Microsoft Pins Hopes on Windows 7 and IE 8

Software Giant Losing Market Shares to Mac, Firefox, Chrome, Safari

Oct 30, 2009

With the launch of Windows 7 operating system in October, Microsoft Corp. hopes to recoup goodwill lost during two winters of customer discontent with the flawed Vista.

According to David Pogue, writing in the New York Times of October 21,2009, the new version combines the dependable XP operating system with the creative flair of Vista. Windows 7 is the fourth operating system Microsoft has introduced in the new century.

New Windows Operating Systems Launched Since the Year 2000

The company also is counting on a recently-introduced version of the Microsoft browser, Internet Explorer 8 (IE8), to entice back computer users who have defected to other browsers.

Microsoft Rivals Gaining Market Share

For Microsoft, the premier software applications company of the digital age, snuffing out rivals in operating systems and browsers will not be a slam dunk. The upstarts have gained toeholds in market share and are clawing for more turf, emboldened by Microsoft's Vista fiasco.

Worldwide market share for the Windows operating system has exceeded 90% for several years, a stratospheric level in modern industrial societies. Its popularity has topped even the legendary Ford Model-T of 1924 – “the car that put America on wheels” - which attained a 50% market share. Driving Today online says hardly anyone liked the Model-T.

Windows Browser More Vulnerable to Market Share Loss

The market shares of Microsoft’s rival Lilliputians do not represent a tight race - yet - and would be a trifle in almost any industry. But in recent months all have gained significantly, at the expense of Microsoft. If Windows 7 is not a tour de force in sales volumes, the race could become tight in years to come.

In terms of market share, the Windows browser IE8 appears much more vulnerable to market penetration by competitors than its basic operating system Windows 7, as the following data from Net Applications online indicates.

World Market Share for Operating Systems (September 2009)

In 2009 significant Microsoft slippage has occurred. Since January, Windows XP has lost 5.7% in market share; however, Windows Vista, after correcting some initial gaffes in its functionality, has gained 18.4% and restored some of its previous loss. Mac OS x 10.5 has risen 17.9%, while Mac OS x 10.4 has lost 19.3%. Linux has declined 5.6%, while others have slipped 6.0%.

World Market Share for Internet Browsers (September 2009)

Since January 2009, Internet Explorer browser market share has atrophied 5.8%, Netscape 18.6% and Opera 1.8%; while Chrome has climbed 108.6%, Safari 17.1% and Firefox 7.4%.

Financial Results for 1Q 2010 Skewed by Deferred Revenues

October was a very busy month for Microsoft. Besides launching the rejuvenated operating system and another promising product that will be discussed later, management reported financial results for the first quarter of fiscal 2010, ending September 30. (See exhibit below.)

Revenues of $12.9 billion declined 14.2%, compared to the same period last year. Operating income, net income and diluted earnings per share were $4.5 billion, $3.6 billion and $0.40, which represented declines of 25%, 18% and 17%, respectively.

However, adding back deferred revenue of $1.5 billion from the Windows 7 upgrade option and sales of Windows 7 to computer manufacturers, revenue totaled $14.4 billion, a 4% year-to-year decline. Earnings per share were $0.52, an increase of 8% over the same period of the prior year. Decreased operating costs allowed this apparent contradiction.

Preliminary reports indicate Windows 7 sales are going well, which could result in a strong second fiscal quarter, in which Christmas holiday shopping occurs.

Growth Depends on Reversing Market Trends and New Products

If Microsoft cannot reverse the trends in its computer operating system and browser markets, future growth for the company largely resides in its ability to introduce new products, such as its Mobile 6.5 operating system for smart phones, in October. That market, of which Microsoft holds only 10%, has been dominated by Apple, Research in Motion (RIM), Nokia and Palm.

But since Microsoft is not renowned for developing innovative products, penetrating the smart phone market could be a long shot. Even so, the company's formidable presence and resources to assimilate competitors, combined with what appears to be a more cooperative attitude toward competitors, suggests the company will be a major player over the long term.

True, the cachet of the high-growth stock of Microsoft's heyday is missing. But since the year 2000, diluted earnings per share have compounded annually at a respectable 6.7%. For investors, the company that was once an accelerating Porsche has become a cruising Cadillac.

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