Don't be fooled by Microsoft's earning report about Windows growth

At first blush, the news is all good about Windows from Microsoft's earning report. But a closer look shows that's not at all the case.

Overall Microsoft reported revenue of $20.5 billion for the quarter that ended March 13, an increase of 18 percent compared to the same quarter a year ago. The big surprise was Windows Division revenue of $5.7 billion, up 23 percent compared to the quarter a year previous. That certainly sounds like good news.

But it's not necessarily so. That revenue includes $1.1 billion of revenue that was really gained in previous quarters, from Windows 7 sales under a program to offer free Windows 8 upgrades. So in truth, Windows sales were flat from the year previous.

Given that PC sales have been down 13.9% compared to a year previous according to IDC, even flat sales might be considered a success for Windows 8. But there's a strong possibility that Windows sales for the quarter include a sizable amount of revenue from Windows 7, not Windows 8, and that it's substantially discounted.

Chris Suh, head of Microsoft's investor relations, told Wall Street analysts yesterday that sales of consumer PCs were poor for the quarter, according to Computerworld:

"OEM revenue performance was in line with the underlying x86 PC market, which continues to be challenged as the PC market evolves beyond the traditional PC to touch and mobile devices."

In other words, sales were bad. So how did Microsoft manage to keep Windows sales flat from a year ago, instead of having them fall? There's a reasonable chance that Microsoft has been giving discounts to big enterprise customers to get them to upgrade to Windows 7, and pump up revenue that way. Patrick Moorhead, principal analyst at Moor Insights & Strategy told Computerworld:

"Microsoft can massage the numbers as they relate to licenses for enterprises and consumers. And that's exactly what they're doing here. The reality of the situation is that you really can't measure Windows performance from license sales. The fact is that new PCs weren't sold, so from a strategic point of view, their numbers don't hold a lot of value."

Rob Helm of Directions on Microsoft added:

"Microsoft is benefiting from Windows 7 migrations to a certain extent. More companies are upgrading PCs that are three or four years old, that when they were bought, were downgraded to XP. And Microsoft may be giving incentives on those upgrades."

The problem, of course, is that's only a short-term solution because at some point most enterprises will have upgraded to Windows 7. So it's not a sustainable solution. At some point Windows 8 will have to stand on its own.

Clearly, that time is not now. Microsoft will only be able to play with numbers and offer discounted upgrades to Windows 7 for only so long. And because Microsoft is not giving out information about Windows 8 sales, after that is when we'll find out how Windows 8 is really doing.

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