Last Updated Apr 23, 2010 10:56 AM EDT
Microsoft used "Windows 7 momentum continues" as a secondary head on its earnings release. There's a good reason the company points to the predictable uptake on the new version of its cash cow operating system: every other division has been stagnant year-over-year. Look at this chart taken from the company's 10-Q filing:
Pay attention to the nine-month summary on the right. Windows & Windows Live is the only winner in the group. Everything else was flat or even down, like the Business division, home of Office, the company's other revenue king. I'd attribute the drop in Office revenue as largely due to people holding off from purchases, waiting for the new version to come out, though I wouldn't ignore the impact that Google (GOOG) apps may finally have, given the company's claimed 25 million users.
There's a limit to how many conclusions you can draw from the divisional break-out because costs in one area may subsidize others, so getting a clear view to profit and loss by division is impossible. For example, it wouldn't surprise me if the Online Services group actually underwrote costs from Windows Live, which would mean that even the operating income of the entire Windows division would appear higher than it actually is, keeping investors happy. Would Microsoft be concerned over that? Let's see, how to put this: Would Bill Gates use a Windows-based phone over an iPhone?
Interestingly -- and, on second thought, obviously -- we have the same pattern that I saw in Intel's earnings, which should disturb anyone anxiously trying to see a tech resurgence. Client sales are up, but server-oriented sales aren't.
Maybe virtualization (the ability to let servers effectively run the work once split among multiple machines) and more powerful hardware are taking their toll on the enterprise data center market, by reducing the number of servers that companies need. I've spoken with several corporations that have significantly downsized -- as in by half -- the number of servers they once ran. Utilization, which means how efficiently and completely a company uses a server's resources, goes way up.
And that gets us to the most important pattern that I've seen over time. There's an enormous change happening in the IT industry. Duh, I can hear you say. Yes, we all know about cloud computing and virtualization, but people forget that when you change how companies work, you change the economics of industries. What we see in Microsoft's and Intel's earnings announcements is the beginning of the end of traditional IT powerhouse vendor dominance. The number of machines and copies of server operating systems drops and important revenue lines begin to recede. This already had created new opportunities -- VMWare is a good example -- and will make new giants in the future.
Image: stock.xchng user dreamguy, site standard license.