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Microsoft translates itself to a services and devices company

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Microsoft has transformed itself from a software provider to a services and devices company, reports The N.Y. Times.

That was clear on Thursday, when the company reported a happy 14 percent increase in revenue in large part from brisk holiday sales of its new Xbox game console and Surface tablets and a less happy 3 percent rise in profit.

The person driving that change at Microsoft has been Steven A. Ballmer, the chief executive. But if the vision is going to be seen through to the end, it will be by someone other than Mr. Ballmer, who is stepping down in the coming months. Struggles for a successor with vision and implementation savvy to carry on.

Ballmer’s vision translated into sales. Microsoft sold 7.4 million Xbox consoles, and the Surface tablet more than doubled to $893 million from the previous quarter.

Brendan Barnicle, an analyst at Pacific Crest Securities said ‘It was the devices and consumer business driving everything in the quarter.’

The bad, though, is that Microsoft’s gross profit from the hardware business actually fell to $411 million, compared with $762 million a year ago, despite the surge in sales. One of the big reasons for the fall is that profit from new consoles like the Xbox One is almost always nonexistent when the devices are introduced, but they improve as component prices fall, manufacturing becomes more efficient and the audience of game buyers expands.

In an interview, Amy E. Hood, Microsoft’s chief financial officer, said the PC market showed ‘signs of stabilization’ but consumer demand for PCs was still soft. Windows 7 and Windows 8 sales fell 20% in the last quarter with a 3% drop in profit but commercial license were up 12% in profit to offset the weakness.

Ms. Hood advised analysts and investors to consider the profit of Microsoft’s overall business, rather than focusing in on one part of it. For all its challenges, Microsoft’s bottom line remains enviable compared with those of some more lionized companies, including Amazon.com and Salesforce.com. Microsoft’s commercial business, which includes databases, Office software for organizations and cloud computing services, rose 10 percent, to $12.67 billion, more than half of overall revenue.

To further Microsoft’s new image hardware ambitions are only getting bigger, too. The company is nearing the completion of its $7.2 billion deal to acquire Nokia’s handset business.

Ted Schadler, an analyst at Forrester Research, said Microsoft’s results spoke to the growing appeal of products like the Surface in which hardware and software are tightly coupled, rather than Microsoft’s traditional approach of shipping software to independent hardware makers to put on their devices. A bundled package has made a marketing difference with sales results.

‘What those numbers reflect to me is that people want that,’ Mr. Schadler said.

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