Why two Microsoft cash cows are better than one

Why two Microsoft cash cows are better than one

Summary: Microsoft's third quarter for fiscal 2011 was a bang-up one for Office, and a not-so-great one for Windows. Luckily for Redmond, Microsoft isn't a one-trick pony.

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Microsoft's third quarter for fiscal 2011 was a bang-up one for Office, and a not-so-great one for Windows.

Some time during the past three months, Office 2010 moved from being Microsoft's "biggest consumer version of Office in history" to the "biggest version of Office in Microsoft's history." Meanwhile, Windows revenues declined four percent from the year-ago quarter with Microsoft still expected to be more than a year away from delivering a new version of Windows.

For years, Microsoft has been a two-trick pony. Even today, Windows and Office continue to bring in the majority of Microsoft's revenues -- revenus that have fueled the other businesses Microsoft is nurturing to help itself diversify its product base.

In the quarter that ended in March 2011, the Microsoft Business Division had $5.25 billion in sales, and $3.16 billion in operating income. Windows/Windows client had $4.4 billion in sales and $2.76 billion in operating income. Chief Financial Officer Peter Klein noted that consumer PC shipments, primarily netbooks, dropped 8% in quarter. The rise of tablets was to blame, in part, he said.

Windows sales have been mostly steady since the introduction of Windows 7 in October 2009. But this quarter's $4.4 billion is the lowest Windows/Windows Live revenues have been since just before Windows 7's introduction in fiscal 2010.

Windows/Windows Live revenues per quarter (in billions)

Q3 FY11  4.4  (Jan 11 - March 11) Q2 FY11  5.1  (Oct. 10 - Dec. 10) Q1 FY11  4.8  (July 10 - Sept. 10) Q4 FY10  4.6  (April 10 - June 10) Q3 FY10  4.7  (Jan. 10 - March 10) Q2 FY10  7.2  (Oct. 09 - Dec .09) ** Windows 7 launched October 2009 Q1 FY10  2.9  (July 09 - Sept.09)

There's still quite a bit of time left before Microsoft is expected to launch Windows 8. If Microsoft continues along its expected and usual trajectory, Windows 8 PCs and tablets aren't likely to debut until holiday 2012. Microsoft is really counting on strong business demand for Windows 7 PCs -- as well on new Windows 7 tablets to keep demand moving in the coming months.

Luckily for Microsoft and its partners, Microsoft's other cash cow, Office 2010, is picking up the slack.

Office division revenues per quarter (in billions)

Q3 FY11  5.3 (Jan 11 - March 11) Q2 FY11  6.0 (Oct. 10 - Dec. 10) Q1 FY11  5.1 (July 10 - Sept. 10) Q4 FY10  5.3 (April 10 - June 10) ** Office 2010 launched May 2010 Q3 FY10  4.3 (Jan. 10 - March 10) Q2 FY10  4.9 (Oct. 09 - Dec. 09) Q1 FY10  4.5 (July 09 - Sept. 09)

We don't know at this point when Microsoft will deliver Office 15, the next version of Office (the rumor is 2013), but the Softies increasingly have been diversifying the set of products that contribute to the Office division (Microsoft Business Division), with server-based products (SharePoint, Exchange, Lync), the cloud-based versions of those products (BPOS/Office 365) and the client licenses (CALs) of these products.

To be fair, Microsoft's Server and Tools business  -- and especially in the most recent quarter, the Xbox division, thanks to sales of the Kinect sensor -- have been acting as healthy cash calves themselves. (Server & Tools contributed $4.1 billion this quarter -- almost as much as Windows client.) The Online Services Division, plagued by Yahoo ad-platform transition problems, not so much...

The biggest questions in many Microsoft analysts' minds remain whether and how quickly Microsoft can count on products outside of the Windows and Office divisions to make up the shortfalls when market changes happen -- such as the netbook market tanking or the tablet market roaring off and leaving Microsoft at the curb. It was great for Microsoft that it had the Office division to fall back on this quarter. But if/when the Office feed bag starts to empty, will there be new Microsoft cash cows lined up to provide the milk?

Topics: Windows, Collaboration, Microsoft, Operating Systems, Software

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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36 comments
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  • No surprises here...

    This past two quarters saw a holiday season in which people were buying up iPads like candy and a subsequent launch of the iPad 2. It's no wonder netbook sales are down.

    That said, Microsoft has plenty of other strong businesses right now in the Server & Tools division. Exchange+Lync+SharePoint are stronger than they've ever been and their ties to Office are only going to improve sales for both.
    GoodThings2Life
    • RE: Why two Microsoft cash cows are better than one

      @GoodThings2Life

      Why on earth was this flagged?!?

      ZDNet: I hope your upcoming maintenance outage this weekend includes completely scrapping your crappy comment system.
      DeusXMachina
      • RE: Why two Microsoft cash cows are better than one

        @DeusXMachina<br>And now every post save one is flagged. By the time you read that, it should be at 100%.<br>ZDNET, your readers are petulant brats. Fix your damned comment system
        DeusXMachina
      • RE: Why two Microsoft cash cows are better than one

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        Shamrock12
      • RE: Why two Microsoft cash cows are better than one

        @DeusXMachina He is an envious with your succes :)<br>
        Good day, <a href="http://www.ofertareonline.ro">Termopane</a>
        termopane
    • RE: Why two Microsoft cash cows are better than one

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      andrewroy
  • Actually MS has 6 cash cows, not 2.

    6 different billion dollar businesses and more moving up to join them. Not bad to rake in 16B+ in the weak quarter in a bad economy. With windows phone taking off, bing steadily taking market share, and W8 tablets coming next year theyre in fine shape for continued revenue and profit growth. Wouldn't you rather have that to look forward to than what apple has with already plumeting ipod numbers and soon to plumet iphone numbers? It's going to suck to only have the ipad to hold onto when W8 and android tablets hit their stride...
    Johnny Vegas
    • RE: Why two Microsoft cash cows are better than one

      @Johnny Vegas
      umm, windows phone has already declined in consumer and developer interest according to the recent nielsen stats. The are throwing billions at Bing and really isn't going anywhere quick. No one will care about windows 8 tablets, in my opinion, anymore than any other. People want an ipad/android style interface which invalidates windows main advantage which is traditional desktop apps and legacy compatibility. People only use windows because it comes on about every PC you can buy. If apples #s are down its because people going android, which has surpassed apple in desirability.
      deathjazz
      • billions at Bing?

        @willyampz makes it hard to take you seriously. Lots of millions, but NOT billions. Do you even know what a billion is?
        sackbut
      • RE: Why two Microsoft cash cows are better than one

        @sackbut
        Is this the chart of billions you were looking for? http://www.businessinsider.com/microsoft-bing-losing-billions-2011-4

        I think we know what a billion is.
        symbolset
    • RE: Why two Microsoft cash cows are better than one

      @Johnny Vegas Excellent point. SharePoint is a billion dollar a year business, SQL Server is a billion dollar a year business. There are several other billion dollar businesses. Windows and Office are the most predominant because of the immediate familiarility with the consumer. Microsoft sold more copies of Windows 7 in the first 3 months of its release than apple has *all* Mac OSx PCs combined. However, the consumer facing side is just one small piece of a much larger cohesive offering.

      This does not include the eco-systems that these solutions provide either. It is estimated that ever $1 in SharePoint sales is $7 in VARs, LARs. SIs, and other participants. Those that decry Microsoft's success and want to see it fail have no idea just how devastating that could be on not just Microsoft, but whole industries.
      Your Non Advocate
      • RE: Why two Microsoft cash cows are better than one

        @facebook@...

        Sharepoint is a POS and the fact that it has huge implementation and support costs shows what a POS it is. It only has inertia becuase MS "includes" the CAL's in enterprise agreements. So you have 3/4 of the Sharepoint paid for. You just need the expensive stuff, the servers (lots of 'em) and programming.

        Compare that with other solutions which are cheaper, more flexible, and better.

        Exchange is a POS as well - great for SMBs but falls on it's A$$ in a large implementation.
        itguy08
      • RE: Why two Microsoft cash cows are better than one

        @itguy08<br><br>I can only assume that you have absolutely no idea what you are talking about.<br><br>Servers are rarely the expensive stuff. The SharePoint Server license is fairly cheap vis-a-vis its competitors like Documentum. <br><br>And, yes, Exchange is another billion dollar a year business. Your point that it fails on large implementations is counter-intuitive given that the majority of large implementations of mail infrastructures tend to be Exchange based. I have routinely successfully deployed both BPOS and Exchange on institutions larger than 30,000. I do not believe that you can call 30,000 clients a SMB.
        Your Non Advocate
      • RE: Why two Microsoft cash cows are better than one

        @itguy08,

        "Sharepoint is a POS and the fact that it has huge implementation and support costs shows what a POS it is. It only has inertia becuase MS "includes" the CAL's in enterprise agreements. So you have 3/4 of the Sharepoint paid for. You just need the expensive stuff, the servers (lots of 'em) and programming.

        Compare that with other solutions which are cheaper, more flexible, and better."

        What other solution compares with SharePoint?
        bmonsterman
      • RE: Why two Microsoft cash cows are better than one

        @facebook@...
        "I can only assume that you have absolutely no idea what you are talking about." That's a very safe and accurate bet!
        ItsTheBottomLine
    • Opposite Day on Planet Johnny Vegas

      @Johnny Vegas <br>"windows phone is taking off": Oh yeah? <a href="http://j.mp/gl6Fom" target="_blank" rel="nofollow">http://j.mp/gl6Fom</a><br>"bing steadily taking market share": <a href="http://www.businessinsider.com/microsoft-bing-losing-billions-2011-4" target="_blank" rel="nofollow">http://www.businessinsider.com/microsoft-bing-losing-billions-2011-4</a><br>"W8 tablets coming next year": <a href="http://www.zdnet.com/blog/gadgetreviews/steve-ballmer-unveils-the-hp-slate-tablet/10804" target="_blank" rel="nofollow">http://www.zdnet.com/blog/gadgetreviews/steve-ballmer-unveils-the-hp-slate-tablet/10804</a>
      symbolset
    • RE: Why two Microsoft cash cows are better than one

      @Johnny Vegas it very good that a different billion dollar businesses for moving up to join. <a href="http://www.paperprofs.com/writing-types/assignment/">Assignment</a> | <a href="http://www.paperprofs.com/writing-types/dissertation/">Dissertation</a>
      andrewroy
  • RE: Why two Microsoft cash cows are better than one

    @DevGuy_z

    Again, in the 50's, 60's you could have said the same thing about GM. "What's good for GM is good for the country" was a popular slogan.... Look at GM now.

    You also make the mistake that in the absence of Microsoft there would be nothing. There would be another company just as there were before MS. And those that have smarts will work on that technology.

    All companies at the top fall. It's just how hard and how long. And in MS's case they deserve it.

    We'll get along just fine without them.
    itguy08
    • RE: Why two Microsoft cash cows are better than one

      @itguy08 - you are still a lost ball in the tall weeds, but you are funny little snip. Enjoy reading your comic posts every day. Now back to the fry station with you, break is over.
      ItsTheBottomLine
  • RE: Why two Microsoft cash cows are better than one

    @pdq

    Worth noting , is the $10.7 Billion in profit that Exxon Mobile reported. Exxon Mobile left Apple in the dust a while ago. But...you see how it does not really matter? Just like Apple and Exxon are not in the same industries, Apple and Microsoft are only tangentially related. Apple is a HARDWARE company that focuses on consumers. Microsoft is a SOFTWARE company that focuses on business. Apple's success or novelty is actually only an opportunity for Microsoft to sell more Office for Mac software.
    Your Non Advocate