Microsoft Windows franchise spurs analyst debate over future

Microsoft Windows franchise spurs analyst debate over future

Summary: Microsoft's Windows business can bounce back with modest tablet share gains and PC stabilization. But lower average selling prices may crimp profits.


Is Microsoft's Windows unit, likely to become the operating systems division, fighting a losing battle with falling profit margins or a cash cow that can bounce back if just a little goes right?

The answer depends on what analyst guesstimate you want to believe. Stifel Nicolaus analyst Brad Reback downgraded Microsoft shares on Tuesday based on the theory that Windows average selling prices are going to fall. As those prices fall so does Microsoft's profitability. Analysts were spooked by Microsoft's fiscal fourth quarter, which indicated Windows weakness.

Reback said that Microsoft will aim to boost demand for Windows 8, gain tablet share and entice corporate upgrades and drive average selling prices from about $43 today to $39 in fiscal 2015. He said:

We are increasingly more concerned that pricing pressures and elevated Windows sales and marketing expenses could be a meaningful headwind to revenue and EPS growth in coming years.

Reback noted that Microsoft's Windows business is driven by enterprise agreements and challenged by consumers. Bottom line is that Microsoft's enterprise side of the house can't keep prices up forever.



On the flip side, Morgan Stanley analyst Keith Weiss noted that Microsoft just needs a few likely bounces to restore Windows profitability.

A tough FY4Q13 brought investor concerns on the durability of earnings from the Window’s division to a head. Our deep dive analysis suggests improving PC shipments combined with modest tablet share gains should stabilize the Windows division EPS contribution and improve sentiment.

The big question is whether Microsoft can gain modest tablet market share. Weiss added that Office and some inroads to tablet buyers can stabilize Windows profits. Corporate buying could also help tablet share. Overall, it's likely that Microsoft can achieve modest gains in tablets.

As for PC shipments, Weiss' scenario didn't include a return to growth days for laptops and desktops. Instead, the PC market just has to stabilize. That outcome also seems likely, but it's unclear whether the PC market has bottomed. A move from XP to Windows 7 and Windows 8 in the enterprise will hold the PC fort, but once that migration is complete we'll really know what the post PC era looks like for Windows.



Topics: Enterprise Software, Microsoft, Tablets, PCs, Windows

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  • here is hope msft doesn't make it

    Into mobile. Who wants another ie debacle on their mobile device? Simply put, any mobile called 'windows' spooks consumers who have had it with the windows of the PC.

    Msft ceo don't seem to get that point, and hopefully they don't.
    • They have had it!

      Odd that - Windows being so TERRIBLE and all - there are 1.5 BILLION Windows desktops/notebooks running world wide. In the mean time, the popular alternatives are Mac OS X (at 8% market share) and a very fragmented Linux segment (at under 2% market share).

      Microsoft may not be able to compete in the tablet market but a lot of Android tablet makers would love to have Microsoft's Surface RT sales figures.
      M Wagner
  • It's about price & apps...

    I agree that the first Windows tablets were over-priced. Not because they weren't worth the price (hardware-wise), but because it was a new entrant into a competitive market and consumers simply don't understand what "Windows RT" is. I mean, try to explain the different between RT & 8 to the average person... and their eyes start to glaze over. lol

    Also, Microsoft is fighting the "app war" on their other guys' turf, constantly trying to play catch-up. Meanwhile, they've got a perfectly good gaming studio NOT producing exclusive, kick-*ss games for Windows Phone & tablets. Why the h*ll not?!? Imagine if, right now, Windows Phones & tablets had 20 high-end, exclusive Xbox titles like Spartan's Assault... instead of just one? Suddenly, Instagram & Pinterest seem less interesting, less essential. They've sold 75 million Xbox consoles, so why not attract the people who like those games to the Windows Phone & tablet platforms? It's so obvious!

    The problem with Microsoft is not the software, or the engineering, or lack of talent... it's that the guys at the top aren't playing to their own strengths. XBOX is the COOLEST brand that Microsoft owns... and, yet... they rarely leverage it. It's dumb.

    Microsoft can win the app war by creating exclusive Xbox games to the platform. Microsoft shouldn't have to beg for a Facebook app. Facebook should WANT to be on the Windows 8 & phone platforms... because consumers are clamoring for the next exclusive Xbox game.

    That's how they're going to win this. Geez!
  • If you build the games... they will come...

    If I were Microsoft CEO for a year, I'd immediately order a "gaming Manhattan Project."

    I'd say:

    "I want 20 exclusive, kick-*ss Xbox titles for Windows Phone & tablets one year from now... or you're all fired. Carry on."

    Angry Birds?!? Screw Angry Birds!!! We've got Halo, man!!! lol
    • you think

      Everybody in the world is into games? Or is anybody interested in playing games on a touch screen?
      • Not everybody, but enough. At least 75 million...

        I didn't say either of those things, but nice try.

        My point is that smartphones are really only good at a few things: checking email, checking texts, looking up a movie time, and... playing games when you're bored. For a lot of people (not all), the games are the most important part. Therefore, having exclusive games could be a way to draw people to the platform while Microsoft tries to catch-up in the other app war.

        Exclusivity is a way of offering something that the other guys cannot... and thereby attracting consumers to the platform. Microsoft was using the same strategy with Office... but since most people don't do much productivity work on their phones, Office wasn't the big draw they thought it would be.
    • Microsoft

      Their biggest revenue streams are Office and Windows. The xbox was originally sold as a loss leader because Microsoft knew it couldn't get into the gaming market any other way. And there simply isn't that much money to be made gaming when compared to the corporate world.
  • Given that MSFT has declared war on everyone ...

    ... Intel (ARM), OEM partners (Surface), developers (30% tax), Office users (subscriptions) ...

    ... I would like to see ADBE port their tools to *IX and/or ARM+GPU. I'd like to see the need for Windows driven down to Office, then I could marginalise it on a small number of machines (or virtualise it to one).
  • Commoditization of the OS (and office suites and gaming and databases ...)

    Been saying for a long time - the big proprietary players are fighting a desperate (and ultimately doomed) battle to hold on to their markups for software that has become as near a commodity as software can be.

    MS desperately tries to enforce lock-in to Windows and Office and SQL Server (through legal and sometimes quasi-legal means) to prevent people from recognizing that jumping to Linux and Open Office and PostgreSQL/MySQL is NOT that hard (and reduces costs a LOT).

    Apple desperately tries to lock you in via proprietary MMS and video streaming and walled-garden app installation and iTunes (when fully capable alternatives exist that wouldn't lock users in), to keep Android from eating their lunch. Too late on that one.

    HP and IBM etc. keep charging for system management suites that do no more than open source alternatives. VMWare keeps charging for ESXi when KVM and Xen have cught up on features.

    And all of them are finding that Adam Smith is winning out, and they have to reduce margins in order to not be buried by an avalanche of defections.

    Good luck with that. Only a matter of time. Software vendor landscape in 15 years is going to be very different.
  • Hmmm

    "On the flip side, Morgan Stanley analyst Keith Weiss noted that Microsoft just needs a few likely bounces to restore Windows profitability."

    I believe you meant to say "lucky" instead of "likely." Outside the office (for the time being) nobody wants/needs windows anymore except the geeks . . .
  • Windows 8, whatever...

    I absolutely hate Windows 8. Put Windows 8.1 out there for the masses. There is NOTHING that can be done to Windows 8 (i.e. Windows 8.1, 8.2, etc.) to make me use it and like it. Microsoft is on the road to being insignificant.
    • LOL, because YOU hate Windows 8

      ..."Microsoft is on the road to being insignificant" because you hate Windows 8? For no good reason, I might add.

      I wish all the haters would get over themselves. The interface for the start menu is changed, yes. Under the hood though, Windows 8 is the best, most efficient, fastest OS Microsoft has ever done by a long shot.

      There's a reason why PC gamers are being quick to pick up Windows 8, games run much better than on Windows 7 (or any previous version of Windows).
  • absolutely hate Windows 8

    I agree...
    Windows 7 does everything I need...
    I wouldn't run windows 8 again or 8.1 or any other version...
    I think the Metro UI is a waste of time... There are no apps out there that I want or need...
    I don't like the plain looking desktop without aero effects...
    I don't think Windows 8 would catch on even if it was given away for free...
    Chimera Obscura
  • Microsoft's future

    None of the big three, Apple, Google or Microsoft cares about leaving their users with a warm, fuzzy feeling. Especially in light of the fact that they all are in the pockets of the NSA, I would have rated all three equally contemptible. However, Microsoft has decidedly raised the bar with Windows 8x and Surface RT. These were not shots fired across the competitors' bow. They were Microsoft shooting itself through the temple.

    Any rational person at Microsoft should have realized that Windows 8 was as big a dud as ME and Vista. Instead of updating it, they should have let it die the agonizing death it deserves. Doesn't anyone realize that PC desktop (especially) and notebook sales are in free fall. It's not the economy, Stupid. It's people's reluctance to adopt that ugly pig of an OS. It wouldn't hurt MS to find someone, anyone to replace Ballmer.
  • Oh, this is just silly.

    Microsoft's stock price has bounced around between $37.00 and $44.50 over the last year, with an average of $43 and somehow, this means that the company is going to go down the tubes over the next two years? Oh gimme a break!
    M Wagner
    • Re: somehow, this means that the company is going to go down the tubes

      That depends: what price did you buy them at?
  • Microsoft Must Become Less Profitable

    Growth in the Windows market has become dependent on OEMs willing to sacrifice their profit margins in order to fatten Intel and Microsoft. They may have had no choice before, but now there is a new growth market where lots of OEMs are actually making money: Android. So we see hardware makers, one after another, gradually tapering off their Windows efforts and concentrating more on Android.

    Microsoft could possibly delay this trend by cutting the price of Windows. But I doubt it can reverse it, because Windows is simply too inflexible to adapt to modern needs.
  • Microsoft Windows franchise spurs analyst debate over future

    Microsoft just reported they have 16 billion dollar businesses. Their is no debate that they have a strong future.