Microsoft's worst year ever: What comes next?

Yesterday's financial results show that Microsoft has had the worst year in its history --- for the first time ever, sales and revenue from Windows dropped from the previous year. Is this the end of Microsoft as we know it?

There's no way around it; Microsoft's results were dismal. The New York Times put it best when it reported:

Microsoft, the once-swaggering giant of the personal computer industry, has been humbled, both by the recession and by problems of its own making.

On Thursday, the world’s largest software company reported its worst fiscal year since it initially sold stock to the public in 1986. Year-over-year revenue and full-year sales of Microsoft’s flagship Windows software dropped for the first time.

The cause is very clear: Windows is in trouble. Microsoft's "client" revenue -- that is, revenue for Windows -- was $3.1 billion for the quarter that ended on June 30, which is a massive drop from the $4.36 billion in revenue for the same quarter a year previous.

Overall, revenue was down 17%, largely due to the dropoff in Windows revenue.

Partially the problem is the economy, of course, but Microsoft faces much deeper problems than an economic downturn. By any business measure, for example, Vista was an unmitigated disaster. The New York Times notes that a study by Forrester Research found that 86% of corporate PCs still run XP. Windows 7 may or may not change that.

In addition, the growth of netbooks sales hurts Microsoft, because it gets less money per netbook sold than it does for a desktop or laptop sold. Having Windows 7 run on netbooks won't solve the problem, because Microsoft will still get less revenue per netbook, whether the netbook runs on XP or Windows 7.

What does this mean for Microsoft's future? The Microsoft of tomorrow will be very different than the Microsoft of yesterday or today. It will no longer be able to rely on "big-bang" operating system releases to drive revenue, as yesterday's results clearly show. Don't be surprised if Windows 7 is the last big-bang release, with future versions of Windows possibly being more modular, and people charged per module they buy on a regular basis, rather than for the entire operating system. Microsoft may even end up charging an annual subscription fee for users to get regular updates.

Office will no longer be client-based; Office 2010 will be Web-enabled in some way, with Microsoft getting some amount of revenue on Web use. Expect that revenue to rise in future years.

As for the "swagger" that the Times wrote about --- those days are long gone. There simply is no longer any real swagger to the company, which is likely a good thing. Arrogance can only get you so far; after a while it blinds you and becomes a hindrance.

Don't expect Microsoft to ever dominate the computing world the way it once did. I'm hoping that the just-released results will lead to a company that's more quick to respond to change, and releases more innovative products on a faster timetable than it has over the last five to ten years.