While Windows Slowly Shifts, Office Drives Forward

A good chunk of the technology industry spent the end of this week gorging on the performance of Microsoft’s Windows unit, which pulled off relatively flat growth despite some doomsday predictions of a collapse in PC sales.

Another narrative was tucked into the background: Microsoft’s software applications, driven by its Office suite, continue to be the company’s biggest revenue source.

In fact, it’s looking increasingly like Office could be driving Microsoft’s future—even with one hand tied behind its back.

Let’s look at the numbers. Microsoft’s Windows unit has reported revenue of $14.8 billion over the first three quarters of Microsoft’s fiscal year, which ends in June. Over that same period, the division dominated by Office has counted $17.5 billion in revenue, or about 18 percent more than Windows.

But that’s just a snapshot in time. If we zoom out, we can see just how Office has performed when compared with Windows.

Here’s a chart that shows annual revenue and operating income for both units, from 2007-2012.

Now, there are a few variables to take into account here, like the smaller businesses that flesh out the units.

And there are clear cyclical trends that influence things, too—this chart takes into account the transition from Vista to Windows 7, but doesn’t show the effect of Windows 8, which came out during the current fiscal year. Office revenue also jumps much higher in 2010, which is when the last major version of that software was released, and Office 2013’s release isn’t in the yearly figures yet.

But the graph does give a good idea of the overall health of Microsoft’s two biggest products, since Windows accounts for most of the money in its division, as does Office in its division. And this is what I see: In addition to being the bigger revenue generator for nearly the whole span, Office is less volatile.

Even more interesting is that this is all happening while the transition to mobile devices, particularly tablets, is chomping away at Microsoft’s core business, which has always been hitched to PCs.

It does appear that sales of the company’s Surface tablet, while not great in terms of overall units, helped buoy Windows revenues last quarter. The company deserves big kudos for making that happen, as it’s a monster conceptual shift in the way Microsoft approaches the world.

But Windows 8 is not rocketing to enormous new heights yet. And it shouldn’t, really—it’s a drastic change, to a touch-centric, tablet-friendly interface made for class of devices that is still being developed. Windows 8 could be a transitional operating system until the next refresh really makes a dent in the market. We’ve seen that before, with Vista and Windows 7.

While Windows is in the midst of a big, slow transition to a new paradigm of computing, Office could be leaping ahead much faster. Office 2013 is available already—but not for iOS or Android devices. The latest leaks say any Office release for those dominant mobile operating systems will be fall 2014.

Why wait? It must be frustrating for the people behind Office to sit around, knowing they could get their software onto hundreds of millions of new devices very quickly. As longtime Microsoftie (now working at Amazon) Charlie Kindel said last August, “You’ve got to imagine that Office has been built for iPad. It’s sitting there, it’s ready to ship, it’s on a shelf.”

I have to agree with veteran Microsoft watcher Paul Thurrott. His theory is that Microsoft had no choice but to hold back Office, because releasing it sooner would have terribly hurt the new market for Windows 8-based devices.

Waiting for Windows 8 to get established as the best way to get access to Office in a mobile era brings along buyers at the enterprise level (the most important buyers, don’t forget) who can’t abide the widely available but typically far less reliable Office knockoffs.

If that weren’t the case, Microsoft would figure out a way to get Office on other platforms pronto and start making money there, too. But Office is steering the ship right now—and it’s got to bring a new mobile operating system along for the ride.

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