Can Microsoft Fix Windows 8?

Microsoft over the past week has taken its lumps -- first with Gartner reporting a 7.6 decline in worldwide PC sales last quarter, followed by rival researcher IDC's more dire analysis saying shipments dropped a record 13.9 percent. And if reporting the worst decline in PC sales since IDC first started tracking shipments two decades ago wasn't bad enough, the analysts issued an uncharacteristically direct blow, blaming the deterioration on "weak reception" for Windows 8.

It doesn't matter whose numbers you believe -- every market researcher has its own methodologies. We have long understood demand for PCs have been on a downward spiral, thanks to the fact that tablets and smartphones are rapidly becoming the preferred devices for accessing the Internet. The sucker punch came when IDC said Windows 8 has accelerated the PC decline of PC sales.

"It seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market," said IDC analyst Bob O'Donnell, in a statement. "While some consumers appreciate the new form factors and touch capabilities of Windows 8, the radical changes to the UI, removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices. Microsoft will have to make some very tough decisions moving forward if it wants to help reinvigorate the PC market."

It appears Microsoft has made some of those decisions, which the company will start to reveal at TechEd North America in early June and the entire plan unfolding at the Build conference in late June. One encouraging sign is that it appears the so-called Windows Blue wave, will facilitate new form factors. As reported by The Wall Street Journal Thursday, Microsoft is developing a new line of its Surface, and the lineup of its hybrid PC-tablets will include a 7-inch device that will compete with the Google Nexus, Amazon's line of Kindle Fires and Apple iPad mini, among others in that size range.

While Microsoft didn't comment on the Journal's report, the company has not discussed plans to address that form factor, as noted by ZDnet blogger and Redmond columnist Mary Jo Foley.

Presumably if a smaller Surface is in the works, Microsoft will also let OEM partners build and market smaller Windows 8 tablets as well. But Microsoft needs to offer licensing terms that can enable OEMs to offer devices that are competitive with Android-based tablets. As we all know, OEMs don't pay licensing fees for Android.

Indeed Gartner sees devices based on Google's Android outpacing anything else, running on nearly 1.5 billion units by 2017. Coming in second is Windows at 571 million and those based on Apple's MacOS and iOS will come in third at 504 million. Those forecasts combine PCs, tablets and phones, further skewing in favor of Android, given its dominance in the smartphone market.

If Microsoft was initially reluctant to offer smaller Windows 8 tablets, there's growing hope that mindset has changed. As Microsoft cuts Windows 8 to size, so is Wall Street. What will make analysts, who have downgraded the company in recent days, more upbeat? In a research note issued by Merrill Lynch today, which downgraded Microsoft from a buy to neutral, PCs will continue to decline by 20 to 25 percent before picking up steam again. "PC unit growth could improve after reaching that trough level, as a function of enterprise and high-end unit demand," the research note said. "However, enterprise upgrade cycles could get elongated from trends like BYOD [bring your own device] and desktop virtualization."

Tablets have indeed made it easier for consumers to put off upgrading PCs. Enterprises, coming off or in the midst of Windows 7 upgrades, are replacing systems as needed. I'm personally waiting to see what the next crop of devices look like once PCs are available based on Intel's new Haswell processor, which will deliver better display and offer much longer battery life.

The next shoe to drop will be next Thursday evening, when Microsoft is scheduled to report earnings for the quarter. Of course, a lot can happen before that.

Posted by Jeffrey Schwartz on 04/12/2013 at 1:15 PM