Microsoft miss goes beyond Q1 earnings

Microsoft released less-than-stellar earnings yesterday, attributing its first ever drop in year-over-year quarterly earnings to soft PC sales. Yet its biggest rival in PC software, Apple, reported stronger than expected financials in the same week. Similarly, other tech stalwarts like Google, IBM and Intel all reported far rosier scenarios, even in the face of the current economic downturn. Why is Microsoft more troubled than the rest?

Microsoft's blaming of soft PC sales is a clue. Microsoft's bread-and-butter PC marketplace has shifted under its feet, a change that has only been sped up and exacerbated by the poor economy. And that leaves Microsoft struggling to catch up, even as its rivals enjoy newfound strength in emerging markets and platforms.

In the past, it used to be that users who needed a standard, reliable business computer went with Microsoft, while people like designers and artists--who needed better graphics and ease of use--went with Macs. That's all changing with the advent of reliable 3G networks and easy to use smartphones and netbooks.

Today's high-powered business execs rarely carry a laptop or even touch a PC. Instead, they have a Blackberry, and increasingly an iPhone. While some probably use a Windows Mobile phone too, that percentage is falling or disappearing altogether as Apple, Google, RIM and Palm debut stronger models and snazzier applications.

So, cross off the business execs--they don't need Microsoft. But what about their admins and support personnel? Probably most use Windows PCs, but that doesn't mean they need Microsoft either (as the tepid response to Windows Vista attests). Especially in this economy, few companies are looking to shell out large amounts of cash simply to upgrade to an OS with only questionable improvements over what they use today. They don't need anything fancy and expensive, just a PC that does the job. And as more of that job moves online and into the cloud, the focus is more on the browser and less on whatever Microsoft's latest desktop OS provides.

So who's left? Consumers, and that's another segment where Microsoft has a less than compelling argument. Why should consumers go out and buy a $1,500 desktop or notebook PC equipped with resource-hogging Vista or Windows 7, when all they really need is access to e-mail, IM and Internet sites like Facebook, Hulu and Twitter. A $300 netbook--especially a communications-savvy netbook based on a smartphone OS like Google's Android--serves the purpose just fine in this economy. And those who are even more cash-strapped can make due with an even less expensive tool--a smartphone.

Of course, there are more traditional PC users who seek out the latest and greatest, and require fast graphics, good on-board computing power, big hi-def displays and so on--but they're a dwindling segment of the market. And when they do look to buy, do they choose Microsoft? Or do they go with Apple, who openly disses netbooks and instead focuses on providing the high-end design savvy and quality aura that Microsoft seemingly lacks?

Today, Apple has the stronger strategy. It's cornering both the smartphone segment and the high-end PC segment, leaving Microsoft with an increasingly smaller slice of the pie.

And Microsoft doesn't get it yet. As its most recent ad blitz makes plain, Microsoft is still focused on owning the cheap, does-the-job-just-fine segment of the market. But with netbooks and smartphones becoming cheaper, more feature- and function-rich (despite Microsoft's dubious Windows 7 Starter intentions), perhaps that market is already passing it by.

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