Microsoft's domino effect: Poor PC sales could unravel company

Poor PC sales and lackluster Windows 8 sales could have a significant knock-on, domino-like effect to the rest of the software giant's business.
Written by Zack Whittaker, Contributor

Microsoft's entire business ultimately rests on PC sales, and PC sales are dwindling globally pretty badly.

The knock-on effect to the firm's entire business could be hit in the coming quarters. Poor PC sales mean fewer Windows licenses sold, and that in turn could lead to a scaling back of business and enterprise servers offered by the company.

All the major technology players are all at the prom, but nobody wants to dance with Microsoft. It's the geeky kid in the corner, sobbing its heart out.

Is Microsoft's Steve Ballmer still smiling? (Credit: CNET)

Microsoft's worries all rest on the mere mortal PC. The software giant has already made steps to alleviate some pressure on the PC market by offering its own post-PC tablet in two forms, the Surface RT and Surface Pro tablets, but is also offering a post-PC capable operating system for the wider PC market and tablets, which should theoretically fill the gap.

Microsoft tried, but something isn't working. The platform is crumbling; the ecosystem isn't being capitalized upon. The worry is that the decline in PC sales could hit other areas of Microsoft's business. PC sales hit Windows sales and Office sales, therefore ultimately server software sales.

And that's where it could all unravel.

1. PC sales are declining, Windows 8 isn't helping 

But research firm NPD said that in the first four three weeks (and one day) following the launch of Windows 8 ending November 17, sales of Microsoft-powered PCs fell 21 percent from a year earlier. Desktop PC sales are down by nine percent, while notebook sales down by 24 percent.

ZDNet's Mary Jo Foley notes that this could be just history repeating itself. Microsoft sold more "standalone Windows 7 software units" during its first week, but Windows 7-based PC sales were lower than they were with Vista. 

Microsoft and PC manufacturers have a vastly symbiotic relationship. PC makers build the computers that Windows sits on, and Microsoft providers the software. But as PC sales are declining in favor of post-PC devices, the other half in the relationship has to try and spur on exciting new software in a bid to revitalize PC sales.

All in all, 40 million Windows 8 licenses have been sold to date, putting it far ahead of Windows 7 sales in the first month. Analytics firm StatCounter says this translates to 1.31 percent of the market compared to Windows 7's first month, while rival Net Applications says Windows 8 is installed on 0.45 percent of all new computers in the first month, double that of Vista's but a far distance behind Windows 7's initial uptake.

It's not catastrophic, but it's not great. Other factors play into the fold. 

2. iPads, Android tablets are eating away the consumer, BYOD market 

This hasn't been a sudden, overnight shift away from the traditional Microsoft-PC combination. The post-PC shift was upon us a year ago and really took force this year. 

PC sales are down nearly 10 percent worldwide year-on-year. It's not that overall device sales are down due to poor macroeconomic conditions or weak currency -- it's surely a factor -- but the shift towards tablets, smartphones and "phablets," or part-phones, part-tablets, is pushing ordinary PCs out of the limelight in favor of post-PC devices.

IDC estimates that in the smartphone market, the BlackBerry will crumble in favor of iPhones and Android devices. By 2016, iPhones and iPads along with Android devices will rule the roost. It's clear to see that bring-your-own-device, (BYOD) employees are shifting away from the more consumer-friendly devices with business appeal. The iPad is a perfect example of Apple not pushing enterprise factors on the enterprise, but allowing them to arrive to their own conclusions over time. 

Apple sold 14 million iPads in the last quarter alone, and sold 4.9 million Macs. In total, that's nearly 19 million devices. In comparison, Lenovo generated 13.7 million shipments, an increase of nearly 10 percent year-on-year, but the rest of the PC market suffered massive declines

Microsoft is expecting 3-5 million Surface tablets to be shipped this quarter. It's clear to see from previous ZDNet crowdsourced research that Microsoft may expect significantly more Surface devices, but it won't fully plug the gap left by the dwindling PC market.

3. Developers are reneging on Microsoft's platform

It's still early days for Windows 8, and to be fair there's no easy way to quantify the claims as actual fact that developers are leaving the Microsoft platform in droves. But developers are beginning to look elsewhere to other sources, and it's a better time than ever following Barclay's carte blanche of the iPad tablet in the enterprise.

One thing is clear: Microsoft's app platform is hardly a hotbed of activity -- a recent report suggested Microsoft had 20,600 apps in its Windows 8 Store -- and Microsoft no longer has the healthy (albeit large) ecosystem of developers it once had.

It all boils down to the competitors again (see the previous point). Many developers are considering whether to go through the heartache of retooling and re-developing their apps for the 'better' platform (or at least the most popular, enterprise-grade platform): the iPad.

Loyalty among Microsoft developers is fraying. Compared to a year ago, it's far easier to appease the BYOD crowd with iPad-ready apps than it is to stick with Microsoft's platform.

The fact is, the vast majority of Windows software is private and outside the app store ecosystem. Microsoft's dominance in the private space isn't changing much.

But Microsoft and Research in Motion's platforms are being shut out by developers because traditionally, hobbyists would focus on the iPad and Android ecosystems.

The application development shift is becoming more enterprise sponsored, in that a business plan has to sign off on an application, and will only do so if they know where the money is. The money is in the iPad and Android tablet market. Windows 8 and BlackBerry 10 will therefore likely be shut out in the cold. 

4. Windows Phone is going nowhere 

The 'perfect' companion to Windows 8 and Surface tablets is without doubt the Windows Phone platform, just as Windows Mobile was some years ago before it morphed into its present incarnation. But because Surface has yet to take off, despite its higher-than-expected sales orders from the start, it remains a hobbyist device and remains a far cry away from being an enterprise standard device.

If Windows Phone actually takes off, it'll likely be more by accident than anything else. 

BYOD employees remains focused on smartphones, but tablets still has yet to reach its peak. Analysts and research firms expect this to rocket in the coming years. 

Latest comScore figures peg Microsoft's mobile operating system at 3.2 percent, a month-on-month decline. RIM's heavy and consistent decline will likely see Windows Phone take over, despite its own falling figures, in the first half of next year. 

In spite of Microsoft's partnership with Nokia with the Lumia smartphones, it may not stop the company from falling out of the sky into the abyss of the smartphone ocean.

Considering how poor Lumia sales have been in the last year, Microsoft's only hope in order to revive its slumping smartphone division is to either build its own device or rest its hopes on more market leaders in the mobile space, such as Samsung, which has propelled Android sales through the roof -- to the point where Apple wants to sue the living daylights out of it.

5. The knock-on effect of poor Windows, Office sales could hit other Microsoft businesses

The ultimate knock-on effect here of poor PC sales, ergo poor Windows sales, is that Office will become less important. That is, unless Microsoft can continue its steady momentum into cloud-based services that offer document sharing and collaboration in the cloud as it has with Office 365.

But servers and enterprise software is where Microsoft makes the vast majority of its revenue. With long-term business contracts and licensing sales, it can guarantee a steady stream of revenue. Though, if Windows and Office dwindles in the face of rival hardware and operating systems -- notably with the post-PC curve -- Microsoft's back-end technologies will become less and less important.

Microsoft's Server and Tools division brought in more than $4.5 billion in revenue during the company's first quarter, and $5.5 billion from its Business division. Servers and enterprise tools are at the heart of Microsoft's business, but without Windows PCs to operate and serve, the firm's back-end software business could begin to crumble.

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