Windows 8 Isn't Going to Save the PC the Way Everybody had Hoped

When you’re charged with saving the PC market, you have some big shoes to fill. So far, Microsoft MSFT isn’t filling them.
On Thursday, Microsoft reported earnings and Wall Street is not impressed. In premarket trading Friday, the stock is down more than 1 percent.

The Redmond, Washington company posted revenues of $6.4 billion—down from $6.6 billion one year earlier and about $100 million less than analyst expectations. EPS was 76 cents, also down year over year from the previous year’s 78 cents and beating expectations by 1 cent.
Terrible? No. Impressive? Not really. In order to save the PC, Microsoft is going to need “impressive.”

The heart of the PC is Windows. Sure, there have been other operating systems, but when the world thinks of the PC, it thinks of Windows. According to netmarketshare, a Windows operating system runs on 91 percent of all computers compared to Apple’s AAPL 6.3 percent share.

This makes any new version of Windows arguably more important to the PC market than to Microsoft. Companies like Dell, DELL Hewlett-Packard HPQ and Intel INTC rely heavily on Microsoft to wow consumers with each Windows upgrade, but the response to Windows 8 has been tepid.

Intel reported earnings that fell 27 percent from the previous year, according to the company’s earnings release. It shipped 6 percent fewer PC chips last quarter, the division responsible for two thirds of its revenue.

Languishing Dell is considering going private (with Microsoft showing interest as a potential buyer, ironically). Hewlett-Packard is down 40 percent and looking very J.C. Penny-esque JCP with all of the marketing language of a company on life support. “Transition,” “turn-around,” “reinvention,” and “company shake-up” are just a few of the terms being used.

There’s no doubt that the PC market is slowly dying but is it fair to say that Microsoft didn’t give the PC a booster shot with Windows 8? Thursday’s earnings revealed that Windows sales jumped 24 percent to $5.8 billion in the last three months of the year.

In comparison, Windows 7 produced a 74 percent increase and Vista, the operating system everybody hated, produced a 65 percent spike. (Of course, people had to purchase Vista before they could hate it.)

When asked, Microsoft blamed the slumping PC market and to some degree, that's a reasonable assertion, but investors want something more from Microsoft. They want a company, like Apple, that is ahead of the market. A company that is leading and shaping market demand rather than hoping it responds favorably to another update to a 27-year-old product.

According to the earnings release, Microsoft sold 60 million Windows 8 licenses. There are two important caveats to this number. Microsoft slashed the price for current users wanting to upgrade to $39.99—down from $120 for Windows 7. Second, Microsoft reported that its advertising expenses, mostly tied to Windows 8, increased 49 percent.

Finally, investors might remember that Microsoft boasted of selling 4 million licenses in the first three days of the Windows 8 launch. Sounds impressive but Apple, the company with a 6 percent share of the PC market, sold 3 million copies in the first three days.

The PC market needs a “wow” and it was hoping to get it from Windows 8. Thursday’s numbers were respectable. To save the PC will be a Herculean task. That’s going to take something much bigger than Windows 8.