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The 'ugly' truth about what Microsoft has to do to sway Wall Street

Jul 21, 2015, 04:50 IST

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Microsoft is in a weird, in-between state: Its existing Windows and Office businesses are shrinking right alongside the ailing PC market, and new products like Office 365 and the soon-to-launch Windows 10 aren't yet in position to pick up the slack.

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It means that there probably won't be a lot of good news for Microsoft's traditional cash cows when the company reports its quarterly financial results on Tuesday. It's not a great look in the wake of the $7.6 billion Nokia writeoff.

As Wall Street sizes up the software maker's future prospects, Microsoft's bet on subscriptions is becoming increasingly critical.

It's a long-term bet that will take some time to pay off. But a successful outline of the subscriptions opportunity and the potential cash it can generate could win Microsoft some points with the financial world, and it's something the company will probably spend a lot of time talking about during Tuesday's conference call.

Instead of generating revenue from PC manufacturers who license Windows software, Microsoft is shifting towards "monetizing the customer" by getting them to pay for services, explains Forrester Senior Analyst Frank Gillett.

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"It's ugly and it takes time," Gillett says. Eventually, Microsoft estimates this new model will bring in 80% more revenue per customer, but that won't happen overnight.

Cross platform benefits

Mashable

Microsoft's love of subscriptions is increasingly evident across its product lines. Microsoft Office 365, the cloud-based version of its famed productivity suite, is growing so fast that it's cannibalizing revenue from sales of the boxed versions of the software.

For larger enterprises, Microsoft has the Enterprise Mobility Suite, a subscription service that includes all kinds of smartphone and tablet management tools. On the consumer side, there's Xbox Live and Groove, Microsoft's premium gaming and music services.

All about the plastic

The endgame for the forthcoming Windows 10 operating system is to be something that compels people to buy more Microsoft services, Gillett says.

YouTube/Microsoft

But Forrester's research suggests that Microsoft lags far behind Amazon and Apple in terms of having consumers' credit cards on file. That could prove a big impediment to Microsoft's subscription business aspirations.

Getting a bigger collection of credit cards is important for Microsoft since consumers who already have their payment information stored with the company are more likely to take the plunge and sign up for, say, an Office 365 subscription. And since all of those services work across all devices, consumers may be more likely to keep paying.

This also means that Microsoft's big challenge is going to be getting more developers and more apps onto the Windows Store to compel users to come in and buy stuff.

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Tomorrow afternoon, Microsoft is expected to announce its fourth-quarter earnings for the fiscal year 2015. Analysts are expecting earnings of 56 cents per share on revenue of $22.06 billion.

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