Microsoft has no fast Windows fixes as PC sales crater

Microsoft can ride Windows 7 upgrades in the enterprise for a bit, but the dismal PC sales picture is worrisome for the company's flagship OS---especially if it can't get tablet and smartphone traction.
Written by Larry Dignan, Contributor

PC sales in the first quarter were dismal as tablets continue to eat away at laptops and desktops. That reality is likely to put Microsoft and its big bet on Windows 8 in the crosshairs in the quarters to come.

IDC and Gartner reported that PC sales tanked in the first quarter. IDC even noted that Windows 8 not only failed to give the PC market a boost but may have paused it. Worldwide PC shipments totaled 76.3 million units in the first quarter of 2013, down 13.9 percent compared to the same quarter a year ago, according to IDC.

Yes, Apple also saw unit declines in the first quarter, but gets a bit of a pass. Why? If the iPad cannibalizes the Mac at least it's in the same Apple family.

Debate: Can Windows 8 be saved?

For Microsoft, Surface, a bevy of hybrids and Windows 8 tablets aren't moving enough to offset a PC decline. IDC said:

PC industry efforts to offer touch capabilities and ultraslim systems have been hampered by traditional barriers of price and component supply, as well as a weak reception for Windows 8. The PC industry is struggling to identify innovations that differentiate PCs from other products and inspire consumers to buy, and instead is meeting significant resistance to changes perceived as cumbersome or costly.



But don't expect Microsoft to fall apart over the post-PC era just yet. Microsoft's Windows sales may outperform PC sales---at least for now. Here's why:

  • Microsoft can still ride the Windows 7 upgrade cycle in the enterprise. 
  • The end of XP support will boost the corporate upgrade cycle. 
  • The enterprise Windows license is roughly double what an OEM pays selling a PC to a consumer.

Barclays analyst Raimo Lenschow said:

While most investors already knew the PC market was weak during the quarter, we believe the extent of the decline is a surprise. Excluding the recognition of deferrals (~$1.1bn) and our estimate of Surface revenue ($585m), we are currently modeling for Windows revenue of $4.612bn (flat y/y) this quarter. While this is clearly out of sync with the shipment data, similar to last year when Windows growth also outperformed PC shipments, the company should continue to benefit from the Windows 7 upgrade cycle in the enterprise, where the Windows license fee is approximately double what the company receives when an OEM sells a PC to a consumer. With the most recent data suggesting that ~40% of enterprise customers still need to upgrade from Windows XP, Microsoft should continue to see this positive mix benefit this quarter, thus helping drive Windows revenue growth higher than the very poor growth rate in PC shipments.

In other words, Microsoft Windows' Armageddon will be delayed.

However, the PC sales report is dismal and ultimately that spells pain for Microsoft. BCG analyst Colin Gillis downgraded Microsoft based on the theory that PC sales will continue to fall. Gillis said:

While we remain supportive of the quality and innovation of Microsoft’s software to power phones and tablets, traction in the marketplace remains lackluster. Tablet growth is estimated by IDC to reach 190 million units and post 49% growth. We estimate that smart phone shipments could exceed 1 billion units in 2013, above IDC forecasts of 918 million as emerging countries increasingly turn to inexpensive Android phones for their mobile computing needs. Microsoft’s minimal participation in these markets is becoming an increasingly urgent problem that may be prove difficult to reverse.

Gillis added that Google's Chromebooks are also a worry. Even if CEO Steve Ballmer is tossed, Microsoft will have issues. "There are no fast fixes for Microsoft to the current shift in computing trends," said Gillis.

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