Steve Ballmer and other Microsoft execs just finished talking to financial analysts for three hours, and while they tried to paint an optimistic picture — as they always do — it was really clear that Microsoft has no big ace in the hole to drive growth this year.Instead, it’s going to keep doing what it’s been doing for the last decade — trying to dominate the markets it already owns, and clawing market share away in other areas.
Take a look at what Ballmer mentioned in his speech as big areas of focus for the company’s current fiscal year (which started July 1). None of these areas — not one — will add $1 billion to Microsoft’s top line (let alone bottom line) in the current fiscal year.
- The launch of Nokia Windows Phones. Microsoft thinks they can become a “very strong third ecosystem in the smartphone world.” But recall that Microsoft only charges about $15 for each copy of the Windows Phone platform it sells. If the Nokia Windows Phones are a hit, Nokia will gather most of the revenue — not Microsoft.
- The integration of Skype, which Ballmer hopes will clear regulatory hurdles in Europe in the next few months. Skype is a “very very” real business, as Ballmer said — but even so, it’s only got $900 million a year in revenue. Microsoft is going to use Skype to boost other businesses — Ballmer mentioned enterprise meetings via Lync, Xbox Live, and Windows Live. But as a standalone revenue source, it won’t make much of a dent.
- Lync videoconferencing. Video meetings are a big trend, and his videoconferencing and IM app for corporations was one of the few product demos during Ballmer’s speech. It’s a fast-growing part of the Office family of products — revenue was up 20% last quarter from the previous year. But it’s also growing from a small base — probably well under $1 billion at this point.
- Adding TV to Xbox Live. Neat idea if Microsoft can get the licenses signed. But the Xbox is a tiny part of Microsoft’s overall business — its division contributed only $1.3 billion in operating profits and $8.9 billion in sales last year. Microsoft’s total operating income was $27.2 billion, and its total sales were just shy of $70 billion. Small potatoes.
- Windows 8. That’s a cost centre for FY’12, not a growth generator — the product almost certainly won’t be out until late calendar year 2012, or Microsoft’s FY’13.
- Office 365. Office and its related products (Lync, Exchange for email, and SharePoint for collaboration) are the company’s biggest and fastest-growing areas right now. Office 365 is the online version of these products. It’s going to be important for helping Microsoft to make more money in China — it’s a lot harder to pirate a service than software — and to capture more money from small businesses. But it just launched in June, and Microsoft declined to say how much uptake it’s getting or what mix of Office revenues it expects to come from Office 365 this year. In fact, COO Kevin Turner — the second-most powerful man at Microsoft — noted that Microsoft actually made it easier to add Office 365 services to existing software contracts last year, and that’s helping to drive growth. In other words, enterprise software is still the main driver here, and the transition to services will take a while.
Looking at all this, it’s clear that Microsoft is not about to pull an Apple and come out with some great new product that makes revenue skyrocket.
Instead, it’s going to ride the PC growth rate to keep selling Windows and Office, convince corporate customers to add new products, and try to take market share away from enterprise software competitors like Oracle (in databases), IBM (email), and VMWare (in virtualization).
That’s not a sexy story, but it’s allowed Microsoft to grow revenue pretty consistently at about 10% per year during most of the last decade, with the exception of the big downturn in 2008 and ’09.
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