Microsoft still reliant on traditional strengths

A year ago, Microsoft blew away Wall Street’s earnings forecasts with blistering sales of its new Windows 7 operating system and trumpeted optimism about the recovery in tech spending.

This week, with its stock trading slightly lower than a year ago, the world’s largest software company is set to report lower profit as PC sales growth fizzles, and it struggles to grab a foothold in the fast-moving mobile and tablet markets.

“Microsoft is still a juggernaut in the PC business, Windows-based machines are still selling over 300 million a year,” said Tim Bajarin, president of tech research firm Creative Strategies.

The question becomes: Is the iPad a cannibalisation of Microsoft’s existing products, or an added component of consumer electronics spending? I’m sure it’s a mix of both

“But they missed the smartphone revolution, and even though they were the first to really push the tablet, Apple basically redesigned it and left Microsoft in the dust.”

Most investors expect a solid quarter for the company, but are more focused on fears that Microsoft’s new Windows phone software isn’t selling well. And while approving of a recent decision to make a version of Windows for ARM chips, the market understands that means there won’t be a Windows-based challenger to Apple’s iPad for at least two years.

“I wish Microsoft did this (the switch to ARM) two years ago, it’s something it should have thought of,” said Sid Parakh, analyst at McAdams Wright Ragen.

“But it is a long game. The question becomes: Is the iPad a cannibalisation of Microsoft’s existing products, or an added component of consumer electronics spending? I’m sure it’s a mix of both.”

PC sales, the surest guide to Microsoft’s overall health, rose only 3.1% in the last three months of last year, according to research firm Gartner. The year as a whole didn’t match early optimism, with PC sales rising 13.8%, well below Gartner’s summer forecast of 19.2%.

The good news for Microsoft is that business customers – the core market for its software – are buying new computers more readily than cash-strapped consumers, who are holding off on purchases or buying iPads instead.

Sales of Windows 7 are still going strong, but probably won’t match last year, although overall sales are expected to inch up to $19.2 billion from $19 billion a year ago, helped by the unexpectedly strong sales of the Kinect hands-free gaming system, which sold 8 million units in the run-up to Christmas.