Strong Microsoft Sees Tablets Bite Into Windows Sales

Robust sales of Office productivity software and Kinect video-game devices drove record income for Microsoft's second fiscal quarter of 2011. But Microsoft's profits dipped, led by a 30 percent decline in Windows 7 sales as tablets -- primarily Apple's iPad -- cut into PC sales. An analyst said Microsoft wants to shore up PC sales before plunging into tablets.

Microsoft's record income of $19.95 million for its second fiscal quarter of 2011 was higher than analysts' estimates, thanks to strong holidays sales of Kinect video -game devices and robust interest in Office business productivity software.
But profits fell to $6.63 billion from $6.66 billion in the same quarter last year, in part because revenue from the company's signature product, its Windows operating system, fell nearly 30 percent. The decline shows a slowdown after a boost from the July launch of Windows 7, and the company acknowledged that the burgeoning tablet market took a toll on sales of PCs that run Windows.
Profits from Windows fell to $3.3 billion from $5.4 billion in the same quarter last year. Microsoft said a total of 300 million licenses for Windows 7 have been sold, making up 20 percent of the PC operating-system market.
The company said Office 2010 is the fastest-selling consumer version of Office in history, 50 percent higher than Office 2007 at the same period after launch.
Big Win in Gaming
Revenue from Microsoft's Entertainment and Devices division grew 55 percent with the success of the Kinect motion sensor driving sales of the Xbox 360 gaming platform as well as games and subscriptions to Xbox Live.
"We are enthusiastic about the consumer response to our holiday lineup of products, including the launch of Kinect," said Peter Klein, Microsoft's chief financial officer. "The eight million units of Kinect sensors sold in just 60 days far exceeded our expectations. The pace of business spending, combined with strong consumer demand, led to another quarter of operating-margin expansion and solid earnings-per-share growth."
But the decline in Windows is noteworthy as analysts study the effects of the tablet revolution. Klein said in a conference call with analysts Thursday that tablets "created a bit of a drag on the consumer side," according to Market Watch.
"The reality is that people are buying tablets instead of buying a new PC," said technology pundit Rob Enderle, who noted that surveys have found overall consumer spending on technology has been steady as tablet sales soared. "There may be some deferral, maybe people plan to buy a PC later on, but right now tablets are taking a chunk out of PCs."
For the most part, Enderle said, the tablet surge means Apple's iPad. "The iPad is the only thing selling high-volume," he said. "Even with the [Android-powered] Samsung Galaxy Tab, the sell-through is just a small fraction" of the market.

Cautious on Tablets
Microsoft has demonstrated some tablet devices running Windows, but is expected to wait until it releases Windows 8, perhaps later this year, to make a serious push into the tablet market.
"What they are going to do first is try to convince people the grass isn't always greener" with tablets instead of PCs, said Enderle. "Tablets are not good at creation, but they are great at consumption." Future tablets will be better at productivity as they move from single-core to multi-core processors, allowing more multitasking features, he added. For example, a user might check e-mail and run a virus scan while watching a movie and browsing the web with no slowdown in function.
"The reason Microsoft is going slower is because they want to take their base with them, which takes longer," said Enderle.
Microsoft announced it has sold two million licenses for Windows Phone 7, which launched on nine devices in November in 30 countries with 60 operators. It also said developers are adding Windows Phone 7 applications to its marketplace at a rate of more than 100 per day.
But the latest data from comScore show Windows mobile use declined slightly in August through November, from 10.8 percent to nine percent of the U.S. smartphone market, trailing Apple's iOS (25 percent), Google's Android (26 percent) and Research In Motion's BlackBerry (33.5 percent). That rating period only included a few weeks of availability for Windows Phone 7.