Microsoft Is Failing Consumers

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Although Microsoft (NASDAQ: MSFT  ) has been faring quite well serving businesses, the same can't be said about its core consumer-facing operation. Last quarter, Microsoft's devices and consumer segment's operating income declined by 23% year over year, which could be viewed as a bit problematic, considering 65% of all PC sales and 70% of all Office suites are destined for the consumer market, according to CEO Steve Ballmer.

Don't judge a book by its cover
On the surface, Microsoft's recently restructured devices and consumer segment appears to be doing quite well relative to the struggling PC market, but digging deeper into the results tells a bit of a different story. The segment's fiscal first-quarter total revenue increased by 4% year over year, which sounds encouraging until you realize it was dragged down by a 7% decline in software licensing -- the segment's biggest business, representing 58% of the entire segment's revenue. The declines here were driven by a 7% decrease in Windows OEM revenue and a 23% decline in consumer Office revenue, offset by a modest increase in Windows Phone revenue. During the same period, IDC reported that worldwide PC shipments declined by 7.6%.

It appears that Microsoft's reorganization efforts to focus the company's operations along consumer and commercial lines are masking the reality that Microsoft's future vision of computing isn't winning over consumers, and its licensing business remains at the helm of PC shipments. This could be viewed as problematic for a number of reasons, but, most important, it shows that Microsoft is still losing where it has the most to lose on the consumer side.

In practice, this shouldn't be too problematic because the company's commercial segment has been faring quite well, making up more than two-thirds of the company's operating income last quarter. In other words, Microsoft is in a position of strength to offset future declines from its consumer licensing business. While I agree with this assertion, it's also important to note that Microsoft believes its No. 1 goal above everything else is to supply products to consumers. In this light, Microsoft is failing at its No.1 priority.

The road ahead
Considering the bulk of Microsoft's licensing unit sales comes from the consumer segment, the company will likely continue working toward striking a better chord with consumers. Until then, Microsoft's commercial operations are in an excellent position to absorb additional declines from its consumer licensing business, ultimately buying the company additional time to develop a more compelling consumer computing experience.

At the end of the day, it may not be the end of the world if Microsoft is currently failing in the consumer segment, because its commercial operations currently drive the bulk of its profits. Still, investors shouldn't lose sight of the fact that consumers also work for businesses, and if things don't improve on the consumer front, it has the potential to negatively spill over into Microsoft's commercial results. That said, investors should continue to monitor Microsoft for any material developments related to its consumer computing experience.

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