Preston Gralla

Microsoft earnings slide highlights problems with Windows 8

October 19, 2012 2:28 PM EDT

To the surprise of the very few, Microsoft's yesterday reported declining earnings, with 22% less net income than a year ago. A closer look at the numbers shows the challenges Microsoft faces with its design choices for Windows 8.

Net income was down 22%, and revenue was down 8% compared to a year previous. Microsoft reported total revenue of $16.01 billion for the quarter that ended Sept. 30, which is the first quarter of Microsoft's fiscal year.

The real eye-opening number was in the Windows Division, with revenue of $3.24 billion, down a whopping 33% from the same period last year. The Business Division had $5.50 billion in first-quarter revenue, down 2% from a year ago. The Server and Tools business was a lone bright spot, with $4.55 billion in revenue, an 8% increase from the same quarter last year.

The drop in the Windows division was most telling. It's attributable to the worldwide PC slump, as well as OEMs letting their stock of Windows 7 computers fall as they prepared for selling new Windows 8 machines.

Clearly, Microsoft is betting that PC sales will jump when Windows 8 is released, due to pent-up demand. But that's where Microsoft made its basic mistake with the design of Windows 8. Windows 8 offers very little for users of traditional computers over Windows 7, and is designed more for touchscreen devices than traditional computers. It's true that there are some new Windows 8 native apps, but those apps are as a rule underpowered and underwhelming. So Microsoft won't likely get the big jump in sales from Windows 8 that it needs.

Microsoft certainly needs to jumpstart tablet sales and sales of mobile devices. But forcing a mobile interface on traditional computers isn't the way to do that -- designing a mobile interface for mobile devices is the way to do it. My guess is that sales of Windows 8 computers will be somewhat depressed by the new interface. And that won't help Microsoft's struggles in mobile.