Microsoft breakout quarter shows the future of the company isn't spelled "Windows"

Yesterday's earnings report shows that Microsoft had a breakout quarter and year, with its highest yearly revenue in history at $69.94 billion and a big-growth quarter. A closer look shows that the company's big earnings this quarter weren't driven by Windows. Microsoft should take the hint, and stop pushing the Windows brand so hard.

Windows revenue for the quarter fell 1%, the second quarter in a row it has declined. Despite that, the company posted $17.4 billion in sales for the quarter, an increase of 8% over the previous quarter.

So if Windows sales slumped, where did the increase come from? One very bright spot was Xbox 360 and Kinect, with sales of 30% over the previous quarter. For the entire year, it had sales of $8.9 billion and operating profit of $1.3 billion. That's a gain of 114 percent compared to the $618 million a year previous.

Sales of Microsoft Office boomed as well, with a jump of 7% for the quarter and 16% for the year. Servers and tools revenue, meanwhile, grew 12% for the quarter, and 11% for the year.

Note that no product with the word "Windows" in it drove dramatic growth. Microsoft didn't break out Windows Phone 7 sales, with good reason --- those sales have been anemic.

The message here? Microsoft shouldn't peg its future to Windows. Yes, Windows will remain a cash cow now and as far into the future as the eye can see, and Microsoft should continue to milk it. But that's not where growth is.

One big growth area is tablets, and tablets are hurting Windows sales, because people are buying them instead of secondary notebooks or netbooks. But using Windows as the tablet OS is a mistake; by the time Windows 8 comes out and is ready for tablets, that market will be sewn up by iPad and Android.

The use of the term Windows for smartphones is a mistake as well. A Gartner report says that Windows Phone 7 is hurt by the "Your-dad-uses-it" syndrome. The perception that their fathers use it at work makes younger people less likely to want to use it.

As for the Internet in general, the Microsoft online brand "Windows Live" is meaningless, because Windows has nothing to do with Hotmail, SkyDrive, or other similar Microsoft sites.

So Microsoft should take a hint from its successful quarter, downplay Windows, and look elsewhere for growth. CEO Steve Ballmer has said that the future of the company remains Windows. But maybe the hard numbers will make him change his mind.

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