Microsoft blames netbook appeal, marketing costs for Windows drop

Microsoft's planned layoff of 5,000 employees over the next 18 months is what most company watchers are focused on today. But performance of the Windows client division is also sure to be under the microscope, too.

Microsoft's planned layoff of 5,000 employees over the next 18 months is what most company watchers are focused on today. But performance of the Windows client division is also sure to be under the microscope, too.

For the three months ending December 31, 2008, client revenue was down eight percent, compared to the  same quarter a year ago. OEM revenue -- the money Microsoft earns by charging its PC maker partners a set amount for each copy of Windows they preload on new systems -- was down $465 million, or 12 percent. OEM license units were down one percent, according to the company.

From Microsoft's 10-Q filing on January 22:

"The decline in OEM revenue reflects an 11 percentage point decrease in the OEM premium mix to 64%, primarily driven by growth of licenses related to sales of netbook PCs, as well as changes in the geographic and product mixes. Revenue from commercial and retail licensing of Windows operating systems increased $113 million or 19%. Based on our estimates, total worldwide PC shipments from all sources was approximately flat, driven by increased demand in emerging markets, offset by decreased demand in mature markets."

I am seeing some folks speculate that Microsoft's sales of Windows PCs at retail are what dragged down Windows client. But based on the statement above, that is not the case. It is more about the growing percentage of netbooks, for which Microsoft is collecting some amount less-per-copy for Windows than it does with full-fledged notebooks and PCs.

Many netbooks cannot run Vista, due to its higher resource requirements. But as Microsoft has demonstrated, they will be able to run a full copy of Windows 7. Microsoft is raking in from its OEMs less-per-copy for XP than Vista. What's unknown at this point is how much less it will charge PC makers to preload Windows 7 on a netbook vs. a notebook.

The other force dragging down Windows client, from the income side, was increased sales and marketing expenses. From the aforementioned 10-Q:

"Client operating income decreased primarily reflecting decreased revenue and increased sales and marketing expenses. Sales and marketing expenses increased $80 million or 19%, primarily reflecting increased advertising and marketing campaigns."

Microsoft spent an estimated $300 million for its "Windows Without Walls" print/online/TV ad campaign, which kicked off at the end of last year.

See also:

Larry Dignan: Netbooks are disruptive and wreaking havoc in the industry

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