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Revenue in the Windows Division. (Credit: Microsoft)

Microsoft says in its quarterly regulatory filing today that sales of PCs to businesses were actually up 5 percent last quarter. Meanwhile, sales of PCs to consumers would have grown about 8 percent — if not for a decline in sales of netbooks.

But taking into account the netbook slump, actual consumer sales were flat. And that’s why the PC market overall grew only by an estimated 1 percent to 3 percent.

And that, in a nutshell, is where Apple’s iPad is hurting Windows PCs. It’s happening on the low end, as consumers looking to spend somewhere in the realm of $500 on a portable computer move away from netbooks in favor of “media tablets,” a market dominated for now by Apple.

In line with the overall market trend, Microsoft’s Windows & Windows Live Division revenue rose 2 percent in the quarter, leaving the Microsoft Office and Server & Tools Division to pick up the slack, helping Microsoft meet Wall Street expectations.

Here’s the summary from Microsoft’s Form 10Q, explaining the Windows revenue trend.

Windows Division revenue reflected relative performance in PC market segments. We estimate that sales of PCs to businesses grew approximately 5% and sales of PCs to consumers were flat. Excluding a decline in sales of netbooks, we estimate that sales of PCs to consumers grew approximately 8%. Taken together, the total PC market increased an estimated 1% to 3%. Windows Division revenue was positively impacted by higher inventory levels within our distribution channels and higher attach rates, offset in part by the effect of higher growth in emerging markets, where average selling prices are lower, relative to developed markets, and by lower recognition of previously deferred Windows XP revenue.

Microsoft is looking to combat the trend with a new wave of tablets coinciding with the Windows 8 release, presumably sometime next year.

But in the meantime, a recent report by IDC suggested that the overall trend in PC sales will continue. “An unfortunately familiar combination of cautious spending wrought by economic fears, PC saturation in mature markets, and budget cannibalization from competing devices, such as media tablets, is expected to contribute to weak growth in the second half of the year.”

Apple this week reported sales of 11.12 million iPads during its recent quarter, a 166 percent increase. Answering a question from analysts, Apple CEO Tim Cook said he expects the tablet market to eventually be larger than the market for traditional PCs.

This is likely to be one of the topics on Microsoft’s call with analysts, which is starting now. You can access the audio here.

Update: Addressing the PC trends on the conference call, Microsoft’s investor relations GM Bill Koefoed said the company is optimistic about a new wave of thin and light “ultrabook” computers coming from hardware manufacturers later this year.

PreviouslyMicrosoft hits profit estimates, lifted by Office and servers

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