Forbes is one of the more respected business publications. While it has had it’s problems, such as it’s early support for The SCO Group, as Christ said, “Let those who are without sin throw the first stone.”
Forbes often runs financial analysis from The Trefis Team. The Trefis people are specialists at crunching financial figures, which I am not. Where they appear to be weak is in technology, sales and marketing, fields where I feel far more confident.
So let’s look at their numbers, then consider the implications of how technology, sales, and marketing, could impact those numbers.
The Trefis numbers were published both on their website and on the Forbes website. The text on both sites is the same, however the Trefis site won’t display properly in my browser, so I’m reading from the Forbes site.
The first major comment is that Microsoft has 75% of the PC market. They don’t specify what PC market. Is this worldwide, or North America? I suspect the figure is for North America based in part on Steve Jobs recent claim that Apple had taken 20% of the North American PC market, and the fact that Apple’s market share has been growing continuously for the last 8 quarters.
The also claim that Office has a 95% market share by their estimates. This seems high to me. When I recently took a night school course on writing the teacher, who wasn’t a geek, recommended Open Office as the best option for the students. Microsoft Office may hold 95% of the paid market, but I strongly doubt that it holds 95% of the total market.
I’m going to skip over a huge chunk of the text, because it isn’t important. The next important part, while accurate from one point of view, shows that they don’t understand the technology:
Microsoft OS’ operating margins have declined from around 79% in 2007 to around 66% in 2010, and we expect it to continue to decline to around 59% by the end of Trefis forecast period.
The problem is that reports indicate that Microsoft is giving away Windows Phone 7 (WP7) and will probably need to do the same with Windows 8 for ARM if they wish to gain any market share against Android, WebOS, and IOS (Apple). If tablets eat into PC market share the way it many of us believe that they will based on early reports of things like hard disk drive sales drops, then the 59% figure is extremely optimistic, and a figure of 30% is far more likely.
At the same time, the 95% market penetration of Microsoft Office will drop to approximately 50% based on the number of tablets that are estimated to be sold (assuming that none of them run a Microsoft operating system). Even if Microsoft ports Office to IOS or Android they face a significant problem, in that Apple has set the price for productivity applications very low – Pages, Keynote, and Numbers sell for less that $10.00 each, and Mail is free. Microsoft cannot afford to sell Office applications at that price level.
Let’s skip ahead to Trefis’s coverage of Office:
Microsoft Office operating margins have declined from around 67% in 2007 to around 61% in 2010, and these could continue to decline to around 54% by the end of Trefis forecast period.
Trefis is being too optimistic here. Microsoft is facing a dual problem. One, their traditional market is being cannibalized by tablets on the low end. Two, their traditional market is under pricing pressure because of offerings from Google, Apple, Word Perfect, Open Office, Libre Office, etc. While they might be able to maintain the margins that Trefis foresees, their total sales are still going to be negatively impacted. Margins mean nothing if your sales are falling like a paralyzed falcon.
Trefis does mention Cloud Computing, a method by which Microsoft could theoretically continue to deliver Office to everyone, no matter what Operating System they are running. Theoretically. Microsoft has several severe problems here.
- The phone companies intend to charge every penny they can for 3G and later 4G access, and most people aren’t willing to pay a monthly charge, when they can pay a onetime charge of $10.00 for something like Pages on the IPad, or download LibreOffice for free.
- Microsoft Office on the Cloud really only works if you run Internet Explorer, and Internet Explorer is tied to Windows.
- Most people don’t trust the Cloud. I use it a lot, but I only use it from places where I have a trusted connection, like from home. It’s just not safe.
And that puts Microsoft in a bind. As I wrote yesterday, Microsoft has to have started on their Windows 8 for ARM project in the summer of 2009, to have been able to deliver a demo in January of 2011. But a demo isn’t a working operating system. Microsoft doesn’t work the way that many Linux distributions do, with rolling releases. Linux distributions can do this, because there’s hundreds of projects involved, and the distribution is effectively testing and packaging the combination, not writing them all from scratch. This is also why Apple can turn out operating system releases relatively quickly, since OS X is based on Open Source software.
By the time Microsoft gets Windows 8 for ARM onto the market, will anyone want it? And if they do want it, will they be willing to pay for it? And how much of the PC market will the tablet market have eaten up?
For that matter, how many PC manufacturers will have switched to using ARM processors in their notebook and desktop machines? The new Dual Core ARM processors, like Apple’s A5, are about as powerful as the chips that Intel was supplying two years ago – more than powerful enough for everyday use, far cheaper, and far more power efficient. Ubuntu for ARM exists, why not start selling computers with it installed?
I know that the usual suspects will start crying that this couldn’t happen to Microsoft. I remember when the usual suspects were crying that this couldn’t happen to IBM, and guess what? IBM came closer to bankruptcy than anyone would have ever guessed was possible. It could happen to Microsoft too.
Monday March 7, 2011