If PC sales dropped 14%, how did Microsoft keep Windows revenue stable?

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Despite all the predictions that Surface sales were dismal, tablets might have saved Microsoft’s Windows division. But we might have to wait a quarter or two to find out for sure.

Microsoft reported earnings for the quarter ending March 31 and said that adjusted revenue for the Windows division was absolutely flat compared to the same period last year -- it recorded a 0% change.

That's a sharp contradiction with IDC's report last week that worldwide PC shipments plummeted 14 percent in the first quarter of the year, the steepest decline ever since IDC started watching the PC market in 1994.

There are a number of potential reasons and they don’t mean Microsoft should necessarily be jumping for joy.

First, note that we aren’t comparing apples to apples – IDC reported on shipments, Microsoft is reporting revenue. As Gregg Keizer recently pointed out, Microsoft has a number of ways to increase revenue while keeping shipments the same, such as charging more for licenses that allow companies to retain downgrade rights.

Also, IDC defines PCs as desktops and notebooks with hardwired keyboards. In other words, it excludes tablets. Microsoft includes its own Surface tablet sales as well as partner tablet sales.

Still, given the generally muted reception of the market to Windows tablets, it’s unlikely that tablet sales made up what looks like a big gap between Microsoft and IDC reports.

More likely, OEMs bought more Windows licenses than they actually sold devices, meaning that there are a lot of unsold PCs or tablets in inventory.

Also, Microsoft may have gotten a bit of a boost from sales from selling Windows upgrades at retail. A year ago, Windows 7 was several years old, so the in-place upgrade cycle had run its course. But with Windows 8 only six months old, it's conceivable that some customers are still upgrading their old Windows 7 computers.

Finally, enterprises may be buying more Windows Enterprise licenses than they were a year ago. Those licenses are the only way to get certain new features in Windows 8, like Windows To Go (which lets users boot a personalized copy of Windows from a USB stick) and Direct Access (a remote access technology that lets users log in without a VPN.)

It’s unlikely that Microsoft is going to break out Surface or tablet sales so we probably won’t know exactly what made Windows sales not as dismal as expected. Over the next few quarters as Windows tablets get more established we might be able to pick up some more trends. And it’s possible that executives will shed some light on Windows revenue during the financial earnings call this afternoon. 

Update: Sounds like Surface and enterprise volume licensing combined to make up for dropping PC sales.

During the analysts call, Chris Suh, general manager of investor relations at Microsoft, said that OEM revenue performance was in line with the underlying PC market, which he characterized as “challenged.” He also said that inventory levels dropped as the channel waits for new Windows 8 models.

But he also said that non-OEM revenue was up 40 percent, boosted by sales of Surface tablets and double digit growth of volume licensing.

So despite all the negative buzz around Surface tablets, they seem to have helped keep the Windows division above water during the quarter.

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