Microsoft Windows 8

All Eyes Turn to Windows 8

Investors Expected to Mine Microsoft Results for Insight Into Crucial New Product

By STEVEN D. JONES

When Microsoft Corp. MSFT -0.96%reports its third-quarter earnings Thursday, investors will be watching closely for insights about a coming product vital to ensuring the software giant’s relevance in computing.

Microsoft has spent the past two years developing Windows 8, the next edition of its flagship computer operating system, which will for the first time run on both desktop computers and tablet devices.

MSOFT

Bloomberg News

A Microsoft ad at the CeBIT trade fair in Germany in March. The company plans to simplify its Windows line.

The company is putting the finishing touches on the software before shipping it to manufacturers, which will load it on devices slated to hit stores in October or November, in time for the holiday-sales season.

Windows 8 is Microsoft’s best hope for competing with devices running Google Inc.’s GOOG -0.35%Android operating system and with Apple Inc.’s AAPL -0.22%iPad and iPhone products. Microsoft has almost no presence in the tablet market, which is expected to double in size, with sales of 118.9 million units this year, according to research firm Gartner Inc.

Apple’s iPad is expected to account for a little less than two-thirds of those sales and Android machines for nearly a third.

Microsoft’s quest to steal some of that market share will likely be slow going. By the end of the year, Windows 8 tablets are expected to account for just 4% of tablet sales, according to Carolina Milanesi, who co-authored a Gartner report on the tablet market.

But the effort is critical for Microsoft as it tries to compensate for flagging personal-computer sales. In its fiscal second quarter, revenue from Windows products fell 6.3% from a year earlier to $4.7 billion.

The stock market is already counting on Windows 8. Microsoft’s shares have risen 20% this year on prospects for “a rich year of new products,” said Nomura Securities analysts Rick Sherlund, who also expects promising new versions of Windows Server 8 to manage networks and updates to Microsoft Office this year.

On Monday, Microsoft said it would simplify the Windows product line by offering just three versions—Windows 8 for most people, Windows Pro for professionals and businesses, and the preinstalled Windows RT for tablets.

It isn’t clear whether Microsoft will make Windows 8 available for smartphones, a market in which the company has struggled.

Windows 8 has received positive early reviews since Microsoft released a preliminary version to software developers in September and a preview of new features that consumers could start downloading in February.

The features include an updated version of the Internet Explorer Web browser, Web-based storage and a single-password sign-on to allow users to access their email, address books and documents across a range of Windows-powered computers and mobile phones.

Like Apple and Google, Microsoft is also wooing the legions of developers who create apps, the tiny downloadable programs that run on tablets and smartphones.

To appeal to a new generation of developers, Microsoft expanded the number of programming languages developers can use to write Windows 8 applications. That might help the company avoid the app shortage that has hobbled its current phone software, Windows Phone 7, which has failed to catch on, even though it received strong reviews.

To entice developers, Microsoft is offering them a bigger cut of sales than they get from Apple or Google. Developers who sell apps through the Windows Store get to keep 80% of sales after an app hits $25,000 in revenue, a higher margin than competitors offer.

Microsoft also allows developers to work more freely with customers, said Jonathan Sasse, marketing chief at Slacker Inc. Clients who download its Slacker Radio app to a Windows device can pay by credit card or through their network carrier. IPhone users pay through iTunes, which is more costly for Slacker.

“We have a better margin on Windows Phone than on iPhone subscribers,” said Mr. Sasse, who expects to reap similar returns from Windows 8 tablet users.

Microsoft’s tactics seem to be working. In January, Appcelerator, a Los Angeles firm that helps create tools for developers, conducted a survey of its 300,000 clients.

The survey found that 66% of respondents said they were developing or planning to develop Android applications and 88% said the same about Apple’s iOS, the operating system that runs the iPad and iPhone. But it also found that 37% were developing apps, or were planning on doing so, for Windows 8.

“The fact that many developers are interested in developing for a system that isn’t even out yet is striking,” said Mike King, Appcelerator’s mobile strategist.

Write to Steven D. Jones at steve-d.jones@dowjones.com

A version of this article appeared April 19, 2012, on page B4 in some U.S. editions of The Wall Street Journal, with the headline: All Eyes Turn to Windows 8.

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