Preston Gralla

Latest numbers show the consumer market may be dying for Microsoft

July 19, 2013 10:20 AM EDT

Microsoft's latest earnings numbers make one thing perfectly clear: Enterprises love the company, but consumers are staying away in droves. In the quarter, revenue for businesses was up solidly, while consumer revenue was far more problematic. Does this mean that the consumer will eventually be dead for Microsoft?

Revenue for the quarter was $19.9 billion for the quarter ending June 30, up from $18.1 billion a year ago. In a sluggish economy, that may sound encouraging. But a close look shows that the growth comes almost exclusively from the business side of the company, and Microsoft is serious trouble with the consumer side.

Amy Hood, Microsoft's chief financial officer, admitted as much in an interview with the New York Times. The Times had this to say:

Ms. Hood said the company's Windows business is a "tale of two markets," one in which PC sales to businesses continue to grow modestly, while consumer demand for the machines is fizzling. She estimated that total industry PC shipments to the consumer market fell more than 20 percent during the quarter.

A 20 percent plunge in a single quarter for consumer PC shipments is astonishing. But the bad news for the consumer side of things for Microsoft doesn't end there. The news is even worse for tablets, notably the company's RT-based Surface. Microsoft took a $900 million charge because of the massive backlog of unsold Surface inventory that it may never sell. Based on that charge, one estimate holds that Microsoft has 6 million unsold Surface tablets in inventory. As a way to help clean that out, Microsoft has launched a fire sale on RT tablets, slicing the price by $150 to $349, down from $499.

Meanwhile, the business side of things is doing well,  despite the economy's continuing woes. The Microsoft Business Division, which includes Office, grew 14 percent compared to a year ago. (Only 2 percent if you substract deferred revenue from a previous upgrade offer.) It had $7.21 billion in sales. And Office 365, its subscription-based version Office, is going like gangbusters. Microsoft says that at its current run rate, it would bring in $1.5 billion in year.

The vast majority of revenue from Office comes from businesses, not consumers -- almost 88 percent of it. Of the $1.5 billion in projected annual revenue for Office 365, for example, only $100 million would be coming from consumers.

The other business-dominated Microsoft group also reported solid numberts. Revenue for the Server & Tools group was up 9 percent to $5.5 billion.

News wasn't all bad on the consumer side. The Entertainment and Devices Division grew 8 percent revenue increase, because Xbox Live sales grew nearly 20 percent. Still, that's a rare bright spot for Microsoft when it comes to consumers.

Can Microsoft survive with a shrinking share of the consumer market? Of course, it can, and might even be able to thrive, for the short and medium term at least. In the longer term, without a strong consumer presence, things will be problematic for the company, because much enterprise use is increasingly being driven by consumer preferences. That especially holds true for tablets. Barbara Coffey, an analyst at S&P Capital IQ had this to say to the New York Times:

"The consumer has voted. I don't know that enterprise has yet. We've seen such a big shift to tablets. Microsoft just doesn't play in tablets at the same level that they do in PCs."

Unless the company plays better there, it may be that eventually the enteprise side of things will start to sag as well.