Looking back to its fiscal year 2008, Microsoft booked $16.9 billion in revenue ($13.1 billion in operating income) directly attributable to Windows client sales, either through OEM licenses, upgrades or retail sales. That’s 28% of the company’s total revenue for that year and a whopping 58% of its $22.5 billion earnings. Taking the most recent data, the FY13 Q4 report, fiscal 2013 saw earnings of $26.8 billion. Of that, the Windows division accounted for $9.5 billion of income, or nearly 36% of Microsoft’s earnings for the year.
In other words, during the past five years Microsoft has reduced its reliance on Windows as a profit center, but it remains extremely important. Add in the Office productivity suite and you basically have Microsoft’s business. A Forbes piece from earlier this year points out the company still makes 75% of its profits on the Windows and Office combination.
Wired’s Ryan Tate thinks the move to free operating systems is a permanent one, writing “the desktop operating system is dead as a major profit center, and Apple just delivered the obituary.” The move to offer free computer and mobile versions of iWork doesn’t put the same degree of pressure on Microsoft — new users with existing Macs still pay, and Microsoft can make the case that Office is a more feature-rich product — but it certainly doesn’t help either.
Outgoing CEO Steve Ballmer has made a frequent point of telling us that Microsoft is reinventing itself as a devices and services company. A recent corporate reorganization, plans to purchase smartphone maker Nokia (NOK), its Azure web platform, Bing, the latest Surface tablet releases and the upcoming Xbox One release are all signs of the company moving in that direction. Apple’s announcements — and the corresponding threat to Windows (and Office) revenue — will only add fuel to the fire of transforming from a software company.
The question is, if Microsoft is forced into playing the free operating system game sooner rather than later, how can it make up that revenue shortfall? It took six years to reduce Windows from 58% to 36% of annual profits, so what happens now that the pressure is on to stop charging for Windows altogether … and Office is also threatened?
The move is extraordinarily low-risk for Apple (with considerable possible upside) with grim implications for Microsoft. Again quoting the Wired analysis, Apple’s move to kick off the era of free PC operating systems will look “very scary” to Microsoft shareholders. I have to agree.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.