Microsoft Earnings, Windows Phone Talks Dominated Week

Microsoft's week was dominated by its quarterly earnings and a host of news related to Windows Phone.

Microsoft's week largely centered on its Oct. 20 earnings report, which suggested the company's predominant revenue model-traditional software sales providing the bulk of the billions, while online and cloud services continue to gain users at considerable expense-remains in force.

Overall, Microsoft reported revenue of $17.37 billion for the quarter ended Sept. 30, a year-over-year increase of 7 percent. Operating income, net income and diluted earnings per share all rose. Business software and Windows helped drive the increases in revenue. Microsoft also recently completed its acquisition of Skype, forming the communications company into a new division headed by former CEO Tony Bates; Skype software will eventually find its way into a host of Microsoft products.

A slightly healthier PC market seems to have buoyed Microsoft's bottom line, particularly in terms of Windows. During an Oct. 20 earnings call, Bill Koefoed, Microsoft's general manager of investor relations, estimated that the overall PC market grew between 1 percent and 3 percent during the quarter, overcoming a weakness in netbook sales. "We have seen the cannibalization of netbooks," he said, adding that Windows sales on traditional notebooks had risen 14 percent.

But online services still represent a considerable gray area for the company, despite Microsoft's "all-in" cloud strategy. Koefoed alluded to "monetization challenges" for aspects of Microsoft's Online Services division, although overall revenue grew 19 percent. Quarterly losses for the division totaled $494 million. Microsoft is depending on the data from its Bing search engine to help inform and refine the rest of its cloud services, and using its search-and-advertising partnership with Yahoo to help grow market share and manage expenses.

He also described himself as thrilled" with the progress of Office 365, Microsoft's cloud-productivity platform, but declined to break out specific subscriber numbers.

Earlier in the week, Microsoft CEO Steve Ballmer used a talk at the Web 2.0 Summit in San Francisco to make the case for Bing, arguing (as seen in a video of the talk posted on YouTube) that the search engine's progress was good "not just for share but for having enough data to continue to improve the product."

He then delved into Microsoft's progress against Google with cloud-productivity applications such as Office 365. "Our ramp rate of sold seats, it's got a nice trajectory," he said, "We've got a highly functional product that's highly available."

Ballmer also discussed Windows Phone, comparing it to Apple's iPhone: "You're going to have two phones sitting there, they're going to feel good in your hand." Even so, he suggested that Windows Phone's interface, based on a system of highly customizable tiles, would beat out the Apple iPhone's grids of individual applications. Windows Phone is "not seas of icons" he said, but puts "information front-and-center."

He reserved more ire for Google's smartphone offering. "It is very hard to be excited, for me, about the Android phones," he said, which is exactly what you'd expect from the CEO of Microsoft.

Microsoft hopes its new Windows Phone Mango update, which offers some 500 tweaks and new features, will give the platform the momentum it needs to combat both Apple's iOS and Google Android, which reign as the twin titans of the mobility market. Microsoft hopes that the combination of boosted software and new manufacturing partners can give the platform the needed momentum. One of those partners, Nokia, reportedly plans to show off its first Windows Phone devices at Nokia World in London, due to start Oct. 26.

Microsoft is already positioning Windows Phone to target the midrange of that market.

"We are dramatically broadening the set of price points in Mango-related phones that we can reach," Andy Lees, president of Microsoft's Windows Phone division, told the audience during the Asia D conference Oct. 19. "That's particularly important because going lower down in price point opens up more addressable market."

For a couple of months, rumors have circulated about a stripped-down Windows Phone OS code-named Tango, aimed at lower-cost hardware and developing markets such as India and China. If that actualizes and succeeds, of course, it could give Microsoft another solid number on its balance sheet. If Microsoft's competitors manage to shut it out of the midmarket, on the other hand, it could undermine Redmond's plans to become a substantial player in the mobility market.

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