PC Sales Off, Games Buoy Microsoft

While Microsoft reported Thursday that its fiscal third-quarter profits were up 31 percent, revenue from the division that includes the Windows operating system fell 4 percent, to $4.45 billion.

The fall was due in part to an overall decline in PC sales worldwide of about 3.2 percent. Analysts have blamed the earthquake and tsunami in Japan, a big market for computers, for part of that decline.

But the sales of tablet computers, like the iPad, were another major factor and that could become a persistent problem for Microsoft. The category of the tablet computer created by Apple and its iPad is expanding quickly. Apple has sold 19.5 million iPads, and all the big PC makers and cellphone makers are making tablets.

Most of the tablets on the market run either Apple’s operating system software or Google’s Android software. Manufacturers have shown little interest in using Microsoft Windows software to run a tablet.

Canalys, a technology market research firm, noted that when tablet computers are grouped with PCs, Apple becomes the fourth largest PC manufacturer in the world with almost 10 percent of the market. The three biggest PC makers, Hewlett-Packard, Acer and Dell, are all making tablets that don’t use Microsoft software.

One other indication of Microsoft’s changing stature: for the first time, Apple’s quarterly profits exceeded Microsoft’s — $5.99 billion compared with $5.23 billion. Last year, Apple surpassed Microsoft in market capitalization and in revenue.

“It’s a huge testament to Apple,” said Colin Gillis, an analyst with BGC Financial. “There is clearly some disruption in the PCs.” However, Mr. Gillis noted that Microsoft Windows 7 is the fastest-selling operating system in history. He thinks Microsoft will probably make a move into tablets later this year with its expected release of Windows 8. In any case, Mr. Gillis said, “PCs aren’t going to disappear.”

Microsoft also has found itself left behind in software for cellphones. It recently acted to ramp up its presence on mobile phones through an agreement with Nokia, the Finnish handset maker that is troubled, but still the largest makers of cellphones in the world. The two companies are working together on new mobile phones that would use Microsoft’s Windows Phone operating system.

Microsoft has seen declines in its operating software before, as recently as last year’s first fiscal quarter when it fell 4 percent.

To be sure, other parts of the company’s business remain strong and helped Microsoft report Thursday that net income in its third quarter rose 31 percent to $5.23 billion, or 61 cents a share, from $4 billion, or 45 cents a share, in the quarter a year ago. Revenue climbed 13 percent, to $16.43 billion, from $14.5 billion.

The company’s Office software, where it has no significant competition, grew 21 percent, to $5.25 billion. Office 2010 is the fastest-selling version of Office ever, Microsoft said, with businesses deploying the software at five times the rate of its predecessor.

However, revenue from Microsoft’s entertainment and devices, which includes the Xbox 360 video game console and the innovative Kinect game controller that interprets gestures and voice commands, gained 60 percent, to $1.94 billion. Kinect, a sensor that lets players interact with video games without having to hold a controller, did particularly well, selling 2.4 million units in the quarter. Customers bought 2.7 million Xbox 360s.

Microsoft blamed the economy for the lower revenue from Windows. Consumers are saving their money rather than buying new computers, said Peter Klein, Microsoft’s chief financial officer. Asked in an interview about the impact of tablets on computer sales, he acknowledged that “it’s part of the story.”

“There are a whole host of consumer purchases vying for the consumer wallet,” Mr. Klein said.

Sales of Windows for consumers PCs fell 8 percent in the quarter, Microsoft said. Windows for netbooks, the small laptops that had been big sellers until tablets came along, declined 40 percent, highlighting the rapid shift in computer buying habits.

Revenue from Microsoft’s online properties like the MSN portal and Bing search engine rose 14 percent, to $648 million. The unit lost $726 million in operating income, continuing a pattern of losses.

Two years ago, Microsoft signed an agreement to take over Yahoo’s search business to create a more formidable rival to Google. However, Yahoo’s chief executive, Carol A. Bartz, said last week that the partnership had not yielded the expected financial results for Yahoo and that technical glitches by Microsoft were to blame.

Downbeat reports about personal computer shipments in early 2011 had raised questions about Microsoft’s future dominance. Microsoft has developed an operating system for smartphones, but it is on relatively few phones. It does not have software that makers of tablet computers want. In after-hours trading, Microsoft’s shares lost 1.4 percent. They had ended regular trading at $26.71, up 33 cents, or 1.25 percent.