It’s been three months since Microsoft (NASDAQ:MSFT) launched Windows 8. We’ve been through press events, the Consumer Electronics Show (where the new Windows 8 convertible Ultrabooks were on display), the Surface RT and a new version of Office. The Surface with Windows 8 Pro launches on Friday. Windows Phone 8 has a few months under its belt. And rumors are ramping up about the next-generation Xbox video-game console.
If 2012 was the year where much was on hold at Microsoft as customers delayed upgrades in anticipation of a slew of new products, how does 2013 look now that they’re (mostly) here?
On the official Windows blog, Microsoft says it has sold over 60 million Windows 8 licenses to date, and that the number is on par with Windows 7 performance. Those are OK numbers, although we still don’t know how many actual copies are actually being used as opposed to sitting with manufacturers. There’s also the issue of Windows 8 going from $40 to $120 ($200 for Windows 8 Pro) on Feb. 1 and the effect that will have on sales.
Plenty of complaints were heard early on about Windows 8 being difficult to use, and the head of Microsoft’s Windows Division abruptly left soon after its release. But the dust seems to have largely settled on those fronts. In its fourth-quarter earnings report, Microsoft said Windows Division revenues were up a solid 24% year-over-year.
Microsoft may be in for some trouble on this front. Launch phones like the Nokia (NYSE:NOK) Lumia 920 have failed to make a dent in iPhone or Android sales. According to stats for Q4, Windows Phone actually lost market share in the U.S. in December, dropping to 2.6%, although it’s apparently more popular in Europe.
The big question is whether a resurgent BlackBerry (NASDAQ:BBRY) will take third place in 2013, knocking Windows Phone into a position of virtual irrelevance in the mobile market.
Click the “Buy” button for Office 365 Home Premium on Microsoft’s website and instead of the expected retail price, you instead get two options: $99 per year or $10 per month. You can still buy various flavors of Office in the usual retail packages (ranging from $139 for Home & Student to $519 for professional), but these options aren’t quite as prominent.
Is anyone interested in renting Office? It looks expensive at first glance — $99 every year for software you never actually own — and PC Magazine’s John C. Dvorak is one of those predicting the rental option will flop, writing “there is no real reason why anyone would want to subscribe to the suite.”
Dvorak points out that Adobe (NASDAQ:ADBE) has been successful with this approach, but its Creative Cloud suite is aimed at creative professionals who depend on the software, which is frequently upgraded. When buying the full package outright costs $2,599, then renting it monthly makes sense in many cases.
As successful as Office is, Microsoft has a problem. One of the primary reasons it’s the de facto standard productivity suite is that you can open Word or Excel files from 10 years ago, and Office users can pass files back and forth between any number of alternative products that are Office-compatible. If Microsoft changes things too much, that cross-compatibility and backwards compatibility is broken, and customers get angry. They also have other options that are compatible with Office, most of which are cheaper.
Upgrading has always been problematic for Microsoft largely because of the “Office as a standard issue” factor (ZDNet references a Forrester survey when Office 2010 was released showing only 25% of Microsoft customers keep up with the Office upgrade cycle, and 60% were still using Office 2003). But the combination of a new operating system, the confusion over renting vs. buying and a soft PC market might make it tough for Microsoft to move the number of copies of its cash cow that it might hope for.
Microsoft’s Surface caught everyone off-guard when announced last June. But even though the covers with built-in keyboards impressed, there was considerable confusion over the two models. The Surface RT (which runs apps, not Windows 8 software) had disappointing sales, reportedly under 750,000 units over the holiday quarter — compared to the 22.9 million iPads that Apple (NASDAQ:AAPL) moved.
Now, The Surface with Windows 8 Pro goes on sale Friday. It’s already under fire for its high price (starting at $899) and lack of storage space after word leaked the OS eats up more than half of the advertised capacity. Adding insult to injury, Apple just took a shot at Microsoft’s coming professional tablet with a new 128 GB iPad.
Microsoft’s Xbox 360 continued to dominate video-game console sales in 2012. Nintendo‘s (PINK:NTDOY) poor-selling Wii U began the next-gen console war with a whimper. Sony has a press conference scheduled for Feb. 20 where it’s expected to announce the pending arrival of its Playstation 4. And Microsoft is expected to release the successor to the Xbox 360 (Xbox 720?) this year. But the real issue isn’t Sony or Nintendo, it’s the sudden onslaught of new game consoles from the likes of Nvidia (NASDAQ:NVDA) that threaten to disrupt the market in 2013.
So, what will this year be like for Microsoft? I suspect it will be more of 2012: modest growth. The company is battling between irrelevance and third place in mobile; Windows 8 and Office — despite being new products and natural upgrades — are caught in a PC market that looks to shrink in 2013; Xbox faces new competition; and the Surface RT tablet is failing to live up to expectations.
The bright spot for 2013 may well turn out to be the Surface with Windows 8 Pro. Despite the steep price tag, it has a chance of bridging the gap between tablets and PCs, hitting the functionality sweet spot that business wants. This wouldn’t stop the PC slide, but it would at least help maintain Windows and Office sales. Plus, the hardware sales would contribute to MSFT’s bottom line.
As of this writing, Brad Moon didn’t own any securities mentioned here.