Bangalore: On Thursday, Microsoft Corp. posted its first year-on-year quarterly fall in revenue since it listed in 1996. In the three months to March, the world’s top software maker reported revenues of $13.65 billion (Rs68,250 crore), a drop of 6% in the same period a year ago, and a 32% decline in net income to $2.98 billion. This came in the background of research and forecast firm Gartner Inc. saying that shipments of personal computers (PCs) at 67 million units in the quarter dipped by 7% compared with the same quarter last year.
Even as Microsoft struggles globally, India is a bright spot, with revenue and profits growing at a fairly rapid clip. Though the company doesn’t provide country-specific revenue numbers, trade magazine Dataquest estimates that Microsoft India had revenues of Rs3,263 crore in 2007-08.
The firm’s chief operating officer, Brian Kevin Turner, 44, was recently in India and talked about the challenges facing the company including the fall in the PC market, the rise of netbooks, imminent launch of Windows 7 operating system, its search strategy with or without Yahoo Inc. and its mobile computing plans, among a few other things. Edited excerpts:
Difficult year: Turner says personal computers growth numbers on the consumer side have been hit the hardest. Kevin P. Casey / Bloomberg
How is Microsoft coping with the crimp in information technology budgets across the world?
Microsoft sells products and services in 191 countries across the world. Depending on geographies, there have been currency devaluations, gross domestic product shrinkage and some where stimulus plans are providing growth. So, it is a mixed bag, but certainly an interesting time to be in business.
We have studied and analysed companies which have come through different economic recessions, depressions and crises during the course of time and figured out what distinguishes the successful ones. It really came down to innovation.
When most companies are pulling back on research and development (R&D) and innovation, Microsoft has decided to enhance it. Last year we invested $8.1 billion in R&D, and as market conditions became tough we decided to increase this by $1 billion to $9 billion. If we are really going to get through this tough macro-economic environment, we have to keep innovating and keep our pipeline strong. While that might not be the popular thing to do among financial circles, we believe that is the right thing to do. We are doubling down on innovation.
We (also) have an exciting line of products coming up. New releases of Windows 7, Office (productivity software suite) and we just released a new version of our browser, business productivity online suite with our software plus services strategy. We want to seize this opportunity.
When do you see growth returning?
We clearly think that the rest of this calendar year will be difficult from a growth perspective. That said, in some of the mature markets such as the US, our businesses are holding up well. Bric (Brazil, Russia, India and China) countries, with India as an example, will see some growth. They will be big growth drivers for us both in the near and the long term.
We will be leaning on Ravi (Venkatesan) and Rajan (Anandan) to continue the growth which Microsoft here has experienced for a number of years. We have 5,500 people here and I am proud of the success we have had.
If Microsoft revenues can be split into annuity, transactional and consumer buckets, which segment is hit the most?
Clearly, the PC growth numbers on the consumer side are the hardest hit both in the consumer and small business.
The PC market this quarter actually shrunk. Will the launch of Windows 7 reverse that trend and give a growth nudge to the entire ecosystem?
If you categorize the PC market, netbooks are growing by leaps and bounds. Today 90% of the netbooks sold include Windows. Netbooks today constitute around 15% of the total PC shipments and we see this going up to 20-25% in the near future. Windows 7 will also be available on netbooks. As far as the PC market is concerned, we are probably two-three quarters away from completely bottoming out. This is a speculation and my own personal opinion and not that of Microsoft.
The reviews and feedback on Windows 7 has delighted and exceeded our expectations. You know we haven’t announced a launch date yet. We don’t have a forecast on what it will do to the demand (or to the ecosystem).
What have been the learnings from the Vista launch?
There are two reason why Windows 7 will be successful. One, it is a fantastic product. Two, it will be because of Vista. If you look at what happened with Vista for the first time we engineered security into actual operating system (OS). As a result of this we broke a lot of compatibility issues. This, in turn, broke a lot of device and application compatibility. As a result of this the ecosystem wasn’t ready when Vista hit the market and it was a painful process. We have fixed all this.
Vista post-service pack 2 is the best engineered and the most secure operating system in the world, better than Linux and Leopard (the Apple OS). Any device or application compatible with Vista will work seamlessly with Windows 7.
Will we see Windows 7 launch before the holiday season in the US?
That, for sure, is something we are striving for though we have not made a commitment to that effect.
Is the rise of netbooks as a category worrisome as analysts say that Microsoft makes a fraction of the money by supplying software to this category as it does for the regular PC market?
We have a very affordable version of XP for netbooks and that is not going to go away. When netbooks got launched, it used to be Linux that was the OS of choice but that changed as the return rates increased because of poor user experience and as compatibility issues came in. We went from 0% to 90% market share in the netbook OS category.
Windows 7 Starter edition with a lot of new features will be available for the netbook category at a slightly higher price than XP. They can even upgrade to Windows premium for these netbooks which are essentially low-end, entry level laptop devices. I think the growth of netbooks category is a opportunity for Microsoft.
India has been adding close to 10 million mobile customers a month. Several of them are graduating to smartphones. What is your strategy here? Will we see a Zune equivalent of an iPhone?
This year we will sell about 21 million copies of Windows mobile (for smartphones). We have examined getting into hardware at various points and at this particular time we have chosen not to. Windows Version 6.5 and 7 are on the anvil with some pretty exciting features. PC, smartphone and television we see as connecting the digital lifestyle and the digital workstyle. This is where the next wave of innovation is going to come from Microsoft. Our current strategy is we will not do hardware in the mobile computing space.
I know Microsoft is not very big on mergers and acquisitions (M&A). But would you make a play for RIM (Research in Motion Ltd that makes BlackBerry smartphones) especially as you are sitting on so much cash?
We do not comment on rumours and speculations. Having said that, our M&A strategy (is) at 30,000ft level, lemme say that it will continue as in the past. We will look at small companies with great talent of people, great IP (intellectual property), great ideas.
What is with search? Getting back into bed with Yahoo?
We got Qi Lu on board who I personally believe is one of the world’s leading minds in the search space and one of the smartest people I have met. (Qi Lu till recently used to head Yahoo’s search and technology advertising group.) He is working with a team to improve our search products and the analytics around search.
Internal to Microsoft right now we have certain very exciting beta products in the search space. We are making pretty good strides in the search business.
We are investing heavily in search, stay tuned. We are committed to the game long-term and to become a world-class digital advertising company. We are clearly not the dominant player in the market today (smiles) but we will continue to invest to and grow that business.
Will we see a new version of your search effort, whether it is branded as Kumo, Bing or Sift, being launched soon?
We haven’t announced a timeline but all I can say at this point is that it will be sooner rather than later.
What is happening on the cloud computing front?
We have got software plus services in the cloud. Azure (which is Microsoft’s brand of cloud computing offerings) has been phenomenally successful in Beta. We are the market leader in cloud computing in the commercialbusiness.