Microsoft’s finals results for this fiscal year were dismal. Not disastrous, just dismal. There’s a great deal to look forward to in the coming months. Microsoft has Windows 7 nearly ready and it will probably drag in some much needed revenue once it is released. It probably wont diminish the dash to the Mac among consumers, but it may help to boost corporate PC revenues.

Reading the Entrails

So here’s the skinny. Microsoft, clawed in revenues of $13.10 billion and reported net income of $3.05 billion. Rewind to this time last year and the figures were revenue of $15.83 billion with net income of $4.30 billion. But that was when the PC market was buoyant. For the year as a whole, Microsoft recorded a 3 percent decline in revenue to $58.44 billion but an 18 percent drop in net income to $14.57 billion.

Being realistic, net income of $3.05 billion on revenue of $13.10 billion is a 23.28% profit. This is a long way away from red ink and blind panic, even if the previous year showed profit at 29.51%. Let’s also note that when revenues decline, profitability always goes with it. It’s the opposite of economies of scale – dis-economies of diminishing scale, if you like.

The point I’m making is that this is not a set of results to get real nervous about. The real problem for Microsoft is that the two competitors that currently have Microsoft caught in a pincer movement did much better in the same quarter. While Microsoft shrank by 17%, Google grew by 3% and Apple grew by 12%.

The Google Story

Microsoft’s problem with Google is that Bing on its own will not stop Google. Unfortunately for Microsoft, Bing is far too late. To be fair, Bing is a very good, perhaps even brilliant competitive move. It genuinely does beat Google in a number of ways. The problem that Microsoft has here though is the same one that Mozilla has in the browser market. Microsoft, it seems, forgot that the browser market was competitive and let Mozilla’s Firefox in.

Firefox was superior in many ways to Internet Explorer, but because if the bundling effect of IE with Windows, Firefox has only gradually increased market share – which is now around 20%. Microsoft will, I believe experience the same frustration with Bing. It should and probably will increase its share of the search market. Some of that increase may come at the expense of Google and that will impact Google revenues because 97% of what it reaps is from search advertising. But Bing is not going to make swift inroads. It launched very well and, despite the frequent TV adverts, has since declined. If Microsoft manages to continue the pace of innovation it has set, it may succeed in growing Bing gradually.

The problem is that there are too many factors that pull you back to Google. Google is very sticky – if you use iGoogle and GMaps, and GNews, and Gmail, and Gwhatever. In the mean time Google is chipping away at Microsoft’s email market in the corporation and it’s Office Apps market. in that area the boot is on the other foot. Google may do healthy business but there are many factors that make customers stick to Microsoft.

Right now, Microsoft is not hurting Google. Even if it managed to do that, Google looks very strong in the mobile market – a market which has great potential for more advertising revenue and in which Microsoft is  weak.

The Apple Story

Apple is now utterly dominant in the premium PC market with more than 91% of the business in the US. The simple fact is that among the opinion leaders and the power users, nobody wants Windows any more. They are voting with their wallets.

There is no obvious way back from this for Microsoft. Adverts that try to promote Windows as a better deal may cause the buyer to pause a little, but they are not halting the move to the Mac. The growth in the Mac market is deceptive in many ways. One of them is that Macs last longer so the renewal rate is lower and this masks some of the growth in the user base. Another factor is the phenomenon Apple Stores. Every new one that opens up boost Apple’s market share in the country and city where it opens.

Microsoft has decided to take the fight to Apple by opening its own stores. But unless they are going to sell those excellent X-Boxes I really don’t see the point. there is no real shortage of places to buy PCs. Also it could easily be a PR disaster.

For Fear Of Reaping The Whirlwind

You know what I think is going to happen when those Microsoft stores open? People are going to start treating them like Apple Stores. They are going to walk in with their virus infected, software degraded PCs and netbooks. And they will ask the sorry shop assistants to fix them. And if the Microsoft decides not to offer support from its new cool shops, it’s going to run into severe negative publicity.

In conclusion…

Microsoft is shrinking, and I expect that it will continue to shrink. Its diminishing began with the recession, but it will not end when the recession ends. It’s caught in between a cloud and cool place.