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Microsoft Continues to Fight for Windows Relevance

- By Sangara Narayanan

When Microsoft Corp. (MSFT) rearranged its financial reporting segments two years ago, Windows was not a standalone reporting segment, but rather got itself mixed up with Device, Gaming and Search revenues. The company that once wanted to place a desktop in every home made as clear a statement as possible that its goals had changed: it was cloud and mobile first, not Windows first and everything else second.


But the More Personal Computing segment - under which Windows' revenue is now counted - is still the biggest earner for Microsoft, bringing in $21.12 billion in the first six months of the current fiscal compared to $14.04 billion from Productivity and Business Processes and $13.24 billion from Intelligent Cloud. The bulk of More Personal Computing's revenues must have come from Windows.

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Before Microsoft changed its financial reporting segments, Microsoft reported commercial licensing revenues, which would have included Windows commercial revenues and other licensing-based products such as Microsoft Office. Microsoft reported $10 billion in commercial licensing revenues during the fourth quarter of 2015 and a whopping $41 billion, or nearly half of overall revenues, for the full year. Suffice it to say, licensing was the bread and butter for Microsoft, and Windows was the lead revenue earner.

From a macroeconomic perspective, things have changed drastically over the last five years. As smartphone and tablet sales soared, PC sales went the other direction, declining steadily year after year. Windows was the operating system of choice in the PC world, but found no place to compete in the mobile operating systems world. No one knows if PC sales will ever recover, but it is clear they are on their way to becoming more of a commercial product rather than a consumer one, relegated to offices instead of homes.

The age of PCs in the home has almost found its bottom. Microsoft clearly saw this coming and deftly moved toward becoming a software powerhouse with a robust suite of cloud services. But where does that leave Windows? Despite how it may appear to outsiders, Microsoft has made it clear it is not ready to completely give up on its beloved WIndows.

Devices

With cloud and software-as-a-service products raking in sales, Microsoft could have easily concentrated on those segments and wriggled itself out of the devices segment. A lot of people actually thought that would be the case when Microsoft wrote off its Nokia investment and started selling those assets to third parties.

Contrary to that belief, however, Microsoft has put a lot of weight behind its Surface lineup, which is slowly gaining traction in the market. The rumor mill has churned reports of the company possibly launching a Surface Phone in the near future. Either way, Microsoft staying in the device manufacturing world means Windows is here to stay.

Edge and search

Microsoft recently launched Microsoft Edge, the default web browser that replaced Internet Explorer in Windows 10, Windows 10 Mobile and Xbox One.

The company also continues to chip away at the search engine market with Bing.

Both products are dwarfed by Google Chrome and Google Search, but Microsoft has not given up because it needs these products to assist its operating system, Windows 10.

Conditions are indeed a bit bleak for Windows due to declining PC sales, but Microsoft is far from giving up its position in the operating system race.

Disclosure: I have no positions in the stock mentioned and have no intention of initiating a position in the next 72 hours.

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This article first appeared on GuruFocus.