Watch CBSN Live

Microsoft Saved by Office and Games. Yup, Games

It's quarterly earnings time for Microsoft (MSFT), and while the results were strong, they also showed shifts not only in the overall market -- Apple (AAPL) finally surpassed its longtime rival in quarterly revenues and profits -- but in Microsoft's continued revenue diversification. The company may still be heavily dependent on Windows and Office, but it continues to make serious headway in broadening its financial foundation.

It's a good thing for Microsoft, because one of its two traditional mainstays, Windows client, has been hammered. Year-over-year, last quarter's sales were down by 4.4 percent. Over the first nine months of fiscal year 2011, Windows revenue was off by 2.9 percent compared to 2010.

It's becoming a trend. Look at the previous quarter, which would be the last calendar quarter in 2010. Windows sales were down 29.7 percent year over year. That leaves two questions: Why are Windows sales off, and why does Microsoft's revenue keep rising anyway?

Smartphones and tablets are eating Windows
One temptation is to blame the iPad for weak Windows sales. Clearly it's a factor, but not the only one. Tablets and smartphones together, however, are closer to an answer.

While recently traveling through multiple airports, it was striking how few laptops and notebooks I saw in use compared to smartphones. Not that a handset or a tablet is a complete replacement for a full PC, but for what most people do, they'll do. And so people will pay less and get what they need -- plus they'll schlep less weight and enjoy better battery life. Fewer portable PCs means fewer copies of Windows.

Yet revenue is still rising
That's been coming for a while. But the big surprise is that Microsoft has managed to not only keep sales level, but grow them by more than 13 percent. To see what's happening, here's the segment revenue and operating income table with the addition of a percentage change column for both the quarterly and first nine month views (click to enlarge):

Windows server and tools was up a significant amount. Entertainment and device revenue for the quarter went up by nearly 60 percent. The business division -- Office, but also accounting software and other products -- jumped by 21 percent.

Look at the results over the first 9 months and the non-Windows client growth remains impressive. And that underlies the change of a different ratio: the percentage of total revenue that Windows, Windows server, and Office represent:

Over the first 9 months of FY2011, Microsoft has brought its dependence on the old cash cows down to 82.1 percent. That may be the lowest it has been in many years.

Now factor in the deal with Nokia (NOK), continued growth of Bing, and whatever else the company has up its sleeve for gaming, and you can see where Microsoft is going. the company may not be able to walk away from Windows, but these are some good initial steps. And necessary ones, given how far behind Microsoft is on the tablet front.


Image: morgueFile user luisrock62, site standard license.
View CBS News In