While it’s been more than six months since Apple (NASDAQ:AAPL) surged past its old rival to become Earth’s most valuable technology company, Microsoft (NASDAQ:MSFT) hasn’t taken it lying down.
The company’s final quarter of 2010 was full of ups (Kinect) that far outweighed the downs (Windows Phone 7.) — but ultimately resulted in both profit and revenue surpassing Wall Street’s expectations.
While Microsoft’s bread-and-butter software offerings — especially Office — stayed strong, the company’s entertainment and devices division led the company’s growth, with revenue climbing 55% to $3.7 billion. The jump came from both the runaway success of its Kinect hands-free motion control game device and the resurgent Xbox 360 game console.
Microsoft sold 8 million Kinects in just 60 days in addition to 1.86 million Xbox 360s in December alone — the machine’s all-time best-selling month.
What’s next for Microsoft’s top-growing division? The Consumer Electronics Show came and went last month, with little to drum up public interest — no Microsoft Windows Tablet (just a rumored OS), no big Windows Phone 7 announcement, no new Xbox or Kinect software.
Microsoft is expected to make a series of major software announcements at the beginning of the second quarter, leading up to the Electronic Entertainment Expo. The company will be publishing a new sequel to Epic Games’ popular series, Gears of War 3, as well as the rumored Kinect-only Gears of War, Gears of War: Exile.
The Kinect should continue to sell well this year, especially when third-party publishers like Electronic Arts (NASDAQ:ERTS) and Activision Blizzard (NASDAQ:ATVI) finally announce major games for the device this spring.
The big push for the entertainment division at Microsoft this year, however, will be television. Reuters recently reported that the company is meeting with broadcast and cable networks to bring their content to a subscription-based cable channel audiences will access through the Xbox 360 game console. Microsoft launched an exclusive version of ESPN 3, Disney’s (NYSE:DIS) college sports-focused cable channel, on the Xbox 360’s Xbox Live gaming network service last November and it is considered a precursor to the broader network.
If Microsoft can position its gaming console as a set-top box — a role it has grown into since Netflix (NASDAQ:NFLX) partnered with Microsoft for Instant Streaming content on the console in 2008 –it should only strengthen the Entertainment division’s prominence in 2011.
On the software front, expect a significant marketing push for Windows Phone 7 to come in March or April, after the hype surrounding Apple and Verizon’s (NYSE:VZ) new iPhone partnership — and before the iPad 2 and iPhone 5 are announced. Microsoft has claimed that Window Phone 7’s November debut was a “soft launch,” and that more polished products should be the focus in 2011. The company said on Wednesday that “over 2 million” Windows Phone 7 licenses have been sold to mobile phone manufacturers around the world, so at least the operating system is drumming up some business.
Late spring, however, will be the moment Microsoft has to announce its plans for tablet-specific software, both its operating system and profitable tools like the Microsoft Office suite. The time is fast approaching when Microsoft will be left behind by Apple and Google (NASDAQ:GOOG) in the tablet market, much as it was in the smartphone segment.
If Microsoft can find a compelling way to merge its tablet and Windows Phone 7 offerings alongside a multi-platform software tools strategy, it should be boast another strong quarter a year from now.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here.
