SAN FRANCISCO – Microsoft may still be suffering from lagging sales of personal computers, but the tech giant has taken some cues from rivals like Apple and Google – and it’s now seeing substantial growth in more promising lines of business ranging from Internet apps and advertising to online games and cloud computing.
In the company’s latest earnings report, issued Thursday, key segments of Microsoft’s business continued to decline in the quarter ended September. Licensing payments from PC-makers were down 6 per cent, a fifth straight quarter of declines, after the July launch of Microsoft’s Windows 10 operating system failed to spark an immediate revival in sales.
In addition, Microsoft’s decision last summer to pare back its struggling Nokia division meant the company made less money from selling mobile phones. But Microsoft reported strong performance in cloud computing, online advertising and subscriptions to online services – areas CEO Satya Nadella considers key to the company’s future.
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All told, the company said it had $20.4 billion in revenue for the quarter ending Sept. 30, down 12 per cent from a year earlier. Net income rose 1.7 per cent to $4.6 billion. The results drove Microsoft shares up more than 6 per cent in late trading after the earnings announcement. The stock closed earlier at $48.03, up 1.76 per cent for the day.
PC makers like Hewlett-Packard and Lenovo are still hoping Windows 10 will boost PC sales this fall, when they’ll be offering more new models for sale. But Thursday’s report showed Nadella’s increasing emphasis on other segments that promise more potential for growth.
“I think he is realistic about the role of Windows,” said Gartner tech analyst David Smith. Instead of counting heavily on Windows licensing fees, Smith said, Nadella “is much more focused on cloud computing and other services. That’s where the future of the company will be.”
Rather than charge individual PC owners to upgrade their older versions of Windows, for example, Microsoft has been offering free upgrades to Windows 10 – much the way Apple and Google provide free updates to their operating systems for Macs, iPhones and Android devices.
Microsoft hopes to make up the revenue from other sources, such as online advertising tied to its Bing search engine and new Edge browser, which comes with Windows 10. It’s also prodding consumers to pay for ongoing subscriptions to its Xbox Live gaming network and Office 365 “productivity” software.
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Analysts say Nadella’s goal is to build a broad ecosystem of interrelated products, offering some for free – including Microsoft apps for Apple and Android devices – while making money from others. By getting Windows 10 onto more computers, he’s also hoping to persuade independent app-makers that there’s an audience for apps that work with Windows on PCs, phones, tablets and gaming consoles. That in turn could give consumers more reason to use those devices.
To some extent, that’s again similar to strategies that have worked for Apple and Google, which offer a variety of online services and mobile apps to keep people using their products.
Windows 10 is now running on 110 million devices, according to Microsoft, although it hasn’t said how many are new PCs and how many are older machines whose owners took advantage of the free upgrade. Analysts say that suggests a healthy interest in the new software, although International Data Corp. estimates overall PC sales still dropped 11 per cent in the third quarter.
Thursday’s results were the first to reflect Microsoft’s recent reshuffling of product lines into new reporting segments. Windows revenue is now lumped in the same category with online advertising, Xbox gaming and its remaining phone business.
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The somewhat cosmetic move “shows the shrinking importance of Windows as a stand-alone product,” said Bernstein Research analyst Mark Moerdler.
Two other categories consolidate Microsoft’s other major revenue sources. One is business software, including the popular “Office” programs. The other combines data centre software with cloud services, in which companies use software housed on Microsoft’s servers.
The latter is Microsoft’s fastest growing segment, and one where analysts say Microsoft is outshining rivals like IBM and Hewlett Packard. Yesterday, in fact, HP announced it will shut down its public cloud-computing service, a tacit admission of defeat.