Microsoft Needs Windows 8 to be a Big Hit

Pressure is building on Microsoft to make Windows 8 a hit as sales of its Windows division fell 33 percent in the last quarter as businesses and consumers hold off on buying new PCs. While there are high hopes for Windows 8, the latest Microsoft earnings numbers and those of strategic partners’ shows success isn’t a guarantee.

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Next week’s launch of Windows 8 has moved from “high hopes” to a “must win,” as Microsoft Corp.’s latest quarterly earnings report were doused by plummeting sales in the flagship Windows division.

Microsoft yesterday reported a 22 percent decline in quarterly earnings, dragged down by a 33 percent slide in Windows sales. The Redmond, Wash.-based company blamed the decline on businesses and consumers holding back on buying new PCs ahead of the launch of Windows 8 next week.

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“The PC market was challenged this quarter,” said Microsoft Chief Financial Officer, Peter Klein, on the earnings call. “In addition to a tough economic environment and competitive pressures, OEMs drew down their Windows 7 inventory as they began to transition to Windows 8.”

>>See our Channelnomics retrospective: Windows Through the Years<<

Microsoft reported quarterly profits of $4.47 billion on $16 billion sales the third quarter of the calendar year, which is the company’s first fiscal quarter. For the same period last year, Microsoft reported $17.4 billion in revenue and profits of $5.74 billion.

Microsoft isn’t alone in its slump. Other big tech companies are reporting dips in third quarter earnings, including IBM, Intel, AMD and Google. Declining PCs sales are part of the problem, as desktop and notebook sales fell more than 8 percent in the last quarter. Also continuing debt crisis in Europe, slowing growth in Asia and the looming “fiscal cliff” in the U.S. in which automatic budget cuts will take place to lower the national deficit. These factors are conspiring to sap business confidence and curtail new spending.

In years past, the launch of a new Windows operating system was enough to infuse new life into the technology segment, stimulate sales in the channel and drive revenue spikes. While Microsoft has high hopes for Windows 8, the outlook doesn’t have a guarantee of success.

PC sales are slumping because more users – particularly consumers – are switching to smartphones and tablets for their computing needs. What makes this consumer wave different from those of the past is consumer devices are displacing corporate-issued PCs, the BYOD trend. As a result, businesses aren’t spending as much on PCs.

Complicating the Windows 8 forecast further is the continued legacy of Windows Vista, the 2006 version of the Microsoft operating system that failed. Many businesses refused to upgrade to Vista, and remained on Windows XP. It was only after Windows 7 launched in 2009 that businesses started migrating away from XP. Those migrations are just now wrapping up, and few believe there’s a compelling reason for businesses to immediately begin a new upgrade cycle. In fact, a poll showed that longtime Windows users prefer the current version, Windows 7, to the new Windows 8.

Some analysts and reviewers say Microsoft went too far with the redesign of Windows 8. The operating system is designed specifically for tablets and touch-interface PCs. It does have a classic mode that makes it more palatable for conventional PCs. However, the operating system isn’t as initiative to use, and some reviewers believe that could turn off longtime Windows users.

Microsoft isn’t giving a forecast for the rest of this current quarter. Analysts expect earnings to spike to nearly $23 billion on the strength of Windows 8, plus the release of numerous other products, including Windows Server 2012, Dynamics, the Surface tablet and Windows Phone 8.

Manufacturing and component partners of Microsoft aren’t so confident. While PC manufacturers such as Dell, Hewlett-Packard and Lenovo are release up to 20 new Windows 8 tablets and a raft of ultralight and conventional PCs with the Windows 8 launch, the market is bracing for lackluster sales. Chipmakers Intel, AMD and ARM have all forecasted lower fourth quarter sales.

For solution providers, the arrival of Windows 8 may not bring a lift, either. PC vendor and solution providers tell Channelnomics that Microsoft’s increased direct upgrades of Windows 8 and its emulation of the Apple go-to-market model is robbing them of sales opportunities that came with previous launches of new Windows versions.

The top example of Microsoft leaving the channel out of this launch cycle is the Surface tablet. Microsoft is only selling Surface through its Web site and retail stores. Channel chief Jon Roskill reiterated to Channelnomics earlier this week that Microsoft hasn’t changed its plans in withholding Surface from the channel.

Many small solution providers worry that their sales will be hurt by the discontinuation of the popular Windows Small Business Server. Microsoft scraped the product last spring, urging partners to move their customers to Windows Server 2012 or cloud alternatives. Solution providers understand Microsoft’s logic in killing SBS, but say the move will rob them of services opportunities and force customers to a platform they neither need nor understand.

Bottom Line: Microsoft needs Windows 8 to come out of the gate strong and dispel the naysayers. But it looks as though Microsoft has a lot of work to do to keep its partners in line and win the confidence of the market. It won’t take long to recognize whether the Windows 8 launch is a hit or a dud.

>>See our Channelnomics retrospective: Windows Through the Years<<

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