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Microsoft First Ever Quarterly Loss Signals End of an Era

The tech industry has been busy reporting earning this week. As usual, there were winners and losers, but the biggest news is Microsoft’s first quarterly loss since the company went public almost three decades ago. Is this the end of an era?

Tech By the Numbers

A number of technology companies released earnings numbers this week. Yahoo and Intel revealed lackluster financials on Tuesday. IBM and eBay released numbers on Wednesday, and both companies performed well. However, eBay stood out because it more than doubled its second-quarter net income. This was the strongest growth for eBay since 2006. Then, on Thursday things got interesting. 

Google reported its second quarter earnings increased 11 percent and revenue rose 21 percent, in spite of a continued decline in the price search ads, the company’s primary revenue stream. The price of pay-per-click ads has fallen 16 percent since last year, but fortunately for Google ad clicks grew 42 percent year over year. Now that Google’s acquisition of Motorola Mobility is complete, everyone is waiting to see what will happen with Google’s hardware strategy. Some industry watchers will also have their eye on Google’s CEO, Larry Page. He skipped the company’s earnings call using the same excuse he gave for his absence at Google I/O weeks ago — he lost his voice.

Microsoft also reported its earnings on Thursday, overshadowing any continued buzz about its preview of Office 2013 this week and announcement of a late October release date for Windows 8. Unlike the search giant, Microsoft found itself in the red for the first time since it went public in 1986. The company reported a net loss of US$ 492 million. Much of the loss is related to Microsoft’s ill-fated acquisition of aQuantive in 2007, which resulted in a US$ 6.2 billion write down — almost the entire purchase price.

The write down is a one-time incident, but it wasn’t the only problem for the Redmond-based software maker. Revenue from Windows fell 13 percent for the quarter, but a portion of that decline was because it had to defer US$ 540 million in Windows sales due to a special offer. The deal allows consumers that purchase PCs with Windows 7 to upgrade to Windows 8 for US$ 14.99. When Windows sales are adjusted for the deal, there was only a 1 percent decline in Windows sales, which is still bad, but not quite as dismal.

Microsoft invested a significant amount in Bing, but sill only has a small share of the search market when compared to Google. Continuing declines in PC sales because of consumers’ appetite for mobile devices also hurt Microsoft. The company is playing catch up to Apple and Google because of its delayed investment in mobile. Sales of Windows phones grew 50 percent between the third and fourth quarter. Microsoft is also working on its Surface tablet, but nobody (outside of Microsoft) really believes it has any chance of surpassing the popularity of the iPad.

Is This the Beginning of the End for Microsoft?

Not all of Microsoft’s news was negative. It had US$ 18 billion in revenue for the quarter, about a 5 percent increase from the previous year, driven by server tools, Office products and the entertainment division. In spite of its loss, Microsoft still performed better than analysts’ expectations. Excluding the write-down, but including deferred Windows revenue, Microsoft said it earned 67 cents instead of the 62 cents per share in the quarter the market expected.

Microsoft’s financial fate may improve once Windows 8 and Office 2013 are in the wild, but even then, there is no rest in sight for the software giant. The PC revolution that Microsoft ushered in during the early 1990s is over. This doesn’t mean the PC or Microsoft is disappearing. However, a new era of computing formed by the intersection of the Internet, cloud and mobile has shoved the desktop and Microsoft out of their leadership position.

 
 
 
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