When Microsoft held an Apple-style product introduction in New York on Tuesday, tech reporters yawned. “This event has been over an hour long and so far I think the only hard news was the launch of a new operating system version,” Quartz’s Mike Murphy tweeted.
In addition to releasing a new version of Windows, Windows 10 S, Microsoft also unveiled a $999 laptop called the Surface Laptop. These products aren’t generating anything like the excitement that new versions of Windows generated during the 1990s. That’s probably because PCs are now a mature technology. There just isn’t that much difference between one operating system version and the next.
Most of the excitement in the consumer market has shifted to a new crop of non-PC devices: Google’s Pixel, the Apple Watch, the iPad, Amazon’s Echo and Kindle, and so forth.
This might seem like an ominous news for Microsoft since the company has struggled to gain traction in any of these consumer markets (it has had modest success with the Xbox). But the stakes here are actually quite low for Microsoft. Consumer sales aren’t very important to Microsoft’s bottom line, and that has been true for years.
The modern Microsoft is fundamentally an enterprise software company. It sells copies of Windows and Office to businesses, along with online services and technical support contracts. It’s a lucrative and stable business that could generate healthy profits for the Redmond software giant for decades to come.
But it’s hard for a company that was once at the forefront of consumer technology to accept a future making profitable but obscure products for businesses. It’s a lot more glamorous to compete with Google and Apple than IBM and Oracle. So Microsoft keeps trying to boost its consumer profile, with little success, while the company’s revenues and profits come disproportionately from lucrative but unglamorous business customers.
Windows promoted a new desktop image as a feature. Really.
“The first thing you’ll notice about Windows 10 S is a new default desktop image,” said Microsoft’s Windows boss, Terry Myerson.
It got more exciting from there, but not by much. The event focused on the education market, and Microsoft unveiled several features designed to help school administrators, like one that allows them to quickly reinstall software on from a USB key. There were also some new software for students, including a “mixed reality” app that projects virtual objects like the Mars rover into a real-life scene, and educational versions of Microsoft’s Teams messaging app and its Minecraft world-building game.
The strategic goal here is to compete with Chrome OS, Google’s bare-boned operating system built around the Chrome operating system. Chromebooks are simple, low-cost, and require no configuration, making them a good fit for the classroom. Microsoft says that Windows 10 S laptops will start at $189 each, making them a strong alternative.
But students will likely not feel much excitement over the mature platform, and Windows 10 S represents an incremental improvement — at best — over the previous version of Windows.
Microsoft has struggled to sell laptops
The other big announcement was the introduction of the Surface Laptop, a $999 computer running Windows 10 S. It came complete with an Apple-like promotional video highlighting its elegant industrial design.
It’s a beautiful device, but the reality is that its success or failure won’t have a very big impact on Microsoft’s bottom line. There are lots of other Windows laptops on the market, and Microsoft gets a licensing fee for each one. If customers buy few Microsoft laptops and a lot of laptops from Dell, HP, Acer, and Asus, Microsoft will do just fine financially.
And that’s lucky for Microsoft, because customers haven’t been buying very many devices in Microsoft’s line of Surface tablets and laptops. In 2016, Microsoft had Surface revenues of $4.1 billion, a slight increase from $3.9 billion in 2015. For comparison, Microsoft Office raked in $23 billion in 2016, Windows earned more than $8 billion, and Microsoft’s server products brought in $19 billion. That latter figure includes Microsoft’s Azure cloud computing service, which more than doubled its revenues between 2015 and 2016.
Microsoft’s business is boring but lucrative
Microsoft’s profit margins were also much bigger for business products than the consumer ones. Microsoft’s “intelligent cloud” category, which includes Azure as well as the cloud-based Office 365, earned $9.3 billion on revenues of $25 billion. In contrast, Microsoft’s “more personal computing” category — which includes Microsoft’s phone and laptop products, the Xbox, online services like Bing, and other consumer-facing products — earned $6 billion on revenues of $40 billion. Overall, nearly 80 percent of Microsoft’s operating income comes from its enterprise software business.
Fundamentally, the stereotypes in Apple’s old “I’m a PC” ads are true: Microsoft’s products are great for business applications but don’t always catch the imagination of consumers. Microsoft is better at selling stodgy business software like Azure and Office than it is competing in the consumer market.
And from a financial perspective, that’s fine. Microsoft is a hugely profitable company and that’s unlikely to change any time soon. In fact, in many ways businesses make better customers. Once a large company chooses a particular piece of software they’re likely to keep using it for years or even decades, providing a stable and dependable revenue stream.
But selling business software isn’t glamorous, and Microsoft isn’t a company accustomed to losing. So it keeps trying to crack consumer markets.