Windows 8 Is Not Do-or-Die, Yet

You may have been led to believe that the future of Microsoft hinged upon Steve Ballmer’s performance in New York Thursday. That somehow the software giant’s financial success depended upon its CEO’s repertoire of ticks and growls. It didn’t, nor does it rely solely on the immediate success of Windows 8.

Take out anything with the word “Windows” in it from the Microsoft sales column, and you are left with a mostly corporate-focused, services-heavy set of businesses that bring in about $40 billion a year, or about 45 percent of Microsoft’s annual revenues. These are non-PC products that target businesses, things like Azure and Dynamics CRM, which companies typically sign long-term contracts to use. Not only does this collection of offerings bring in huge revenue, it’s growing at an almost a 10 percent clip.

“I don’t think people fully appreciate how much cash Microsoft has flowing in from their other businesses,” says Ed Maguire, managing director with CLSA. “They have to take a big chance with things like Windows 8 and Surface, but they also have to keep their corporate customers happy.”

That’s where that tens of billions in revenue comes in, and why guys like Maguire and much of Wall Street are far more patient than reviewers when it comes to the eventual success or failure of Windows 8. On the day of the big launch, Microsoft stock dropped 2 cents. Year to date, it’s up about 7 percent.

The reason for Wall Street’s two-cent-response to Ballmer and Co.’s theatrics was two-fold: Nothing dramatically new was revealed, and more importantly, most investors are expecting a slow burn for Windows 8 and the attendant ecosystem rather than some sales supernova.

“Fail or not fail? We won’t know for a while, it’s going to take time for Windows 8 to cycle through. Hell, I am still running Windows XP,” says Colin Gillis, a tech analyst with BGC Financial. “It will be a migration just like every other Windows launch, but it will happen because there isn’t any other choice. What are you going to run? Linux?”

If there is to be anything for investors to sink their teeth into in the coming months it will be sales of the new Surface tablet. But even there Wall Street isn’t banking on Apple-like numbers.

“Let’s say they sell 1 million in a quarter, most people would call that a failure, but that could add 15 percent to their Windows revenue,” Gillis says. “If they sell 2 million, that is over $1 billion in revenue. That is significant. It’s not Apple, but at least they are in the game.”

Pessimists would argue that the game Microsoft has dominated for so many years, the PC software competition, is the wrong one to be playing. The PC is in terminal decline after all.

“But, what is a PC?” asks Sid Parakh, an analyst with McAdams Wright Ragen. The Surface, and the twisting, flipping, converting, touch-screen enabled gadgets, for which Windows 8 is designed blur the line, Parakh argues. And despite what Apple would have you believe, the market for tablets (twisting and otherwise) is still wide open in the corporate world. “It is a big market that Microsoft has been sitting out of, and now they can compete,” Parakh says. “It could be a huge benefit.”

Parakh says he’s going to be watching over the near term, and especially the holiday season before starting to call Surface and Windows 8 a winner or not. Maguire is looking out even longer.

“I don’t have big expectation for Windows 8 out of the gate,” he says. “It will probably be 12 to 18 months before this operating system hits its stride. Windows 7 was easy, but this is a whole new ecosystem and it will take time.”

At the event in New York, Maguire was impressed by the devices he saw on display from computer makers like Dell, Lenovo, Acer and Sony (gasp). He liked the way Ballmer stitched together the Microsoft story from the Surface to the phone and traditional PCs.

“For the first time they articulated that there is a grand unified strategy behind all this stuff,” Maguire says. “And if the pieces are coming together, that actually results in a very high value enterprise.”

But enterprise is the key word here. Maguire believes business customers are the source of Microsoft’s current and future success. Competing with Apple for consumers is something Ballmer has a need to do. “They will always go after the consumer, and I think there is some wisdom to that,” Maguire says. But the business world is where the money now, and in the future lies, Maguire argues. And there is $40 billion that says he’s right.