A Microsoft Without Client Software: It Could Be the Future

Steve Wildstrom / July 31st, 2013

It’s easy to forget today but Microsoft got its start as a highly disruptive company. The IBM PC running Microsoft software revolutionized business computing in the 1980s, bringing down the priesthood of the mainframe. As cheap clones and better applications flooded the market, Microsoft was everywhere. In the mid-1990s, the friendlier Windows 95 and the explosion of the World Wide Web made personal computing accessible to a mass consumer market, again dominated by Microsoft.

Twenty years later  though, it’s time to contemplate a future in which Microsoft mainly retreats to the back offices its once disrupted so thoroughly. Microsoft’s client business has gotten into deeper trouble faster than I imagined possible. A years ago, the company launched three new client operating systems. Windows RT, the OS designed for tablets with ARM system-on-chip processors, is an unmitigated disaster. Asus, the last OEM with any real commitment to RT products, appears to be bailing out, and Microsoft, after taking a $900 million writedown on unsold inventory of Surface RT tablets, reported that it sold just $853 million worth. Windows 8, the version for traditional PCs and Intel-powered tablets, is not doing much better.  For the first time, the introduction of a new version of windows has not only failed to boost PC sales but may actually have helped accelerate the decline, while Windows tablets and new convertible designs have failed to gain much traction.

In this field, Windows Phone 8 looks like the winner. At least it is gaining market share. But Windows Phone, with about 4% of the U.S. market, is a very distant third in what increasingly appears to be a two-horse race. So where does this leave Microsoft: Nowhere in the rapidly growing space of tablets. Still dominant in PCs, but in a market facing slow but inevitable decline. And hanging on by its fingernails in a smartphone market in which growth may be slowing substantially. The bottom line is that it is not at all clear that Microsoft has a viable future in client systems. To be sure, the Windows PC will be with us for a long time to come, but its future for Microsoft is one of managing decline. What would a Microsoft without clients look like?

On the revenue side, it’s not too bad. Microsoft financials table The Windows Division (these data do not reflect Microsoft’s most recent corporate reorganization), which consists of, well, Windows, accounted for just over a quarter of Microsoft’s gross in the most recent 12 months. Of course, the decline in clients is also going to affect client applications. Office falls into the Microsoft Business Division, which also includes Microsoft’s growing Dynamics line of enterprise management software. Best guess is that Windows and Office combined provide about half of Microsoft’s revenue. The self-explanatory Server and Tools unit and the Entertainment and Devices Division–mostly Xbox–make up most of the rest.

On a pro forma basis, a clientless Microsoft would still be a $40 billion company. The problems come when you look at profits rather than revenues. Windows and Microsoft Business provide nearly all the profit. This picture is not quite a grim as it appears at first glance. If Microsoft were to contract sharply, the $6.6 billion in overhead (“Corporate-level activity”) should also shrink considerably. And the Online Services Division, which includes Bing Search, Skype, and a variety of other services, appears to be in a serious turnaround, trimming its massive losses to $1.3 billion in the most recent 12 months. Server and Tools turns in a very nice 40% margin.

What you might be left with is a company with $40 billion in revenues and a 30% profit margin in place of one with $78 billion in revenue and a 35% margin. No great, but clearly viable. And the fact that Microsoft will go on receiving streams of legacy income for years to come buys it the time it needs for change. The big question is how you get from here to there. Corporate reinventions, in which a company sheds what were once thought to be core businesses to set the stage for future growth, are hardly unheard of. IBM is probably the outstanding example of such a successful transformation. But the process is wrenching and brutal. And I have never heard of a reinvention on this scale being carried out by the management that landed the company on the rocks. Whoever will lead Microsoft to calmer waters, it will not be Steve Ballmer.

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Glaurung-Quena

    The problem with MS’s moving forward isn’t just in leadership, though. Setting Xbox aside, the non-windows, non-office parts of MS (corporate servers and services) are currently dependant on the Win/Office monopoly to help them leverage their client base. One huge reason to buy server and back office apps from Microsoft rather than someone else, is that MS’s apps integrate well with Windows and Office. As the power of the Win/office monopoly continues to crumble, MS will have to start competing on an equal footing with the other enterprise solutions out there, which they have never had to do before (this opinionated and somewhat overstated article at semiaccurate talks more about this issue).

    On the books, the server/services parts of MS are huge and healthy and an MS without its Win/office monopoly will still be a power to reckon with in the tech landscape, but because of that dependency on their monopoly, they could just as easily find themselves shrunken to a mere shadow of their former selves if their corporate customers start transitioning away from MS products to alternative products that are better suited to serving both desktop and mobile clients.

    • Brian M. Monroe

      I agree. Microsoft’s two bases of power starts with the Windows 32/64 API’s along with the Microsoft Office file formats and works out from there.

      That is why they had to design (stupidly for security and updating reasons) Internet Explorer right in to the OS to do everything they could to tie as much of the Internet to Windows as possible.

      That is also why they moved from the older (.doc) file format to the newer (.docx) format as they saw the writing on the wall with the free office suites like OpenOffice. They could not loose control of the office suite space.

      Now if people think that Microsoft in the back office (aka Windows Server) will be able to stand alone I do not see it happening. Instead of running an expensive Microsoft Exchange server you can put in it’s place an IMAP, CardDAV and CalDAV server that does not require CAL’s and licensing fees to pay to Microsoft. The same is true for IIS and Microsoft SQL. Apache and MySQL/Postgres SQL work better and are a lot less expensive.

      So in the end, In the near future, I do not see Microsoft being more than a niche player as I do see there being way more devices that will only work with standard protocols and not have the overhead of traditional computers.

      • arrow2010

        You talk about open source being “cheap”, but that’s only the upfront low cost of the development tools and starting code-base. It’s just as expensive or even more-so to pay for Linux engineers than Windows engineers.

        • Brian M. Monroe

          I am not saying that open source is “cheep”. But many things on open source are standard and are more widely supported with lower overhead. The point is that the road forward will not be one where Microsoft tools and technology will be the standard but more the exception. More users will be using non Microsoft technology as most SmartPhone’s, Tablets and Devices. The only part I see Microsoft having a hand in those devices are any patents that they have.

    • steve_wildstrom

      These services depend on Windows Server. The dependencies on the client side are much weaker. For example, Microsoft services generally work well on the Mac.

      Of course, what Microsoft would have to do to succeed in a world where it does not own the clients is to go to a truly client-agnostic approach. That’s one reason the current management has to go; it will never let go of its Windows-centrism.

  • T Keach

    To me its less interesting that MS is failing than how they are failing. They are failing because their interface is too weird and radical for most people. They are turning to ios and Android which have a more conservative view of how UI should look.

    • steve_wildstrom

      Or maybe Android and iOS just have more coherent ideas about how a UI should work.

      If you can get people to try Windows Phone 8, they seem to like the UI, which is essentially a coherent half of the Windows 8 design. Though I have some quarrels with the Metro half of Windows 8–the full-screen bias doesn’t work well on big displays–90% of the problems come from having Metro and Desktop UIs on the same device.

  • Why is the first paragraph center?

    • That post has been up for a month and I’m not sure whether the formatting was munged from the beginning or if something went wrong later. Not only was the text down to the table centered, but the paragraph breaks were missing. It’s fixed now.

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