Odd, that Microsoft (NASDAQ: MSFT) should announce that it had sold 350 million copies of Windows 7 just as Amazon’s (NASDAQ: AMZN) cloud computing service collapsed and left clients’ website and download services marooned. Windows 7 is viewed by many as the last large Windows release that maintains the world’s largest software company’s success as client-side software–loaded onto individual machines and not operating from remote servers.

“18 months ago to this day was when we launched Windows 7 and with that we’ve hit another important milestone: we are pleased to announce that Windows 7 has sold more than 350 million licenses. The momentum we’ve seen and continue to see with Windows 7 is incredible,” wrote Brandon LeBlanc at the Windows website. He may be whistling by the graveyard on behalf of his employer.

Microsoft has released cloud computing Windows products, but they may so severely cannibalize the firm’s main product that the company could be transformed in the next few years, and not for the better as far as revenue is concerned. Windows 365, one of its  cloud-based products, has been given good reviews.

Microsoft would need a nearly complete rejection of the cloud computing model by both consumers and business to keep its Windows revenue intact. In the December quarter, Microsoft had revenue of $20 billion and net income of $6.6 billion. The Windows division’s revenue was $5 billion and operating income was $3.2 billion. The margin for the segment is so high it still stuns many investors.

It has been said almost too often that Windows will not survive in its current format. That gives the Microsoft two long shots to maintain its Windows revenue. Windows cloud software may take a large share of the industry. Microsoft would have to under-price and out-feature other products. And, it would have to be part of the rising tide of cloud computing that may have been slowed by the Amazon.com service collapse.

Then there is the Windows mobile product, which has done poorly compared to Research In Motion (NASDAQ: RIMM), Apple (NASDAQ: AAPL), and Google’s (NASDAQ: GOOG) Android. The fate of Windows mobile will depend mostly on its tie-up with the world’s largest handset maker–Nokia (NYSE: NOK), which is also desperate to find a portal into the smartphone business.

Microsoft might want to take a lesson from the current backlash due to privacy concerns created by the tracking functions in the Apple and Android mobile OS systems. Microsoft could say it will not use highly sophisticated data gathering with its mobile device. This might assuage some privacy advocates but it would neuter the one critical feature that makes mobile operating systems useful for a whole host of customer assistance feature like location-based functions. It would also undermine any attempt by Microsoft to offer marketers access to the habits of mobile customers who use its OS on their smartphones or tablets.

The advance of the cloud could be set back by the Amazon debacle. but that will not last. The efficiency and utility of cloud computing are too great. Microsoft could press the entire weight of its R&D, marketing, and balance sheet to win in the cloud and still do irreparable damage to its own fortunes. That leaves the mobile market as its only hope.

Douglas A. McIntyre

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