Netbooks hammer Windows revenues for second straight quarter

Cheaper XP Home on netbooks means less money in Microsoft's pocket

Netbooks, the small, cheap laptops that are gaining popularity, hurt Microsoft Corp.'s Windows revenues for the second quarter in a row, company executives said today.

Revenues for the Windows client division were down 16% in the first calendar quarter of 2009 compared with the same period last year, Microsoft said -- in part because of the continued growth in netbook sales, which accounted for 10% of all PC shipments in the quarter, according to Bill Koefoed, Microsoft's general manager of investor relations. Profits for the company's Office suite also fell.

A second indicator of netbooks' impact was another fall-off in what Microsoft calls the "premium mix," or the percentage of Windows sales attributed to the higher-priced and higher-margin editions, such as Vista Home Premium, Vista Business, Vista Ultimate and Windows XP Professional. During the first quarter, the premium mix fell by 14 percentage points year over year, from 76% to 62%.

This was the second quarter in a row that the Windows premium mix drop was in double digits: In January, Microsoft confirmed an 11 percentage point drop, from 75% to 64% year to year, for the fourth quarter of 2008. At the same time, the company noted that Windows revenues had slumped 8%.

Netbooks affect Windows revenues because most come with Windows XP Home, a version that has a much lower price point than, for example, Vista Home Premium. Reportedly, Microsoft sells copies of Windows XP Home to netbook makers for as little as $15, but charges $50 to $60 more for a Vista premium edition.

For every netbook sold, Microsoft settles for less revenue, and in the end, less profit.

Microsoft may not have pointed out the specific difference that netbooks made to its Windows business last quarter, but the numbers were there. "We found a continued deterioration in the PC market," said Koefoed, who added that by Microsoft's estimates, global PC sales declined between 7% and 9%. Its unit sales for Windows tracked that closely -- down 6%, said Koefoed -- not surprising, since most machines sold come with Windows preinstalled.

In pre-netbook days, Microsoft's Windows revenues were more or less in sync with PC sales, noted Chris Liddell, the company's chief financial officer, while answering questions later in the earnings call on Thursday. In other words, if PC sales rose 8% during a quarter, Windows revenues grew by about the same amount. But netbooks have thrown a wrench into that calculation, Liddell acknowledged, making it difficult to predict future Windows revenues.

Allan Krans, an analyst at Technology Business Research Inc., put it more bluntly. "That's what got Microsoft from the 6% decline [in Windows unit sales] to the 15% to 16% decline in Windows revenues," said Krans. "Netbooks are a growing impact on Microsoft's bottom line."

Netbooks can't take all the blame for the drop in Windows revenues, Krans cautioned -- the larger issue is the slide in computer sales -- but they exacerbate Microsoft's problem. And it's not going to get better overnight, if ever.

"Netbooks, and lower-priced PCs in general, show a fundamental shift in buying," Krans argued. "It's not something that will go back to the way it was any time soon. The shift is away from bigger and better toward simplicity and ease of use." The latter, he said, was one reason that Apple continues to do relatively well, even though its Macs are premium-priced. "People want something that's easy to use, not heavy and complex," said Krans, referring to operating systems.

The launch of Windows 7, which most analysts believe will happen in the second half of this year, may not put an end to the netbook revenue problem for Microsoft. The company has said it will sell Windows 7 Starter, its lowest-priced version, to netbook makers.

"Netbooks will have a long-term impact on Microsoft," Krans warned.

Copyright © 2009 IDG Communications, Inc.

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