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  • 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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