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Market share drop from 93% to 4% is real story behind Microsoft's fourth-quarter results

Here's what you really need to know about Microsoft's fourth-quarter financial results: the company has 93 per cent market share of the past, but only 4 per cent of the future. Dealing with the post-PC era is Steve Ballmer's greatest challenge.

Don't pay any attention to the headlines saying Microsoft scored its first overall loss since 1986; that's all because of a $6 billion (£3.86 billion) bad bet on a failed mobile advertising business, and it's over. Next quarter, Microsoft's numbers will return to normal.

But that normal includes a declining Windows business for a declining PC world. Windows still has dominant, absolutely crushing market share in desktop PCs. According to Net Applications, Windows is still cruising along with about 93 per cent market share on desktops and laptops. Mac OS X has a lot of buzz, but it doesn't look like it's inspired a mass movement to switch.

Microsoft's problem is that the entire PC category is in decline, and Microsoft has near-zero market share in the products replacing it. The Guardian ran a useful story analysing IDC sales estimates earlier this year, showing that as time goes on, forecasts for desktop and portable PC sales have tended to decline in favour of booming tablet and smartphone sales.

Microsoft's smartphone market share has been moving in the wrong direction over the past few years. The company has had a shrinking segment of a growing pie. Windows Phone 7, while it won our Readers' Choice award this year, runs on generally uninspiring hardware and was poorly marketed as the "smartphone for people who hate smartphones." Thanks to AT&T's heavy promotion of the Nokia Lumia 900, most recent smartphone market share results have Microsoft at 4 per cent in the US - and that's up from last year. Microsoft-powered tablets are hardly measurable, although the company has had a tablet PC business for a decade now.

Microsoft's one bright spot is in home entertainment, where the XBox 360 is doing very well. That's another growing, post-PC category.

Microsoft Isn't Going Out of Business

Let's not be too hysterical. Microsoft is no RIM, which may run out of cash in a few quarters, and it's no Nokia, which has had to downsize its business dramatically as its fortunes have shrunk. Microsoft's business and server divisions keep on churning out cash. The company isn't in crisis yet.

But Microsoft has to avoid being stuck on the wrong side of history. It could afford to fail with Windows Phone 7, but failing with Windows Phone 8 and Windows 8 tablets will put it in a much tougher position. If these two products don't make a big splash, Microsoft will be stuck in neutral as the move towards mobile platforms gains pace.

Windows 8 will surely lead to a bump in PC sales, but it won't reverse the long-term trend. For Microsoft's real future, Windows Phone 8 and Windows RT - terrifying as this fact is - may be the most strategically important products of all.