Earnings Redux: Microsoft Makes Less Money, But Why?

Yes, by now, you've seen the results of Microsoft's third fiscal quarter of 2008 (but here they are again, in case you haven't). And, by now, you've read the news stories, the blogs and the commentaries about how the software industry's money machine, which had been racking up massive quarters as far back as we can remember -- or at least for the last couple of years or so -- finally hit a wall.

Profit fell 11 percent in Q3 '08 compared to the year-ago quarter, and although Redmond beat analysts' expectations, the first reaction the market had late last week was to punish Microsoft's stock price. Especially weak were the company's client division (basically Windows and Office) as well as -- to our surprise here at RCPU -- the Microsoft Business Division, which is mostly made up of the Dynamics enterprise software line. Both divisions reported revenue shortfalls year over year. Microsoft's beleaguered Online Services Business (search, MSN, various "Live" things and stuff like that) showed a bit of revenue growth but also reported a bigger operating loss than what it had racked up in Q3 '07.

The disappointing news unleashed a flurry of theories as to why Microsoft didn't, after all, make more money in Q3. (On top of everything else, a little helpful accounting actually gave the numbers a bit of a boost, something that suggests that they could have actually been worse.) After scanning a slew of online offerings, we found that most observers pegged Microsoft's shortfall on one (or several) of a few simple factors:

• The end of Microsoft as we know it. Well, actually, maybe not; although we read a bunch of blog entries that referred to "reports of Microsoft's demise" and so forth being premature or inaccurate, we found that very few pundits, if any, actually reported Redmond's demise. Probably the closest thing we found to that sort of thing was here, and it's pretty innocuous. And, no, we didn't search the open source or Mac blogs. So, as often happens in the blogosphere, reports of the reports of Microsoft's demise were, um, over-reported. Or something like that.


• Vista. The weakness in the Client division had a few commentators pointing the revenue-shortfall finger at Vista, which is still failing to impress in the enterprise. There might be something to this -- Microsoft keeps claiming that it has sold 140 million Vista licenses, but as one intra-Microsoft blogger mentions, we've been hearing that figure for a while now. Are Vista sales slowing or stalled? Everything we hear and read suggests that they are...and that could be a big reason why the client division's numbers fell.


• Piracy. Microsoft has struggled to rein in piracy in developing markets such as China, and that semi-failure has led to all sorts of repercussions. For one thing, in an effort to fight both piracy and open source competition, Microsoft has been selling Windows and other software at discount rates in some foreign markets, meaning (duh) that it makes less money on those sales than it used to. Plus, Microsoft CFO Chris Liddell said himself that piracy is hurting Microsoft's sales worldwide. It seems to be playing at least some sort of negative role.


• The economy. Could this be the first sign of the slowdown we've all feared and dreaded and assumed we were already in? Maybe. That would certainly make for a convenient explanation for Redmond, and IDC has been making noise about IT budgets dropping. Of course, we're not convinced that IT folks would spend money on Vista even in good times.


• Yahoo. Mary Jo Foley cites a lack of focus on Windows and Office -- caused by Microsoft's obsessive-compulsive behavior toward Yahoo -- as a possible cause of Redmond's shortfall. This makes sense to us, not only because Mary Jo says it but because as followers of Microsoft news, we've been struck by how little Redmond has had to say lately that didn't have the word "Yahoo" in it somewhere.

Whatever Microsoft's problem was, or is, it's not time for partners or anybody else to panic. Some huge products are on the way -- think Windows Server 2008 and its buddies -- that should get everybody's cash registers ringing again. What will be interesting to track is the trend of Windows sales; did Microsoft have a revenue shortfall because of Vista or because Windows as an operating system really is going out of style? Or was there some other reason? Stay tuned; the next earnings report (Q4 and fiscal year 2008) is a big one.

Oh, and we're through making laws here at RCPU, just for the record.

Send your take on Microsoft's earnings, its future and all things Microsoft to [email protected].

Posted by Lee Pender on 04/29/2008 at 1:21 PM1 comments

IIS and SQL Servers Under Attack

Posted by Lee Pender on 04/29/2008 at 1:21 PM2 comments

Reader Potpourri: Google, Salesforce.com and Vista

Our e-mail of the week comes from Jim, a previous contributor whose area code correlates to good ol' Fort Worth, Texas, home of your editor's alma mater. Jim weighs in -- thoughtfully, we find -- on the Google-Salesforce.com hookup and the impact it might have on Microsoft:

"About your article, 'Microsoft and Google: Another Patriots' Day?', and online applications, my thought on it has always been that Microsoft has a non-breakable advantage because of the macros (VBA) in Office. Businesses of all sizes around the world have proprietary Office-based applications they either developed themselves or had developed, giving them an edge on competition that they do not wish to give up or redevelop. My evaluations after using OpenOffice and Google Apps is that I find them lacking since they cannot make use of existing Office macros (OpenOffice can work with very simple macros). When you include regular add-ins like XLAs and DOTs, plus COM add-ins and managed code add-ins, Google apps, OpenOffice and others just can't compete in the business world with Office.

"Also to be considered in the online application war is what effect application virtualization will have. I have been investigating a number of those and am impressed. With VMware buying Thinstall, Microsoft purchasing SoftGrid and Calista, Citirx XenApp, Endeavor's JukeBox and various others, plus continued increases in bandwidth, application virtualization will be major technology. One can have rich applications acquired via the Web -- which run just as well as if installed -- cached for offline use and potentially brought up as one needs them or for a longer period. These just may make Google Apps and others moot."

Wise words, we'd say, Jim, and we're not just showing Fort Worth-bias here (although we do have a pretty strong one). The app-virtualization angle is especially interesting, as that technology could potentially negate or at least diminish some of the advantages of hosted applications. As for those macros in Office, we're right there with you -- a product as familiar and universal as Office isn't going to go away any time soon. We have a feeling that both Google-Salesforce.com and Dynamics CRM Online-Office will find plenty of success in a growing market for SaaS.

While we're doing this, what would a reader mailbag be without a couple of comments on (you guessed it) Vista? We've had more e-mails about the beleaguered OS than we can run here, so here's a sampling of some of what you've sent. Bob starts us off with a bit of domestic trouble caused by Vista. Is there any problem this OS can't cause?

"Before I will consider buying new hardware, I will replace failed processors, motherboards, etc. before I ever go with Vista. For my personal PC, one of the better Linux versions is a real possibility. For my old HP laptop, I am guessing I can get by for years on XP. For my wife's system, failure means rebuild the hardware before I replace XP. She hates changes, and Vista's continued security prompts and incompatibilities are impossible. I got in enough trouble when I updated her anti-virus software (free version) with Kaspersky 7.1 and too many prompts really ticked her off. I would bet that XP and Kaspersky are much more secure than Vista, too."

Hey, Bob, we hear you. You've got to keep everybody happy at home. Just call XP the Dr. Joyce Brothers of operating systems. (Is that reference too old? Should we have gone with Dr. Phil?)

Nick sounds pretty frustrated, too:

"I'm running a dual-boot with XP and Vista. If Microsoft doesn't pick up the speed getting Vista to rock, I'll most likely go with a Mac. I'm tired of purchasing Microsoft's 'in-betweeny' software like Me and now Vista. Perhaps I'll go with an ESX Server and run Mac Leopard or that dreadful penguin junk. No more for me..."

But enough of the personal stuff. Tom's got real problems with Vista:

"My biggest client's wife bought a laptop with Vista installed. She had a really great home network with a couple of wireless print servers, a Small Business Server 2003 in the basement (for her photos and music), a Media Center PC and high-speed Internet (FiOS). Guess what? The wireless print server wanted to install drivers, but they weren't Vista-compatible. The laptop couldn't see the server, so she couldn't get e-mail through the Exchange Server. The Vista unit could see the Media Center PC but spontaneously rebooted during the first file transfer between the two. I ended up calling Microsoft again. I ended up quitting in vain, again. I ended up with egg on my face, again. So, yeah...keep XP! I can't afford Vista. I can't afford to lose any more clients!"

Yeesh, now that does sound like a nightmare. Wayne, however, is stepping in as the voice of calm, telling us not to worry; Microsoft will extend XP's life, he says:

"I've said all along that XP is the best OS that Microsoft has had on the market, and now they want people to switch from a fast and stable OS to a slow and unstable one. It's really pretty much of a no-brainer as far as I'm concerned, and I'm not surprised that there's a petition. Anyone that thinks that corporate clients are going to sink a lot of money into a new OS in this current economic climate is crazy, and Microsoft knows it. They will extend XP's life the same way that they honored individuals with NT4 MCSE certifications after first saying that they would have to recertify on 2000 or lose it."

We'll see, Wayne. At this point, though, we know that you're not alone in wanting to see XP live a little -- or maybe a lot -- longer.

Have anything to contribute about any topic? Contribute at [email protected].

Posted by Lee Pender on 04/24/2008 at 1:21 PM0 comments

Microsoft To Host Apps for Partners

Posted by Lee Pender on 04/24/2008 at 1:21 PM0 comments

groupSPARK Goes Seismic

Posted by Lee Pender on 04/24/2008 at 1:21 PM0 comments

A Review of Microsoft's Leasing Program

Posted by Lee Pender on 04/23/2008 at 1:21 PM0 comments

Partners Ramp Up for SBS, EBS Launches

What might end up being potentially less simple is understanding what each server can do and developing sales strategies for both of them. On that front, to the rescue rode Arlin Sorensen, president and CEO of Gold Certified Partner Heartland Technology Solutions, who organized last week's SMB Summit in your editor's home town of Dallas to discuss Microsoft's new server wares. Sorensen and a few other partners -- all Gold Certified, as it happens -- sat down for a phone chat with RCPU last week about SBS and EBS.

SBS is probably familiar to most SMB partners, but EBS is a new kid on the block -- a server not meant for the tiny startup but not appropriate for the big conglomerate, either. It focuses on the hugely lucrative, constantly shifting midsize-business market, and many of last week's SMB Summit's 460 attendees got their first look at it in Dallas.

"A lot of partners are just starting to understand what EBS is about," Sorensen told RCPU. "The exciting thing that partners are starting to talk about is they're going to serve a market that they've been afraid to enter. It's going to allow a SBS partner to move up in the market."

But moving up can be a complex -- if potentially very rewarding -- task. Michael Cocanower, president of itSynergy, said that selling to midsize businesses as opposed to small businesses means talking to entirely different audiences. Whereas the small-business owner makes most of the decisions on technology purchases for his or her company, Cocanower said, midsize businesses usually have IT people, financial executives and maybe even CIOs who need to be convinced.

"The messaging that goes to these different audiences is different depending on who it is," Cocanower said.

Added Sorensen: "The sales cycle is much longer in the mid-market space. You have to be prepared to make more investment to get that larger sale. I would definitely say there's a higher cost of sale, but that's offset by a bigger opportunity. When you're serving a larger install base, there's going to be more demands. They have higher expectations than a small business does."

One message that should resonate with just about any audience, though, is that EBS works. Cocanower has a couple of partners running it as part of Microsoft's Technology Adoption Program (TAP), and he's been impressed by the results he's seen so far. EBS, he said, fills a gap that had existed between SBS and bigger offerings such as Windows Server 2008.

"Today, because there is no product in this space, these medium businesses are left with assembling the core business blocks that are out there," Cocanower said. "But there isn't anything that ties that together. EBS provides that layer that rides on top of those products."

And Microsoft folks, perhaps not surprisingly, point out that EBS makes a great upgrade from SBS: "A lot of customers need to upgrade from SBS, and Essential Business Server is going to be an easy transition," said Aanal Bhatt, senior product manager at Microsoft responsible for channel partner marketing, Windows Essential Server Solutions. "Even in some of the smaller companies, because there is quite a bit of complexity going on and SBS has not been the best fit, EBS is going to be a great fit."

But SBS will still have a large customer base, too, and John Endter, president of E Squared C, has already seen customers involved in the TAP achieve results with the new edition of the server.

"We have it installed at a golf course," Endter said of SBS 2008. "It's running their business. They had some key pain points working remotely for the business owner. They had some staffing issues with schedules, general business process issues. SBS corrected all that. It's definitely rock-solid."

Those are the kinds of reviews that partners waiting for the release of both products will love to hear.

Posted by Lee Pender on 04/23/2008 at 1:21 PM0 comments

Dynamics CRM Online Hits the Streets

Brad Wilson, general manager of Microsoft Dynamics CRM at Microsoft, points out that even though Microsoft is hosting the SaaS (or, in Redmond parlance, Software+Services) version of the software, there are still plenty of opportunities to jump in and customize Dynamics CRM online for customers.

"There's lots of different parts to a CRM project," Wilson told RCPU, citing setting up data models, defining workflows and creating user models as a few examples of services partners can provide to customers. "Server setup isn't required, but all the things around domain expertise and best practices are still there."

Plus, Wilson said, Microsoft will pay partners 10 percent of license revenues in perpetuity for a Dynamics CRM Online sale. Some other vendors -- he didn't specify which ones -- pay a 10 percent royalty only once, as a kind of finder's fee.

"Our partners will get paid in a more generous fashion," Wilson said...and that sounds like a good thing to us.

Posted by Lee Pender on 04/23/2008 at 1:21 PM0 comments

Microsoft and Google: Another Patriots' Day?

Not that your editor was watching that game while "working from home," of course...ahem. Oh, and he didn't take a couple of hours to watch his friends run in the marathon, either -- as far as you and his boss know. What he did do, though, was drag his wife out of bed at 5 a.m. and head to the next town over, Lexington, for the reenactment of the first battle of the American Revolution. (There's that "true meaning" of Patriots' Day again -- and, yes, your editor took the linked photo. Hey, it was dark...and early.)

Anyway, what's striking about the battle reenactment, other than the fact that it starts at 6 a.m., is that it's really short. It lasts not even 10 minutes. That's because the battle itself was fairly short; the King's red-clad army whipped the colonial farmers pretty quickly -- on that day, anyway. Of course, we know that as what would become the American Revolution dragged on, those colonists fared better and better and eventually took down one of the world's great powers. (Well, they got King George III to give up, anyway -- but we digress.)

One of the reasons why the first citizens of the United States were able to win was that they were fighting at home, on their own turf. Eventually, the British got sick of sending men and money to the American colonies to fight a grinding war. And so (finally, but you knew it was coming) we see some parallels between the American Revolution and the battle between Microsoft and Google.

Late last week, Microsoft released details about Project Albany, which had been a terribly kept secret for a while. It'll be a hosted bundle of popular Microsoft Office applications -- you know the gang: Word, Excel and PowerPoint -- plus some security and collaboration stuff. It'll be a lot like Google Apps when it's available, except that it won't be free. On the other hand, though, if the Office apps have all of their features, Albany should offer a lot more functionality than Google Apps (maybe even too much).

Nobody has ever knocked Microsoft off of the productivity suite throne. Even Google Apps is a drop in the bucket -- maybe the ocean -- in terms of market share compared to Office. But, just like those Lobsterbacks (nobody actually called them the Redcoats, from what we've read) fighting on another continent, Microsoft is setting up to do battle on Google's Web turf now, and victory isn't guaranteed.

As it has been with a lot of new technologies (remember Netscape?) Microsoft is a little behind the curve with its SaaS offerings. Plus, Microsoft hasn't exactly cleaned up against Google in search the way King George's men did in Lexington yesterday morning. In fact, Google is still routing Redmond in a space that Steve Ballmer and his cohorts would love to own.

So, on one hand, Microsoft starts in a position of weakness with Albany. However, fundamentally, we're still talking about productivity suites here, and Microsoft does those very well. (Say what you will about Office -- you can't argue with success.) The question becomes whether old-school Office battling it out with Google Apps in new, online territory will sweep to victory or eventually succumb to a new power the way old Britain gave up the ghost and handed victory to the young United States.

Of course, to some extent, it doesn't really matter -- right now -- who wins the online app wars. The vast majority of users still installs applications on the desktop and probably will for some time to come. Plus, software battles don't have to be a zero-sum game, although they often seem to be; both Microsoft and Google could carry on for quite a long time competing in the online apps space.

In this battle, the empire is striking back. Maybe someday, some history nerds will dress in costume as Google and Microsoft execs and developers and reenact the "battle" of online apps. That's something that we would definitely not get out of bed at 5 a.m. to see.

What's your take on Microsoft's hosted apps strategy? Have any experience with Google Apps? Shoot us a line at [email protected].

Posted by Lee Pender on 04/22/2008 at 1:21 PM0 comments

Microsoft, Novell Focus on China Linux Sales

Novell and Microsoft are ramping up SuSE Linux sales in the Middle Kingdom. By the way, saying "Middle Kingdom" when referring to China sounds really brainy. Try it at your next cocktail party.

Posted by Lee Pender on 04/22/2008 at 1:21 PM0 comments

Google: World's Biggest Brand

Back in the summer of 2006, RCP the magazine brought you a feature on Microsoft topping Millward Brown's brand list, and Redmond hasn't been back on top since. Is there an RCP cover jinx?

Posted by Lee Pender on 04/22/2008 at 1:21 PM0 comments

Another Microsoft Bug Surfaces

Posted by Lee Pender on 04/22/2008 at 1:21 PM0 comments