Microsoft’s Products Disappoint

According to the recent Gartner report, worldwide PC shipments fell 5% over the year to 90.3 million units during the final quarter of 2012. The decline in PC sales was attributed to the growing adoption and availability of low-cost tablets that replaced the PCs. Analysts were expecting Windows 8 to impact PC shipments during the final quarter of 2012, but the new software has failed to live up to expectations.

Microsoft’s Financials
Microsoft’s (NASDAQ:MSFT) Q2 revenues grew 34% over the year to $21.46 billion, just shy of market expectations of $21.53 billion. EPS slid from $0.78 from the previous year to $0.76 and was ahead of the Street’s target of $0.75.

Windows and Windows Live segment revenues were up 24% over the year to $5.9 billion. The Microsoft Business division generated 27% revenues for the quarter but fell 9.4% over the year. The Server & Tools segment grew 9% over the year to $5.2 billion. The Entertainment & Devices segment generated grew 11% to $3.8 billion.

Microsoft’s Product Development
During the last quarter, Microsoft released several new products including its tablet, Surface, and the long-awaited Windows 8 operating system. The company was hoping to hit it big with these releases, but in many ways the products have failed to deliver.

Windows 8 may have sold more than 60 million Windows 8 licenses during the last quarter, but the software has faced several issues. Consumers trying to upgrade their laptops to the new Windows 8 found it more complicated than expected even when machines met system requirements. In addition, upgrading older machines with the new operating software does not necessarily guarantee that all the features available on Windows 8 will be available on the new machine. Further, since the program requires apps to be developed specifically for the new version, there are relatively fewer apps available right now. The number of apps available will grow as Microsoft continues to add developers. But for some time to come, the availability of apps will remain a matter of concern.

Surface also failed to make big waves during the holiday quarter. The product was expected to challenge the iPad, but it is not really a player in that battle yet. Reviewers have complained about the tablet’s unattractiveness, poor camera resolution, weaker display properties compared with iPad’s retina display version, and shorter battery life. Surface comes with a bigger price tag of $500 compared with the retail price of $399 for an iPad 2. Surface users also have to deal with the limited number of apps available in the stores right now, making it a tougher sell.

Microsoft now plans to release the Surface Windows 8 Pro by next month. Surface Windows 8 Pro is focused on business users and will be able to run popular Microsoft office productivity and application development tools, such as Office and Visual Studio, will be easier for IT staff to administer, and will be able to operate with other business applications such as Microsoft Dynamics. But add to the mixed reviews of Surface Microsoft’s late entry into the tablet market and the steep price of $899 for the pro version, and the company will likely have a tough road ahead.

Microsoft Phone Succeeds

Possibly the only successful product released recently has been Nokia’s Windows Phone, the Lumia series. As part of an agreement with Nokia, Microsoft has been paying Nokia $250 million quarterly since 2011 as platform support payments. The payment has helped keep Nokia interested in the Windows Phone OS and has helped Nokia continue to develop phones like the Lumia, which reported sales of more than 4.4 million units during the last quarter, compared with one million units sold a year ago. But now it is time for Nokia to pay back. According to recent reports, Nokia will soon need to pay more than $1 billion as royalty fees for Microsoft’s mobile software.

Within phones, Microsoft is also working on Windows Phone 8, an upgraded version of its existing offering, and will release it to the market by the middle of this year. Microsoft may have owned a mere 2.6% of the mobile phone market during the last year, but IDC expects its share to grow to 11% by the year 2016.

The stock is trading at $27.91 with a market capitalization of $233.79 billion. It touched a 52-week high of $32.95 in March 2012.