- Windows revenue is on the decline and ChromeOS is now rearing its head.
- Microsoft is shaping its device business in sync with the growing need for mobility.
- Nadella’s vision of mobile first, cloud first is already taking form.
Microsoft Corporation's (NASDAQ:MSFT) revenue from windows has been on the decline for the last few years, and it’s highly likely that the trend will continue in the near future. PC sales are dropping, the older Windows operating system has no space in the mobile operating system world, and gone are the days when people were willing to pay for using the desktop version of Microsoft’s operating system. Microsoft still controls the desktop market, and the company recently ended the free subscription offer for Windows 10, making it even more difficult for them to make gains in the future.
But the threat to Microsoft’s free run in this market is very real. At one end the overall PC market is edging lower and lower; at the other end, Chromebooks from Alphabet Inc's (NASDAQ:GOOG) Google are on the rise. For the first time in history, Google’s low-cost Chromebooks recently outsold Macs.
While IDC doesn't typically break out Windows vs. Chromebook sales, IDC analyst Linn Huang confirmed the milestone to The Verge. "Chrome OS overtook Mac OS in the US in terms of shipments for the first time in 1Q16," says Huang. "Chromebooks are still largely a US K-12 story."
The State of Windows
Microsoft does not break out Windows standalone revenues anymore. Instead, it lumps it as part of its More Personal Computing segment that also houses Search Advertising and Device sales. Microsoft recorded $8.9 billion in sales from this segment during the fourth quarter, a 4% decline, while revenues for the full fiscal declined by 6.25%. Surprisingly, revenues from Windows OEM went up 11% during that period and Windows OEM non-Pro income increased a whopping 27%. To put it another way, they beat the consumer PC market because they sold more premium licenses.
Microsoft is still in control of the PC operating system market with more than 85% of desktops still running on Windows, and that’s very similar to Intel’s control over this market when it comes to the chips that sit inside our PC’s. During the recent earnings call, Intel Corporation (NASDAQ:INTC) noted clearly that the company remains cautious about its fortunes in the PC market where it is the dominant player, and the company has shifted its focus towards Internet of Things and Datacenter for its future growth.
It’s clear that the component manufacturer does not want to depend on PC sales to drive its future revenue and has already identified other growth areas and is investing heavily into that. If sales of PCs are going to decline or even level off, the odds are extremely high for Microsoft’s revenues to keep getting smaller and smaller from this segment.
With the gap between operating systems across devices becoming narrower by the day, Microsoft is speeding up that process by pitching the Continuum concept, which is essentially having a single operating system running across multiple device platforms.
But it is easier said than done. Apple has steadfastly refused to go that route, keeping iOS, macOS and watchOS as three separate entities, Google’s ChromeOS is getting stronger but still separate from Android, and Microsoft is possibly the only proponent of this cross-device OS phenomenon.
The Shift Towards Mobility
However, I contend that there will be a point in the future when the inevitable will indeed happen. As the difference between the capabilities of desktops and mobile devices disappears over time, PCs will further suffer - at least in their current desktop form. I fully expect mobile devices to become the new PCs. In the past, PCs and Macs were attractive because they somewhat emulated what IBMs massive machines were able to do - albeit in a smaller way. That’s why they became so popular, because they personalized the magic of computing.
But mobility has now taken center stage and mobile devices are now beginning to do the same thing - they are to us what PCs were to people in the 70s and 80s. Case in point: Apple Inc. (NASDAQ:AAPL) has already realized that 128GB is no longer enough for a top-end mobile device, and have released the iPhone 7 and iPhone 7 Plus in 256GB variants. And they’ve done away with the 16GB option altogether. Another example: Microsoft’s Surface Phone, which is rumored to be unveiled late in October 2016, may well offer a 500GB option.
As a result of these developments, in the future, the older Windows versions will become obsolete, macOS may see a merging of sorts with iOS, and Android tablets will become far more powerful and may even be seen in a new laptop avatar.
In an interview with Mary Jo Foley of ZDNet, this is what Nadella said:
"Because all of this comes down to how are you going to get developers to come to Windows. If you come to Windows, you are going to be on the phone, too. Even if you want to come to Windows because of HoloLens, you want to come to it because of Xbox, you want to come to the desktop, all those get you to the phone. It's not about let's do head-on competition. That will never work. You have to have a differentiated point of view." - Windowscentral
What is Microsoft’s Plan?
I think Microsoft bringing its older subscription/licensing revenue model into Windows 10 could be a ruse of sorts which will buy them enough time to build out their device and as-a-Service portfolios. The company is furiously releasing product after product from the Surface family: they’re looking to replace the top-end Lumia 950 and 950XL with Surface Phone, they’ve already launched Surface Hub, the Surface Pro 5 is coming out next month and, along with it, they might be announcing an all-in-one PC called Cardinal. In addition, they have already released the commercial version of HoloLens so they’re ready with the hardware for the virtual reality phenomenon sweeping across the globe.
On the services side there’s Office 365, Azure, Stream, Windows 10 commercial subscriptions, the upcoming Skype Teams and several other software products served on the cloud.
So it’s device mobility on one side and cloud-based offerings on the other. It is too much of a coincidence that this structure looks exactly like Nadella’s vision of ‘mobile first, cloud first’, wouldn’t you say?