XBox Pushes Microsoft Deeply Into Home Entertainment

Gartner’s third quarter study on PC shipments reported that global PC shipments grew 3.2% over the year to 91.8 million units, compared with the earlier projected estimates of 5.1% growth for the quarter. The continuing weakness in the U.S. and EMEA markets are contributing to this slow growth. U.S. PC shipments grew a mere 1.1% over the year to 17.8 million units. Gartner believes that the increasing popularity of Media tablets and smartphones is pushing sales away from the PC segment. Within the U.S., Apple reported the strongest growth among the top five vendors with shipments growing 21.5% over the year driven by strong growth in sales of MacBook Air. EMEA PC shipments of 26.6 million units reported a 2.9% decline over the year. Emerging markets helped drive worldwide growth. Asia-Pacific markets grew 6% to 31.8 million units and Latin America grew 19.6%.

Microsoft’s Financials
Despite the slow growth in the PC industry, Microsoft (NASDAQ:MSFT) reported a strong quarter. Q1 revenues grew 7% over the year to $17.37 billion, ahead of the Street’s expectations of $17.25 billion. EPS of $0.68 was in line with the market’s targets and reported a growth of 10% over the year.

The growth was driven by strong performance of the Office segment which helped grow the Business Division’s revenues by 8% over the year to $5.62 billion. Windows and Windows Live revenues grew 2% to $4.87 billion, server and tools revenues grew 10% to $4.25 billion, entertainment and devices, led by Xbox, grew 9% to $1.96 billion and online services revenues grew 19% to $0.63 billion. The big surprise though, was that the online service division took a turn for the better with losses narrowing to $494 million, the lowest ever in the past seven quarters.

Microsoft’s Windows 8
Over the past two years, smartphone shipments have grown by more than three times, while PC shipments grew 45% during the same period. While smartphones are not clear substitutes of PCs, the growth of the shipment of these devices is indicative of the trend that people are switching to alternate devices for everyday computing needs. According to a Frost & Sullivan forecast, smartphone penetration in the U.S. will be the same as that of PCs by the year 2015, compared with a 17% share currently held. Gartner estimates that by 2013, more people worldwide will access the Internet on a mobile device than on a PC.

Unfortunately, Microsoft has not yet managed to successfully break into either the smartphone or the tablet market, primarily on account of their failure to launch in time a product robust enough to compete with iPhone and Android OS. The market was looking for Microsoft’s tablet OS this fall. But, Microsoft claims that they are working on the launch of Windows 8, a tablet OS, which will be available in the markets by next summer. Windows 8 is expected to deliver strong competition to the rivals as it will feature touch screen operation, a screen that is locked but is still able to display prompts for messages and updates, ability to “extract” data from news feed using Metro Live Tiles. Some analysts are so impressed by the Beta version of the software, that they expect that Windows 8 will be available on 75 million tablet devices by 2014, claiming 15% market share.

Microsoft’s Cloud Service
Additionally, to improve their Cloud offerings, Microsoft announced support for the Hadoop framework to the upcoming versions of SQL Server and Azure. Hadoop is a popular framework for supporting data intensive distributed applications and is used to process big and unstructured data. Microsoft is planning to launch an upgraded SQL Server and Azure offering next year.

Microsoft claims that SQL Server 2012 will be able to deliver capabilities for “mission-critical workloads,” BI and hybrid IT across datacenters and clouds besides providing an integrated development environment for SQL Server developers.

Microsoft’s Cable Offering
Recently, Microsoft announced their tie-ups with cable providers, including Comcast, Verizon, and AT&T, to display content on their XBox gaming consoles. Starting this holiday season, XBox Live users will be able to watch TV including content from MTV, HBO, and CNN on their consoles without the use of a set-top box. Additional features planned include voice activated and hand gesture operated remote control. This puts XBox in a very strong position in the home entertainment business.

Their stock is trading at $27.19 with a market capitalization of $228.7 billion. It touched a 52-week high of $29.46 earlier this year.