Every company has one number that defines its success more than any other. For Microsoft (MSFT +1.03%), the world's largest software company by revenue, that number is . . .
14%
That number, according to a recent Gartner report, will be the Windows operating system's share of all computing devices sold in the world this year. Excluding the sales of nearly 900 million devices running an "other" OS, a category primarily made up of inexpensive feature phones, Microsoft's share among the Big Three (which includes Google's Android platform and Apple's iOS and Mac OS) jumps to 22%.
A crumbling facade? Source: Wikimedia Commons.
Microsoft absolutely dominated computing platforms a mere 10 years ago, when its share of consumer devices stood at 95%. How did this happen, and what can Microsoft do to reverse this slide?
A better question might be: Can Microsoft reverse this slide?
When Microsoft reported its earnings for 2014 this summer, it marked the first fiscal year in memory where Microsoft did not offer segment-based financial data on its flagship Windows OS. Windows-sourced revenue is now lumped in with other licensed offerings including the Office suite (Microsoft's other cash cow) and patent royalty revenues.
However, we can still track the Windows segment's progress over the prior decade, from 2003 to 2013. Last year, Microsoft reported $19.2 billion in Windows-related revenue, which is nearly double the $10.4 billion the company reported for 2003. This tracks fairly closely with the growth of worldwide PC sales over the same period, which rose from 169 million to 316 million units.
This looks great on a longer timeline, but the problem -- and this is a problem acutely felt by PC chip-maker Intel as well (you can see why its most important number is similar to Microsoft's by clicking here) -- is that PC sales have actually been declining for the past several years. Microsoft's Windows division earned only $800 million more in 2013 than it did in 2010, despite the fact that half of the 2010 fiscal year included the lousy latter half of 2009. The PC has peaked, and mobile is where you'll now find growth. Unfortunately for Microsoft, it's fallen far behind in mobile.
A decade ago, Microsoft actually accounted for nearly 13% of the mobile OS market, with Nokia's Symbian platform -- which Microsoft effectively shut down as part of its original deal with the Finnish phone maker -- commanding another 56%. Today, Windows is the OS of choice on only 3% of all smartphones sold worldwide. This hasn't stopped Microsoft's revenue from doubling over the past decade, but it has forced the company to seek out growth in lower-margin areas, which has had the effect you might expect:
MSFT Revenue (TTM) data by YCharts.
Microsoft is still impressively profitable, but it's important to remember that technology doesn't die overnight. The Windows-based PC has been a fixture in homes and offices around the world for three decades, and it's going to take more than a couple of years for the world to move en masse to newer form factors.
Microsoft's new CEO, Satya Nadella. Image source: Dan Taylor / Heisenberg Media via Flickr.
It's also important to keep in mind that mobile devices simply don't offer the same degree of productivity as a PC or laptop. Users who just want to play point-and-click games, surf the Internet, or watch videos won't need a PC, but you'd be hard-pressed to find a modern office that can thrive with no PCs at all. That doesn't mean this will hold true forever, of course -- it took offices years to switch from mainframes to PCs after the first desktop machines launched in the late 70s.
Last year, Windows made up a quarter of Microsoft's revenue, but it accounted for roughly 36% of its operating profit. Combining that with the Office division (the vast majority of Office installations are on Windows PCs) results in a super-segment completely dependent on PC sales that accounted for 56% of Microsoft's revenue and a whopping 96% of its operating income. This monster profitability has been put at very real risk now that Microsoft has moved toward giving away Windows and Office for free.
These moves are ostensibly meant to prop up Microsoft's nonexistent mobile market share, but it's worth noting that Google, the current leader in computing OS market share, still gets the vast majority of its revenue from advertising connected to its mobile services. Microsoft's effort to beat Google at its own game has thus far produced a widening multibillion-dollar hole, so it's worth wondering how this next phase of the war on Google will be any different.
