Windows 8: Make-or-break moment for Microsoft CEO

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The biggest question hovering over Windows 8: Is it innovative and elegant enough to lure consumers who are increasingly fond of smartphones, tablets and other sleek gadgets? Those mobile devices have been setting industry standards while Microsoft engineers have spent two years designing a new operating system.

And Windows 8 must address not only the upheaval in the computing market since Windows 7 came out in 2009, but also have the flexibility to adjust to future shifts in technology before Microsoft releases another version in two or three years.

“It doesn’t seem like Microsoft is really pushing consumers into the future with Windows 8,” said Forrester Research analyst Sarah Rotman Epps. “What Microsoft has done is like buying a pair of shoes for a kid. The shoes may fit exactly right today, but those shoes probably won’t fit six months from now.”

Previous versions of Windows and other Microsoft products such as Office are so deeply embedded in companies and government agencies that Microsoft is still assured a steady stream of revenue from that segment of the market. That loyal base of customers is one of the reasons that Microsoft is expected to earn $25 billion on revenue of $80 billion in its current fiscal year ending next June.

“This isn’t a company that is on the edge of extinction, like some people would have you think,” said BGC Financial analyst Colin Gillis. “What we are seeing with Windows 8 is classic Microsoft. They let the (technology) market lead and then they follow.”

But investors want to see Microsoft do something more. The nagging fear on Wall Street is that the PC industry is past its prime and heading into a gradual decline that will pull down Microsoft, too.

The signs of decay have been proliferating since Apple released the iPad in 2010, hatching a tablet computer market that has combined with an already vibrant smartphone market to siphon away technology spending that used to go toward the latest PCs.

Worldwide PC sales year are expected to decline this year for the first time since 2001, according to the research firm IHS iSuppli. It’s a drop of just 1 percent, but it underscores a troubling trend that has been hurting Microsoft.

The shift to mobile devices has whittled Microsoft’s worldwide share of the computing device market from 67 percent in 2008 to about 30 percent today, estimates Forrester Research analyst Frank Gillett. Thanks to its Android software for phones and tablets, Google is now the leader with a 40 percent share of the computing device market. Apple stands at 20 percent.

Analysts don’t expect Microsoft’s corporate and government customers to immediately embrace the new system, no matter how much it’s hyped. About half of this traditionally cautious group of customers still haven’t upgraded to Windows 7. Most analysts expect companies and government to hold off on switching to Windows 8 for at least another year.

Ballmer hopes to accelerate the changeover by making Microsoft’s Office software suite more compelling, with the help of two major acquisitions.

Microsoft bought the video chat service Skype for $8.5 billion last year and in June agreed to pay $1.2 billion for Yammer, a service the builds social networking services within companies. Both are expected to become key features within Office to make it easier for workers to connect and collaborate with their peers and customers.

Ballmer also has won praise from analysts for striking potentially fruitful partnerships with Yahoo Inc. and Nokia. Microsoft now provides Yahoo with much of the same technology that runs its Bing search engine. The Yahoo deal provides Microsoft with 12 percent of the revenue from the ads shown alongside search results on Yahoo’s website.

The Nokia alliance ensured Windows 8 would be the operating system on that company’s latest line of smartphones, a potentially valuable platform if Nokia is able to regain some of the market share it has lost in mobile phones during the past five years.

(Microsoft has also joined with The Associated Press to use AP content in Windows 8 news applications.)

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