Microsoft's Windows Faces Erosion, Competition

Microsoft's long-running Windows franchises faces the twin threats of softening PC sales and consumers' rising preference for mobile offerings such as Apple's iOS.

Microsoft's July 21 earnings call revealed one little tidbit that could have executives in Redmond reaching for the anti-anxiety medication: revenue for the company's Windows and Windows Live Division declined 1 percent during the most recent quarter, even as other divisions reported significant growth.

It's hard to understate the importance of Windows revenue to Microsoft's overall fortunes. Windows 7 has sold some 400 million licenses since its October 2009 release. A galaxy of manufacturing partners and third-party vendors depend on the operating system to help sell their own products and services. And Microsoft needs those truckloads of Windows revenue to help finance less profitable initiatives, such as its "all in" cloud strategy.

During the earnings call, Microsoft executives attributed the dip in Windows revenues to an overall softness in the PC market. But according to at least one analyst, the company could be feeling pressure from consumers' rising preference for mobile devices, which run alternative operating systems.

"Microsoft's most mature franchise, Windows, is facing unprecedented challenges in the form of a new generation of computing devices, tablets and smartphones, which are rising in popularity and are not based on the Windows operating system," Allan Krans, an analyst with Technology Business Research, wrote in a July 21 research note. "Although Microsoft does plan to increase its presence in this space through the addition of ARM compatibility with Windows 8, Linux-based alternatives have already established significant positions in this space that will be difficult to sub-plant."

In other words, he added, "deployment of alternative devices across both the enterprise and consumer markets" is impacting "the vitality of Microsoft's Windows business."

Meanwhile, one of Microsoft's chief rivals is echoing that argument.

During Apple's July 19 earnings call, COO Tim Cook discussed the iPad's potential for cannibalizing traditional PCs. "Some customers chose to purchase an iPad instead of a new Mac during the quarter," he told media and analysts. "But even more customers chose to buy an iPad over a Windows PC. ... There's a lot more of the PC Windows business to cannibalize than the Mac."

Microsoft's solution is apparently the next version of Windows, which reports suggest will appear sometime in 2012. Internally code-named "Windows 8," the operating system will chuck Windows' traditional desktop and taskbar in favor of color tiles designed to be equally tablet- and PC-friendly. An OS capable of running on everything from small tablets to the largest desktop workstation, in theory, could help blunt the threat presented by other operating systems, including Apple's iOS (for iPhone and iPad) and Hewlett-Packard's webOS (now on tablets and smartphones, but scheduled to move to desktops and laptops).

Until the launch of Windows 8, though, the question is whether Microsoft's revenues from arguably its most valuable product will continue to slide.

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