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Free Windows, end-of-XP spree, drops Microsoft revenue by US$455 million

Gregg Keizer | Feb. 4, 2015
Downturn shows the impact of shift in monetising strategy.

Microsoft last week said that revenue generated from sales of Windows licenses to computer and device makers dropped $455 million, or 13%, when compared to the same period a year prior.

The downturn was expected by Microsoft, although the extent of the decline seemed to come as a surprise.

"They knew that consumer [Windows] was going to be tough," said Merv Adrian of Gartner. "It's just very hard to sell an OS these days."

Microsoft blamed the downturn on the consumer side on its decision to give away some Windows licenses and for business, the tough-to-match numbers from 2013, when enterprises scrambled to dump Windows XP, then facing retirement.

Sales revenue from OEMs (original equipment manufacturers) -- the Lenovos, HPs and Dells of the world -- was down 13% both in what Microsoft calls the "Pro" category and the "non-Pro" grouping.

The terms refer to the kind of Windows license, with Pro indicating the OS for business-grade PCs and non-Pro those for consumer PCs and tablets. In Windows 8.1, for instance, the former is Windows 8.1 Pro while the latter is simply Windows 8.1.

Windows OEM licensing was down $455 million from the same period the year before, or about a third of the $1.4 billion total decline for the Devices and Consumer Licensing group, which also includes non-volume sales of Office (consumer purchases of perpetually-licensed Office) and licenses for Windows Phone.

The company's chief financial officer, Amy Hood, acknowledged the Windows revenue downturn, but said it was larger than expected.

"Our results in China and Japan fell short of our expectations," said Hood in a call last week with Wall Street. "In Japan, the PC market lagged due to the macroeconomic environment along with the combined impact of XP end of support and the VAT [value-added tax] increase last year."

The problem with China, added CEO Satya Nadella, was due to "a set of geopolitical issues that we are working through," phrasing that most interpreted as referring to the Chinese government's ongoing antitrust investigation of the American company.

Microsoft's OEM revenue declines were significantly larger than the changes in the personal computer industry, where the Redmond, Wash. company books most of its Windows licensing sales. According to IDC, PC shipments dropped 2% in the fourth quarter of 2014; rival Gartner, which counts systems differently, said shipments grew 1% from the same quarter the year earlier.

On the Pro side, where prices and margins are highest, Microsoft's revenue fell because both the number of PCs sold to business and the percentage of advanced licenses dropped compared to the year prior. "Last year we ended support for Windows XP," said Hood. "That simulated a PC refresh cycle, in particular in developed market and with business customers. As expected, PCs have reverted to a more normal mix between developed and emerging markets, and Pro-attached business PCs [rate] has returned to the levels we saw prior to fiscal year '14."


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