Microsoft's Best Products Are Now Their Most Profitable

With the Microsoft earnings report this week, the big news was the first ever year-over-year decline in quarterly revenue for the software giant. But to me the interesting news in the report was the fact that the company's servers and tools unit surpassed the client unit (which includes the Windows OS) to become the biggest profit area for Microsoft. Servers and tools was also the only unit to post a revenue gain over the same quarter last year.

Jim RapozaWith the Microsoft earnings report this week, the big news was the first ever year-over-year decline in quarterly revenue for the software giant.

But to me the interesting news in the report was the fact that the company's servers and tools unit surpassed the client unit (which includes the Windows OS) to become the biggest profit area for Microsoft. Servers and tools was also the only unit to post a revenue gain over the same quarter last year.

Now others have spoken about the effects on Microsoft's growth this trend will have and its potential ability to shield the company from the volatility of consumer markets.

But as a product reviewer I found this development interesting for one simple reason: When it comes to Microsoft products, servers and tools is where the highest-quality Microsoft products live.

If you were to talk to all but the most rabid anti-Microsoft folks about the company's servers and development tools products, you'd hear a lot of respect given to these products (if sometimes grudging respect).

On the developer side, Microsoft's tools have long been considered among the best in the business. The attention that Microsoft has lavished on developers has made this an area where the customers really feel like they are being listened to. And this has led to products such as Visual Studio that are well-regarded even outside of the Microsoft developer market.

And on the server side Microsoft products are also doing well when it comes quality. SharePoint Server has quickly become the go-to product for businesses that want to add collaboration, social networking, content management and a whole host of classic Web 2.0 functionality for their business. I've even spoken to companies that are mainly not Microsoft shops that have brought in a few Windows servers specifically to run SharePoint.

And this move has been made easier by the big jump in quality that has taken place in the Windows server products. Windows Server 2003 led the way in moving beyond the classic security and stability problems that had plagued older Windows servers, and this led to Windows Server 2008, which many believe to be the best Windows operating system currently available (so much so that there are guides on how to run Server 2008 as a desktop OS).

This improvement on the server side is especially interesting given that, just a little over 10 years ago, one could have made the argument that servers were the lowest-quality Microsoft products. The situation got so bad that at one point I and my colleagues in the Labs here recommended that companies get rid of their Windows NT and Windows 2000 servers (and especially get rid of the IIS Web server) as they were too prone to massive security failures.

And here may be where the biggest lesson for Microsoft lies. In just under 10 years the company was able to completely turn around the fortunes of its server products by paying attention to customer needs, fixing massive problems and focusing on providing an overall high-quality product. If Microsoft can do the same thing for its client and other units (and based on the first looks at Windows 7 it may be starting to head this way), the future for Microsoft may end up being brighter than it looked right after this recent disappointing earnings report.