Microsoft Reports Losses While Looking Set For Rapid Growth

Much has been made of Microsoft’s fourth quarter results because on paper, the company reported a $492 million (£317.6m) loss. But this is a situation in which a loss isn’t really a loss. It’s just a convenient means of balancing the books.

If you take out a $6.2 billion (£4b) non-cash “goodwill impairment” charge related to its ill-fated acquisition of aQuantive and deferred revenue from Windows upgrade offers, things don’t look bad for Microsoft at all.  In effect, the company chose this quarter to write off the aQuantive acquisition that actually happened in 2007.

Others have noted that Windows sales are off $600 million (£387m), including those deferred revenues, when compared to FY 2011. According to a number of analysts, this sales slump is really the result of anticipation of the release of Windows 8 this October. For Microsoft, this is very good news.

Sheer persistence

So how can these losses be good? If you take out the aQuantive calamity and the deferred revenues, Microsoft would have reported a profit for the quarter. In other words, it’s a paper loss, and Microsoft is still making plenty of money. The even more important factor is that people are waiting for Windows 8 and analysts are expecting a strong demand when the OS ships in October.

This is not particularly good news for the competition. The company is essentially clearing its decks for action and is saving strength for the releases of Windows 8, the Surface Tablet and Microsoft Office in October. Meanwhile, it remains financially strong, with just under $60 billion (£38.7b) in the bank.

By having all that cash under its mattress, Microsoft can hang in there and spend money to make sure that Office, Windows 8 and the Surface are given the time and resources to be successful. Unlike some companies with less capital that have to abandon a product line if it doesn’t perform, Microsoft is in its product business for the long haul.

This has happened before. Microsoft continued to pour money into the XBox, and continued to lose money on it, until the competition was eventually worn down through sheer persistence. The same thing happened with Microsoft Office, which spent the best part of its first 10 years in existence toppling competing office productivity suites.

Now Microsoft is clearly planning to take all the necessary action to support the Surface tablet and the Windows 8 operating system that defines its mobile strategy. Competitors can expect that the Redmond giant won’t let price stand in the way of sales. Just as it’s offering upgrades to Windows for $40, it can afford to sell upgrades to Office at prices that will cause its market share to explode.

It can also afford to sell Surface tablets at prices much lower than what Apple is getting for iPads. Right now, as was the case with the XBox, Microsoft needs to get the devices into as many hands as possible to ensure demand for software.

Lose money to make money

There are, of course, a number of questions that remain. The most obvious is whether Microsoft’s products will be good enough so that people will want to buy them in large numbers. The second question is whether Microsoft’s competitors will be willing to stand by and let Microsoft carry out its market crusade unimpeded. Chances are Google will do just that. With Apple, it’s hard to tell.

Google is at somewhat of a disadvantage when compared with Microsoft. It’s not exactly in the same business, as it doesn’t make money off its operating systems and software in the same way as Microsoft. Neither does it have as much cash on hand. So while Google does indeed have a tablet, it’s more of a reference platform than a product intended to lead the market.

Apple is another matter. The company has about twice as much cash as Microsoft, and all things being equal, could hold out longer in a war of attrition. But “can” and “will” are two different things.

This means that you have to ask questions about Apple as well. Will it be willing to reduce the price and margins of its signature iPad and iPhone devices to match Microsoft? Will it be able to sell enough Mac computers to continue its push into the enterprise against Microsoft’s decades-long domination?

The answer is – probably not. If Apple was interested in competing on price, it would have done so already. Instead, the company appears to be more interested in keeping profit margins up and to keep accumulating cash, at least until stockholders start demanding a greater cut of the dividend pie. This means that if Microsoft can make the Surface tablet appear to be as good or better in value when compared with the iPad, and encourage the building of Windows Phones that are as good as or better than the iPhone, Microsoft can start to accumulate market share.

Ultimately, this means that Microsoft will need to hang in there and lose money for years until the perceived value of its products convinces enough people to buy them and causes the market share to make a decided swing in Microsoft’s direction. With patience and care, Microsoft can do this, and in the process change the market. Apple could stop them, but probably won’t. To paraphrase an old saying–money is thicker than water, and Apple wants money.

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