Amid Cannibalization Woes, Netbooks Eat Into Microsoft Sales
Sales of netbooks, which have gained traction among budget-conscious computer buyers, have surged since the earliest versions launched around three years ago. Brokerage UBS estimates netbooks will account for 8% of the worldwide PC market next year, while research firm iSupply sees the little computers grabbing 12% by 2012.
But most netbooks have less processing power than their full-featured cousins and can't run high-spec versions of Microsoft's Windows, the world's most-widely used operating system. Instead, the Redmond, Wash.-based software company is selling netbook makers lighter versions of its operating system at a cheaper price. Worse, some manufacturers are choosing to cut Microsoft out altogether by using Linux, an open-source OS.
The risk posed by netbooks is just one in a series of cannibalization threats faced by Microsoft, the world's largest software company, that is already starting to weigh on the company's revenue growth. As it looks for new ways to address the changing demands of its customers - both huge corporations and consumers - Microsoft is finding many of its products are competing with others it offers. For example, the company is struggling to offer its core Office suite of productivity tools over the Internet, a service broadly known as "cloud computing," without eroding sales of packaged versions of the products.
Microsoft is also having difficulty developing traction for Vista, its most recent iteration of Windows, which has been ignored by many customers who have preferred to stick with its predecessor, XP.
Netbooks mark a new threat to Microsoft. As netbooks grow in popularity at the expense of full-performance PCs, the company can't sell full-priced copies of its operating system as fast as it previously had. It also doesn't have the same penetration in the fast-growing netbook market as it does with other machines. Earlier this week, Microsoft's Windows chief Bill Veghte said about 70% of netbooks come bundled with a copy of Microsoft Windows, much lower than the roughly 90% share Microsoft has for the wider computer market.
"It's pretty clear that netbook sales are cannibalizing sales of higher priced versions of Windows," said Matt Rosoff, an analyst at Seattle-based research firm Directions on Microsoft. "This is clearly a trend Microsoft is concerned about."
Already these challenges have weighed on revenue growth at Microsoft's client division, which houses the Windows operating system business and accounts for around 30% of the company's $60 billion in annual sales. Revenue growth for the Windows business slowed by one percentage point to 12.7% in fiscal 2008, which ended June 30, 2008, compared with 13.7% a year earlier.
In November, Microsoft Chief Financial Officer Chris Liddell told investors the lower-than-expected revenue growth was partly caused by the popularity of netbooks. Sales of Windows grew just 2% in the first quarter of fiscal 2009, which ended Sept. 30, 2008. In most years, Windows posts double-digit revenue growth, according to company data.
The revenue slowdown has already caught the attention of investors, who have pushed Microsoft shares 46% lower since the beginning of the year, amid a broad market sell-off and the company's on-and-off attempts to buy all or part of Internet portal Yahoo Inc. (YHOO). On Friday, Microsoft shares closed up 4% at $19.87.
While executives at Microsoft have acknowledged the problems posed by netbooks, they haven't yet offered a strategy to deal with the growing market.
At a conference earlier this week, Veghte said the company charged less on average for netbook copies of Windows than it did for other versions of the software, although he didn't provide specifics. "My personal view is that there's some cannibalization and some incremental growth in units," he said.
How much the growth in netbooks will affect Microsoft's revenue is an open question.
One analyst, who asked not to be named, estimates that Microsoft charges between $50 and $70 for each Windows license for a netbook. That's between 30% and 37.5% lower than the $80 to $100 it charges for Vista Home Premium, a higher-spec version typically bundled with home PCs.
In recent research, UBS analyst Maynard Um estimated the average selling price Microsoft receives for netbooks could be even lower. Um said Microsoft might be selling netbook versions of the Windows OS for as little as half of those run on traditional PCs. He notes that operating margins for Microsoft's client business were lower in the first quarter of 2009. "Any material impact from netbooks on (business unit) Client's top line results would have a corresponding impact on the segment's overall operating margins," he wrote.
Microsoft declined to comment for this story, but didn't dispute that average selling points for Windows on netbooks are lower than on laptop or home PCs.
Microsoft is also facing competition from Linux. Netbook makers like Linux because its developers give it away for free, allowing manufacturers to make even cheaper machines. About 30% of netbooks, which often sell for as little as $300, run a version of Linux.
Analysts say Microsoft may be able to curb the adoption of Linux when it releases the next version of its operating system. Windows 7, as the new system is known, is expected to need far less computing power to run, potentially making it more attractive to computer makers. The new OS, which was previewed in October, won't go on sale until June or July at the earliest.
"When Windows 7 comes out they have an opportunity to turn it around," said Roger Kay, an analyst at Endpoint Technologies, adding that consumers like the familiarity of Microsoft products. But, he said, "Until Windows 7 comes out, there's not much Microsoft can do about it."
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com
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(END) Dow Jones Newswires
December 05, 2008 17:42 ET (22:42 GMT)
Publié le 05 Décembre 2008 Copyright © 2008 Dowjones
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