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January 28, 2006

Microsoft Office earnings top out

Posted by David Hunter at 11:16 AM ET.

In the Microsoft’s Thursday earnings report, the Information Worker segment was effectively flat year to year. Gregg Keizer discusses it with Paul DeGroot, an analyst with Directions On Microsoft at TechWeb News and he plays one of my favorite tunes:

“Frankly, there’s very little upside for Office in developed markets,” said Paul DeGroot, an analyst with Kirkland, Wash.-based Directions On Microsoft. “The market share [for Office] is so high, there’s just not much room to grow.”

This isn’t the first time that the Office group’s revenues have been flat. “They’ve been like that for the last several years,” noted DeGroot. “My understanding is that revenues for Office itself has been very flat or even declining slightly, say about 1 percent per year,” he added. The Information Worker division is responsible not only for Office, but also for Office-associated tools and software, including Visio, Project, and SharePoint.

And the Office-associated software is presumably what is providing what little growth there is. As far as markets in underdeveloped countries:

Nor does he think that Microsoft will try to push Office sales in developing or emerging markets using the same strategy its Client group has with cheaper “Starter” editions of Windows.

“In the long run, I think Office will face serious competition” in those markets from locally-developed application suites, said DeGroot, but for now, “they want to maintain the Office price points. And they’ve been successful doing that.”

Microsoft could compete with upstarts in huge markets like the ones developing in China and India, but to do so would wipe out the company’s profit margins. For now, then, Microsoft is content to bank its 80 percent profit margin on Office.

More by following the link including the limited upside from enterprise license agreements and the maturity of Office as a product, but on the latter point, here’s another of my favorite tunes from James Ragan, an analyst with Crowell, Weedon and Co. via Allison Linn at the AP:

For the most recent quarter, the units that include Windows, Office and server software posted total operating income of $5.8 billion. Microsoft’s overall earnings were lower because of losses elsewhere.

That’s a problem only in that the market for the cash cows is growing more saturated. Already, Microsoft admits that its biggest competition for Office business software is earlier versions of Office itself.

“Over time, the challenge for Microsoft is to build some emerging businesses so that they don’t have to rely so much on Windows, Office and server products,” he said.

Microsoft hopes that the new user interface for Office 12 will make a difference, but I continue to be skeptical.

Filed under Financial, General Business, Office, Office 2007

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One Response to “Microsoft Office earnings top out”

  1. Office Max! Says:

    Microsoft Office Earnings Top Out

    How can you lose if you’re competing against yourself?…

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