Dull, boring and predictable have been some of the more polite descriptors applied to the world’s biggest software company.
Not surprising then that the Redmond, Washington-based Microsoft Corp. has been losing market share in browsers and software for smartphones and ceded the initial advantage it had in online services such as Internet search and email. All the while, rivals such as Apple Inc., with its iPod, iPhone and now the iPad, and Google Inc.,?with its ubiquitous search engine and new smartphone Nexus One, have been grabbing most of the attention.
Upbeat: Microsoft chief financial officer Peter Klein says the company sees huge opportunity for growth across product and services categories. Kaushik Chakravorty/Mint
Described as a company with an amazing past, a great present, but a slightly cloudy future, critics have been carping that Microsoft has withdrawn into the more predictable enterprise market and lost the mindshare of consumers. They have also been questioning its software plus service only model, at odds with the strategy of competitors that are bundling hardware, software and services to provide a better user experience.
Still, aided by its near monopoly in the operating system and productivity software suite of solutions led by the Windows and Office platforms, Microsoft generates net profit in excess of $14 billion (Rs65,000 crore) annually. Over the past decade, it has made $113 billion in net profit.
Microsoft has defied critics in the past to come up trumps in segments in which it had been written off. While the company didn’t cover itself with glory with the Vista operating system, Windows 7 has been a success with at least 60 million licences sold in four months of launch. Meanwhile, the firm is making a fresh start with smartphone software with Windows Phone 7 being unveiled to acclaim last week.
Peter Klein, who was named Microsoft’s chief financial officer in November, says in an exclusive interview that it’s early days yet in areas such as online services and smartphones. Klein, who spoke to Mint during a visit to Mumbai on Friday, is confident that Microsoft will shape the technology industry in the next decade as it did in the last one. Edited excerpts:
You are coming off a great quarter with record revenue of $19 billion and net income of $6.66 billion. Windows 7 has boosted growth. Is this a single-quarter phenomenon? Are enterprises starting to spend again?
We have seen great momentum for Win7 predominantly coming from the consumer space. Win7 has been the fastest selling ever OS (operating system). Not just for us, it has catalysed the entire sector. PC sales grew by 15% globally in the last quarter, compared with either flat or negative growth in several quarters preceding that. Twenty percent growth in the consumer segment and flat growth in the business segment is what we saw. We see more optimism (in terms of spending) for the business segment in the current quarter, which is our third quarter, but which will be the first quarter for calendar year 2010. It is not just Win7, there is considerable excitement across our products categories—be it server, Office 2010 or our other offerings.
When the business PC refresh cycle happens, we will actually see further additional momentum (in sales), both in terms of units and average price.
What about the perception that the future is a bit cloudy, compared with both your past and present?
There will always be competition in successful businesses. Right now our view and that of our investors is that there has never been more excitement about our future growth opportunities as we continue to innovate.
Within the next 12 months we have Office 2010 coming in, Windows SQL server, new launches in server and tools business, Project Natal (for the Xbox console), Azure, our cloud (computing) offering, Bing (search engine), which has been growing market share every month since it has been launched. Across our product and services categories, we see huge opportunity for growth.
Has Microsoft retreated into the more predictable, safe but boring enterprise space at the cost of mindshare of retail consumers?
Not at all. Yes, the enterprise space has great economics attached to it but we do a good job across both (consumers and enterprises). As I said earlier, the Win7 growth story was driven primarily by consumers in the last quarter. If you look at Bing, the response has been terrific. If you look at Xbox Live, we have at least 23 million members and growing at 30-35%. A lot of offerings we have in the consumer space, whether it is gaming, search, phone, PCs, we are doing very well.
Microsoft has always led with a software plus services strategy. But competitors such as Apple and Google are also adding the hardware bit to the mix to enhance user experience. Would Microsoft have a phone of its own, as rumoured with Project Pink?
I think Steve (Ballmer, chief executive officer of Microsoft) made it clear that we would pursue our current strategy of software plus services. We will work with our (hardware) partners and (telecom) carriers for Win Phone 7 too. The feedback we have received for Win Phone 7 has been excellent and makes us more confident to pursue our strategy.
The (smart) phone market is still very nascent and is a constantly evolving market. The game is still very early and we think Win Phone 7 will help us grow further.
In online services, you seem to have lost your initial advantage whether it is in mail or search or other tools.
Particular to search, I am very encouraged by the progress we have made. ComScore, Inc. says that Bing had a 11.3% market share in January. It is a long battle and we will look at monetization and the economics of the business. The Yahoo partnership has helped accelerate our success in the business and helps us gain scale.
Whether it is messenger, hotmail and other services—what we call our Windows Live offerings—we have been very happy with the progress.
You spend close to $8 billion in research and development despite some recent cuts in the budget. What kind of prioritization in innovation is being done?
We continue to invest heavily in innovation. Even when we announced layoffs (for the first time ever in Microsoft’s history) last year, we were also clear that while we would reduce in some areas, we would continue to hire and grow in certain other areas. We have become more disciplined on where we invest, particularly in a tough economic environment. We will continue to invest in key areas such as cloud computing, software plus services and search.
What about the India picture? (Microsoft does not provide India-specific revenue, but ‘Dataquest’ magazine estimates that last year it did Rs3,298 crore of business in the country.)
India is an extremely important geography for us both as a market and as a resource base for our global operations. We employ at least 5,000 people here. India is a critical component of our future growth strategy.