round of layoffs will be repeated or expanded in the months to come, nor that red ink is on the horizon.

But if Microsoft doesn’t make serious changes and start to recognize the cruel reality that its sunny existence has become rather cloudy, an inexorable decline may be inevitable, even if it takes five or ten years to happen.

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10 Responses to “A Harsh Reality for Microsoft”

  1. Andrew says:

    Actually, Vista is pretty decent these days. I run the 64 bit Business version on a Lenovo ThinkPad that is far less powerful than the whimpiest Mac and it does just fine. It has 2GB of RAM, but only a single core Celeron processor and Intel X3100 integrated graphics. Vista isn’t any slower on this PC than XP was.

    Vista hasn’t been a marketing success and it was a horrible OS when it was first released, but that was mostly the fault of poorly written drivers and incompatible applications that admittedly, come from companies other than Microsoft. The application that caused me the most grief in Vista was iTunes.

  2. Jim says:

    para. 5: “… gets 71% if Mac sales.” should be “… gets 71% of Mac sales.”

  3. AdamC says:


    Vista is decent but slow, very slow.

  4. Can you spell slow? 😀


  5. DaveD says:

    Microsoft’s gravy train (Windows & Office) is slowing down. There will never be another Windows 95 that made a big splash by turning Intel-based machines into Mac-like ones. Their continuing business plan is to primarily follow Apple’s lead. It was a good move for Apple to pause and take a long look at where Mac OS X is and where it is to be for years to come. You don’t see that kind of forward thinking at Microsoft. It is more an attempt of being a “jack of all trades and master of none.”

    NT-based Windows have become good enough. New Windows OS purchases have to come from new machines or new users. It’s hard to see Windows 7 as a “must-have” except for existing Vista users. Microsoft as a “sorry” gesture should provide them a free upgrade.

  6. Free upgrade? Dream on, my friend.

    You have as much chance getting a couple of million in bailout money from Uncle Sam. 😀


  7. Richard says:

    The harsh reality for M$ is not that netbook sales have canabalized sales of more profitable machines and OSes, but that the market it down and they have unwisely spent money on unproductive advertising. M$ is still a monopolist, like it or not. Walmart has removed Linux computers from their stores (still available online though) and some of the netbook manufacturers will not be bringing Linux machines into the U.S. market again anytime soon. The sales simply do not justify it. Consumers were purchasing netbooks with Windows in overwhelming numbers and the Linux machines have a disproportionate return rate.

    M$ should be grateful for the revenue from netbook sales. Without it, things would be even worse. XP is preferred to Vista in netbooks because Vista chokes them down due to its greater resource requirements (all that DRM takes a toll as well as the kernel being bloated). To keep Linux out M$ was “forced” to offer XP and appear to have succeed at this.

    M$ greatly needs to have a successful launch of Win 7 so that it will be ready when businesses and consumers begin buying again. When that happens, it will not be like years past because hardware is usable for a longer period of time and the IT crowd is more or less stable with XP even though it is not as easy to administer, particularly clean installs as Vista is for consumers. (Gee, wouldn’t it be nice if they got away from the kludgy registry that causes so much trouble?)

    M$ has been abusing businesses, requiring them to purchase new hardware with Vista installed (and thereby both collecting the revenue and inflating the Vista sales to publicize) and then they wipe the drives and install XP under their site licenses. It does not sit well when both parties know that Vista just does not cut it in the corporate environment.

    But where does this leave Apple? Good question. Opportunity keeps knocking at the door and Apple keeps saying “Go away! You’re bothering me!” One should think that the shareholders, who actually own the company, would eventually tell management to do something with these opportunities which represent a chance to increase both the value of the stock and the return on investment for them.

    It has been widely reported for many years that both computer manufacturers and corporations would very much like to have the option to use OS X, but intransigent, indeed recalcitrant, management has failed to fulfill the business purpose of any company, to make money for the shareholders. Nevertheless, Apple is still making money so it could be worse, even though it could be better.

    Microsoft, on the other hand, really does need to hit a home run with Win 7, even though it is nothing more than a patch job of their existing product.

  8. Vito Positano says:

    Hi Andrew,
    When you say that “Vista…was a horrible OS…(because)…that was mostly the fault of poorly written drivers and incompatible applications that…come from companies other than Microsoft,” what you should have said is that MS and you beat your chests over the robustness of the MS software model because it relies on third party developers who create a healthy hardware and software ecosystem for the MS OS to function properly so that you and MS can then exculpate MS when third party developers when they fail to support MS products and software fully.

    This allows MS to continue to say that Vista works well, conveniently forgetting that Vista is not an island, but dependent on others for it’s good operation. In other words, when all works well, you and MS tout Windows and when things go badly you blame Windows developers. You can’t have it both ways.

  9. Bill in NC says:

    Netbooks remain a significant challenge to both MS and Apple.

    MS must get far less revenue for a copy of XP on a netbook than Vista or Windows 7 on a traditional notebook.

    Apple also faces a loss on hardware as people pick netbooks instead of MacBooks.

    Netbooks used to be stuck with 9 or 10 inch screens, but now 12 inch screens are appearing.

    Those would make an excellent 12″ Powerbook replacement for around half the price of the cheapest MacBook.

    Certainly the Atom processor is no Core 2 Duo, but for web browsing and office apps it does just fine.

  10. Apple is setting some astounding numbers. How much did Apple and MS make last year? How many employees for each? What percentage of computers does MS hold versus Apple? And look how the dollars compare. Apple is in a very good position.

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