Will Microsoft Windows 10 Continue to Drive Q1 Growth?

Windows has become nearly synonymous with Microsoft (MSFT). The flagship product of Microsoft, Windows has long been the favorite operating system of enterprise clients. As the year draws close to its end, Windows 7 is also reaching the end of its life.

In January 2020, the cycle of Windows 7 will be officially over, and users will have to embrace Windows 10. Now is the time when businesses will rush to upgrade their devices. Could Microsoft gain from increased device sales in this upgrade cycle?

Windows 7’s end of life drives global PC shipments

On October 13, research company IDC estimated that worldwide PC shipments climbed 3% annually to 70.4 million in the third quarter, as enterprises were preparing for a software upgrade after Windows 7. IDC further stated that many businesses also intended to finish their target of PC shipments ahead of potential Chinese tariff impositions in December.

IDC considers only traditional PCs and notebooks in its calculation, while its peer Gartner also includes tablets and detachables. Microsoft features in the second category due to its Windows and Surface devices.

Gartner reported that Windows 7’s end of life drove global PC growth by 1.1% annually in the third quarter. In the US markets, Microsoft saw 1.4% YoY (year-over-year) growth in shipments.

Microsoft also benefits from business PCs more than consumer PCs, as the enterprise licensing fee is higher. The company earns a significant profit from the wholesale licensing of enterprise, educational, and government computers. The chances of software piracy are also limited in business PCs. Another advantage of increased shipments owing to the Windows upgrade cycle will be for Microsoft Surface devices, which run on Windows 10.

Microsoft announced last month that its Windows 10 was already running on 900 million devices. These devices include conventional PCs, tablets, laptops, and gadgets such as the HoloLens and the Xbox One. Microsoft had plans to reach 1 billion Windows 10 devices by 2018. However, it extended this timeline due to disappointment over the Windows phone. It seems Microsoft could achieve its dream of 1 billion Windows 10 devices shortly.

Microsoft to see higher Windows OEM revenue

After the expiry of Windows XP and the run-up to the next upgrade, Microsoft saw sudden gains. However, this time, analysts expect that the benefits will be spread across a few quarters. Nomura Instinet analysts believe the 5%–8% growth Windows OEM revenue has seen for the last few quarters is due to end-of-life support for Windows 7. Microsoft has reported an increase in Windows revenue under the More Personal Computing segment.

Businesses are rushing to embrace Windows 10 before January 2020. Nomura Instinet analysts wrote, “We expect upside from migration to Win 10 to continue for several quarters, and industry conversations suggest more multi-year contracts to come.” As per a piece in MarketWatch, Morgan Stanley expects Windows OEM revenue to rise 5% in the second half of 2020.

Why do businesses need to upgrade to Windows 10?

Upgrading to Windows 10 is nothing less than an urgency. After January 14, 2020, Microsoft won’t be providing any further technical support, security, or software upgrades for Windows 7. This could expose businesses to risk from all kinds of malware attacks, cyber threats, and data protection issues. While most users have migrated to Windows 10, many individuals or businesses have yet to upgrade.

According to data from NetMarketShare, the adoption of Windows 7 has increased from 36.9% in December 2018 to 37.19% in January this year. This is the percentage of users who will potentially upgrade to Windows 10 in the coming months.

According to Tech Radar, Microsoft will still offer security updates to individual businesses that haven’t been able to upgrade after January 2020. However, these will be chargeable on a per-device basis. In the first year, from January 2020 to January 2021, the cost will be $25. In the second year, the price will rise to $50. Because the cost is per device, enterprises with a large number of devices will have to shell out a massive sum.

All eyes on Microsoft Windows OEM revenue

In the June quarter, Windows OEM Pro revenue surged 10% on the back of robust Windows 10 demand. NetApplications revealed that Windows 10 commanded a 51% market share as of August. Overall, its income from Personal Computing posted 8% annual growth. The segment contributed 36.3% to the company’s overall revenue. Because IDC and Gartner have reported increases in PC sales, Windows OEM revenue will likely climb in the first quarter as well.

Even as Microsoft aims to reduce its focus on Windows, Windows continues to be a significant product. The company is set to announce its first-quarter earnings results on October 23.

The challenge that Microsoft, however, faces here is its high licensing fee. In October 2018, Microsoft hiked the prices of its licensing programs as well as its on-premises and cloud products. In June, Windows’ increased licensing fee cost Microsoft a client in CERN, the world’s largest particle physics laboratory. CERN had been using Microsoft software for years. Matthew Humphries from PCMag said that if CERN couldn’t afford to pay the licensing fees, then the amount might be too high. It remains to be seen whether Microsoft makes a related fee-hike decision shortly and how it will affect its licensing revenue.