Crashing PC sales send Microsoft profits tumbling

World's largest software firm's profits fall by a third, and revenues drop for the first time since 1986.

Last Updated: 31 Aug 2010

Microsoft's 17% slump in Q4 revenues (down to $13.1bn) and 30% drop in profits for the same period (to $3.05bn) were considerably worse than expected and highlight what a hard time the software giant is having at the moment. Full year results were also disappointing - profits down 17% to $14.6bn and revenues off 3% to $58.4bn. That’s the first annual drop in revenues since the firm was floated some 23 years ago.

Why has it happened? For starters Microsoft is particularly vulnerable to the downturn as it relies heavily on global PC sales and corporate IT spend. Both of these have been badly hit by the downturn, so it’s partly an unavoidable cyclical effect. Microsoft has responded well to this, cutting a whopping $750m in operating costs over the year.

But there are other challenges abroad which the firm has dealt with rather less effectively – the effects of competition and the changing nature of the IT business to name but two. Its Windows operating system may still reign supreme numerically, but for how much longer? It faces two serious challenges, firstly from the various homemade flavours of Linux-based OS’s out there, and secondly from arch-rival Google, which is developing its own PC operating system to go head-to-head with Windows.

Linux is free to use already, and the Google system is likely to be so, too. So the $64m question is, how much longer will MS be able to go on selling very expensive OS’s and equally expensive applications when its key rivals will offer 80% of the functionality, and cost next to nothing?

And as Cloud computing takes off (which uses the internet to deliver programs once held locally on your PC or laptop) the growth area will be simple and portable devices that neither need to nor are able to run high-spec, resource-hungry software like Windows.

MS has been badly caught out by this potential step-change in its business model, continuing to back new and ever-more bloated releases like the disastrous Windows Vista. Meanwhile its rivals are gaining traction in the Netbook market. Small, light, low-spec and cheap, netbooks have been the only growth area in PC sales during the recession, and although MS does provide a stripped-down version of Windows XP for Netbooks, it makes very little dosh on each sale.

But it’s not all bad news for Microsoft - although the results may be worse than anticipated, it’s still a hugely profitable concern, and making a healthy 25% margin in the teeth of the recession, to boot. 

What’s more, convenience, familiarity and ubiquity have always been at least as important to MS’s customers as cutting-edge technology, and that’s something which is unlikely to change overnight.  The blue screen of death is a way off yet.

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