Price cuts to two of Microsoft’s core lines of business, Windows and Xbox, contributed to shrinking profits in the last three months of 2014, according to the company’s most recent earnings. The results were nonetheless in line with analyst estimates and reflect CEO Satya Nadella’s strategic vision for the company.
Revenue related to the licensing of the Windows operating system fell 13% from the previous year, but it wasn’t all the result of declining partner PC sales. Last year’s sales were inflated after the company dropped technical support for Windows XP, necessitating a forced upgrade among those consumers and businesses still running that operating system.
Another reason for the drop in the Windows business was Microsoft’s decision to cut prices on Windows for academic and budget-conscious buyers. That move was a response to its declining market share in the academic and consumer spaces, where Apple’s Macbooks and iPads and Google’s Chromebooks have made significant inroads in recent years.
On the Xbox side, the company again cut prices to enhance market share. Its Xbox One, which originally sold for $500, is now retailing at $350. The lower price allowed the company to sell 6.6 million units over the course of the quarter and increase its overall market share, especially in the United States, but it was not enough to produce a gain on the year before. Instead, the division experienced a drop in revenue of 20%.
Microsoft was buoyed in the second quarter of its financial year by its cloud operations and sales of its Surface tablet. “We again saw enthusiasm and demand around our cloud offerings like Office 365, Dynamics CRM Online, and Azure, as well as Surface Pro 3,” said Kevin Turner, Microsoft’s COO. “Our sales engagement continues to focus on helping customers and partners transition to the cloud and navigate the shifting product mix related to our services and solutions.” Specifically, Microsoft self-reported that its commercial cloud business grew 114%, while quarterly sales of the Surface tablet surged 24% to crack $1 billion for the first time.
In aggregate, the company’s net income for the quarter was down over 10% year over year, falling from $6.56 billion to $5.86 billion, but revenue hopped 8% up to $26.47 billion. The earnings caused Microsoft stock to fall 4.3% in after hours trading Monday. However, for CEO Nadella, the dip is hardly a referendum on his tenure. Currently trading at $47.01, shares of MSFT are up 25% since he took over last February.