Seven reasons Microsoft's profits are tanking

Vista, Bing, Zune, Yahoo...

Microsoft's profits are seriously down, and you don't have to be Warren Buffet to figure out why.

The Wall Street Journal is reporting that Microsoft will post significant declines in sales and earnings when it reports its fiscal Q4 results next Thursday. Wall Street analysts estimate the software giant will show earnings of 36 cents a share for the period ending in June 2009 (on $14.38 billion in revenue), down from earnings of 46 cents a share (and $15.84 billion in revenue) for the same period a year earlier.

Why the slump? An anemic economy isn't helping, certainly, but Microsoft's product offerings and managerial obsessions are hurting the bottom line as well. Here's a quick list of Redmond's Seven Deadly Sins:

-- Vista: No sense in beating a dead horse here. Even if Vista isn't as horrible as its critics claim, it's been a PR disaster for Microsoft. More importantly, many consumer and business users have put off buying new PCs until Windows 7 arrives. The good news? Win 7's launch should boost PC sales -- and Redmond's profits -- this fall.

-- Xbox: Sales of Microsoft gaming console are down, and the Nintendo Wii continues to eat the Xbox's lunch. Redmond's answer: Drop the price of the Xbox 360. The move may help move units, but it'll cut into profits too.

-- Bing: Microsoft's latest search engine effort will cost in the ballpark of $100 million to market, and that doesn't include development costs either. Is Redmond tilting at windmills here, or does Bing really have a shot at challenging mighty Google for search dollars? Whatever the case, Bing is one expensive gamble.

-- Zune: Microsoft's answer to the iPod hasn't exactly taken the world by storm, despite Redmond's tenacious zeal. While the upcoming Zune HD looks promising, Microsoft's digital media players have yet to contributing much to the company's bottom line.

-- Yahoo pact: This on again/off again union is getting tiresome. First there was the $44.6 billion merger offer, which Yahoo spurned. Now there's a rumored search ad deal. Is Microsoft's Yahoo fixation causing it to take its eye off more profitable ventures?

-- Netbooks: Microsoft hates those cheap mini-notebooks that consumers seem to love. Why? Many netbooks are powered by Linux, not Windows. No sale there. And industry watchers report that, compared to desktop and notebook sales, Microsoft gets less for each copy of Windows sold on a netbook. But it beats letting the netbooks run Android or Linux, right?

-- PC shipments plummet: Not only are low-margin netbooks popular, but higher-margin desktops and notebooks are losing favor with consumers. More bad news for Microsoft: The Consumer Electronics Association just released a report stating that this trend should continue in the near future.

Contact Jeff Bertolucci via Twitter (@jbertolucci) or at jbertolucci.blogspot.com.

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Jeff Bertolucci

PC World (US online)

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