Microsoft Death Watch – Fall 2012 Update, Part One

This article is way overdue. A lot has changed since I wrote Microsoft Death Watch – Forbes Weighs In back in March of 2011. Some things I’ve guessed right about, others, well I didn’t do so well.

In the Fall of 2009 I predicted that Microsoft would enter Chapter 11 Bankruptcy Protection within five years. Three years have passed, and there is no immediate evidence that Microsoft has been damaged to the level I had expected. In this article I’m going cover where I was right, and where I was wrong.

Microsoft’s Strengths

Microsoft still holds a monopoly on General Purpose Operating Systems. It is virtually impossible to buy anything other than a computer with a Microsoft OS installed, except for the few independent places that also carry Apple computers. We can ignore the Apple Corporate stores, no one expects them to sell Windows or Linux OS computers.

Microsoft still holds the majority of the business desktop market, and the majority of the PC Gamer market. It holds a certain percentage of the Server market, mostly because of Exchange Server, which is often used for corporate email and authentication.

Microsoft makes the largest portion of its profits from selling Microsoft Office (which you can see by reading Microsoft’s 10K, filed with the United States Securities and Exchange Commission). Office is a fairly competent and popular piece of software.

Microsoft’s Weaknesses

Microsoft has shown itself incapable of moving away from its original core markets, PC Operating Systems and Integrated Office Applications. The company mostly doesn’t make the hardware that its software runs on, which limits its ability to provide a complete integrated package.

Two of Microsoft’s largest customers, Dell Inc. and Hewlett Packard Company have both suffered because of a drop in personal computer sales. Curiously their competitor Apple Inc., had an increase in overall personal computer sales, which may partially have been driven by a price decrease.


Mac net sales were $4.9 billion and $16.6 billion in the third quarter and first nine months of 2012, respectively, representing a decrease of 3% and an increase of 7% in the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011. Mac unit sales increased 73,000 or 2% and 1.4 million or 12% in the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011. The 3% year-over-year decline in Mac net sales during the third quarter of 2012 was the result of lower average selling prices only partially offset by the 2% increase in Mac unit sales. 

Where Microsoft has produced hardware, it has often failed in the marketplace. The Kin phone died off in record time. The Zune lasted longer, but never held a significant share of it’s market.

Microsoft has done well with keyboards and mice, but those items are actually produced for Microsoft by other manufacturers, and brand labeled, i.e. Microsoft was not responsible for the R&D and design of those pieces.

The Xbox and the Xbox 360 did better than the Kin or Zune, however hardware issues with the Xbox 360 cost Microsoft a significant amount of money. While the original Xbox sold reasonably well, it never managed to outsell the Sony Playstation 2. The XBox 360 outsold the Playstation 3, but this may partially be caused by the original model’s unreliability (see Red Ring of Death).

Every device sold without a Microsoft operating system cuts into Microsoft’s lucrative Office sales. Android and IOS phones and tablets directly impact Microsoft’s sales, not only for the operating system, but also because Microsoft Office will not operate on them. Whether Microsoft will produce Office versions for Android and IOS is unknown. We do know that a LibreOffice version for Android is in the works, and Apple has made their iWorks suite available on IOS.

Apple’s decision to enter the Office market with their iWorks Application Suite at less than 25% of the price of Microsoft’s Office, appears to have been a direct attempt by Apple to cripple their biggest competitor. Many purchasers of Apple computers now rely on iWorks instead of Microsoft Office. While Apple holds only a small overall share of the personal computer market, this move probably cost Microsoft an inordinate amount of sales, as many Apple customers are involved in the creative arts.

What is a Computer?

It has been claimed we are entering the Post PC Era. To a certain extent I believe this is probably correct.

Consider the iPad. While it is limited (disclosure: I own an original iPad 64GB), it can do virtually everything a PC can do, is far more portable, and gets better battery life. So do all of the ARM powered Android based tablets.

While there are Windows based tablets available, they currently use Intel/AMD processors, tend to be far more expensive, get less battery life, and the current Windows 7 operating system isn’t optimized for tablets. When Windows 8 arrives, it will be optimized for tablets, and will come in an ARM variant (which will not be software compatible with Intel/AMD Windows). The question is whether it will be competitive, as  the Non-Apple tablet market is extremely price sensitive.

Then there’s smartphones. My three year old iPhone 3GS has almost all the same capabilities as my old P3 desktop computers (which are currently being used as file servers). And it fits into my pocket. Yes, the screen is a bit small, but with bifocals it is more than usable.

Does this make smartphones and tablets computers? Tomi Ahonen who runs the Communities Dominate Brands blog says it does. When you consider the total installed base of the personal computers, tablets and smartphones, Microsoft’s share of the total Operating System market is 31%. Oh, and Apple is the largest computer manufacturer with a market share of 21%!

You can do almost anything on a tablet or a smartphone that you can do with a PC. Of course there are limits. I wouldn’t try to write a novel on a smartphone. Even this relatively short article would be close to impossible to write using a smartphone, whether it is one with a touch screen, or if it has a mini-keyboard.

But… Most smartphones and tablets support Bluetooth. With a Bluetooth keyboard, and some eyestrain you could write a novel using a smartphone. It would be easier to do it using a tablet/Bluetooth keyboard combo, because of the difference in screen size, but you could do it on a smartphone.

I wouldn’t recommend it, but you could.

So what is a computer?

A computer is something you use for computing, which is a circular definition. But you can use a smartphone or a tablet for computing. Admittedly there are things that neither is capable of doing, or at least doing well at present, like playing World of Warcraft, but there are other things that you can do far more easily due to the smaller size factors.

Is a game console a computer? That’s a really good question. Can you use a game console for most things you would use a PC for? Not really. Oh, you could use it for word processing by logging onto Google Docs, and some do support Bluetooth keyboards. But game consoles are heavily limited. The only application software available for most of them is games…

Costs per Person

This is like following Alice down the rabbit hole. There’s two main issues:

  • Retail Price Paid
  • What that the device enables you to do

Yes, a full blown Alienware desktop gaming rig really rocks. But you can’t fit it in your pocket, or use it on the subway. A smartphone can fit in your pocket, and you can use it on the subway, but you can’t play the hottest games on it.

It all comes down to what you require your device to do, and whether you can make the device do it reasonably easily. If you can’t, then no matter how much or how little you paid, the device isn’t working for you, and was waste of your hard earned money.

I have meet people who used their smartphones for almost everything. You might think that they are crazy, but if it works for them, they aren’t crazy.

Your choice of what to use, depends on what suits you, and what you need to do. That is going to determine your costs, and what you can re-purpose. My file servers used to be used as gaming PCs, a long time ago.

Let’s face it. There’s a recession going on. Money is tight, and people are trying to make do. If they can use their smartphone to replace a desktop PC to save money, they’ll do it.

Cost per person is going to vary based on the person, and how few devices they need to get things done.

The Marketplace and Sales Approaches

Microsoft has traditionally sold Operating System software licenses to the computer OEMs, along with some Microsoft Office licenses. They’ve also sold Microsoft Office licenses and some Operating System licenses to retailers. What this means is that Microsoft has only a few customers, but that those customers are worth large dollar volumes in sales.

Apple, by opening their own stores, bypassed the retailers, and started selling directly to the general public.

Both sales strategies have benefits. Microsoft doesn’t have to retain as many sales staff as Apple, and in theory spends less per unit sold. Apple has greater margins per unit sold, as they don’t have to allow for the retailer to make a profit, since they are the retailer.

But if Apple loses a customer, the lost sale amount is low. If Microsoft loses a customer, the lost sale amount can be huge, especially if it is one of the big OEMs. Most of Microsoft’s customers are under contract. This makes them far less likely to abandon ship than an Apple customer, if Microsoft makes a mistake. Apple has to work a lot harder to retain customers, if Apple makes a mistake (which it seems capable of doing, go visit your local Apple store and look at the crowds).

I’ve worked in Sales, under both systems. It can be really nerve wracking when a customer worth 10% of your corporate annual sales volume isn’t happy.

But selling directly to consumers is tough. How do you identify exactly which people will find enough value in your product, use an Ouija Board?

Once you have a customer, you need to keep the customer happy, so they’ll continue to buy from you. People like Jeffrey Gitomer make a fortune selling books on sales. Heck, I’ve got all of his books, and I highly recommend them to everyone in sales.

Another issue is that as a manufacturer, you never, ever, buy anything from a competitor. If you do, you are helping to finance your competitor, and give them an advantage against you in the marketplace.

Consider the console business. Microsoft supplied a modified version of Windows CE to Sega for the Dreamcast system. We can assume that Microsoft also approached Sony and Nintendo about OS sales. They had to have, there’s only a limited number of hardware builders, and Microsoft needs to sell to as many of them as possible.

Then Microsoft decided to produce their own system, the original Xbox. From that point on, the rest of the console manufacturers would have avoided Microsoft. Why help Microsoft compete against them?

It’s not just the money involved. To produce an operating system you have to know about the hardware, and Microsoft was competing on hardware too. If Nintendo or Sony allowed Microsoft to see their hardware to manufacture an OS, it would give Microsoft an advantage in designing the next generation Xbox.

To quote Andew Grygus from Automation Access:

This same fate has befallen numerous Microsoft “partners” in the past, and awaits those that sets up .NET services. Either your service is not successful and you go out of business, or it is successful, Microsoft commandeers it, and you go out of business.

If you haven’t read Andrew’s article 2003 and Beyond, you should, and compare it with what has happened in the last nine years.

How is this going to impact Microsoft?

Microsoft has a lot of extra competition in the OS space. The many versions of the BSD kernel (one of which is the basis of IOS), and the Linux kernel (which is the basis of Android) are the basis for a wide range of operating systems. Both the BSD and Linux kernels can be used with a variety of desktops, such as KDE, Gnome, Unity, XFCE, etc., allowing OEMs and end users a wide range of viable options.

OEMs have already been warned that Microsoft is attempting to compete directly with them. Microsoft’s Kin One and Kin Two phones placed Microsoft on record as willing to try to grab as much market share as possible, even if it did hurt their customers. While the KIN phones were a disaster in the marketplace, remaining on sale for only forty-eight days, their launch was a shot across the bow of the mobile phone OEMs.

Even worse was Microsoft’s announcement of the Surface Tablet, which is competing directly against the computer OEMs. This will directly impact on Dell and Hewlett Packard’s sales (never mind Acer, ASUS, etc.) With Microsoft set to produce a Surface Branded Phone, it will put them in direct competition with companies like Samsung, Nokia, and HTC as well.

This leaves Microsoft’s current customers with two alternatives:

  1. Attempt to compete with Microsoft while being a Microsoft customer.
  2. Dump Microsoft, and use another operating system.

Neither option is likely to make the OEMs happy. Yes, they could attempt to talk Apple into licensing Mac OS X, but Apple won’t license it, and everyone knows that. Mac OS X is Apple’s biggest way of differentiating their personal computer business from the other PC OEMs.

Attempting to compete by selling hardware which is virtually identical to what Microsoft is selling is suicidal. Microsoft doesn’t have to pay for the operating system, which is a huge advantage. Unfortunately most buyers (both corporate and personal) are used to Windows, and while they may not be fans, it’s a “better the devil that you know” situation. Also, users of Microsoft Office will tend to buy the OS that supports Office.

Last but not least, Microsoft is likely to increase pricing to any company that starts offering their own OS in competition to Windows.

But a lot of people are now used to Android, and to Google’s Chrome browser. An Android or Chrome OS based PC might be a workable alternative. Mozilla is working on a Firefox OS for phones and tablets, which also might be adaptable to computers.

And of course those options are already familiar to buyers, while things like Desktop BSD or XUbuntu aren’t well known.

It all comes down to how badly Microsoft’s moves impact the bottom line of the personal computer manufacturers, and that is going to depend on how badly Microsoft’s sales have dropped. Microsoft recently recorded their first ever quarterly loss. If personal computer sales keep dropping, leaving fewer devices to run Microsoft Office, it will push Microsoft into attempting to make up the lost sales by competing directly with the OEMs. If that happens, the OEMs will have no choice but to dump Microsoft Windows.

I don’t know how this is going to play out. What I do know is that the pressures on the “computer” industry, including smartphones and tablets, is going to make every company involved in the market scared. That includes the current king of the hill, Apple, which may not be able to stay on top for very long.

 

May you live in Interesting Times.

Regards

Wayne Borean

Tuesday October 16, 2012

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2 thoughts on “Microsoft Death Watch – Fall 2012 Update, Part One

  1. Wayne: MS isnt going to die any time soon, and your correct that they suck at marketing hardware, tho the xbox/xbox360 have been successful.

    The Zune was doomed due to the way MS management has been reformed since Gates left, rather then geeks designing and building stuff then getting business and legal types involved to ensure that something would pass the sniff test legally and could be marketed, MS now posts MBAs in charge of most teams and ties the teams to a lawyer every step of the way.

    I have an old OLD friend who was part of the Zune Team for a while, thankfully this person managed to find another job/project, the whole problem came down to the MBA’s and Lawyers wanting to try and “out ipod the ipod”, they tied the zune to some really crappy software and wouldnt open it to sync any other way(even apple dosnt force you to sync/manage your player with itunes, you need itunes installed but dont have to use it for more then updates)

    the Zune hardware was GREAT, the software….and inability to even use WMP to manage the player is what killed it more then anything…..

    as to server os’s, Exchange is FAR FAR FAR from the only reason companies use ms server, Active directory is also very very big, and has no real FOSS counter(at least not one that works even close to as well), I say this having worked directly in this industry for a long time….there are many reasons that most companies internal servers are Windows not Linux or OSX(apple dosnt even sell server systems anymore last I checked)

    MS dosnt need to create and market their own hardware, in reality, its better if they would stick to the software side, its what they are best at(far from perfect but…..still they suck at hardware….other then keyboards…their ergonomic keyboards are good..)

    Im not an MS lover, BUT MS has its good side for business and average “joe sixpack” type users.

    1. windows in most cases “just works” you dont have to dick around with dependencies and such like you do on linux.(even the best distro’s still have this issue.

    2. driver support on windows is much better then any other os, even osx.

    3. MS Office is the industry standard, sorry I know you hate MS but this is a fact…..I Use AbiWord most of the time Myself but…..MS Office is still considered the standard…..

    4. software selection is far wider and easier for the average user to find and install/remove.
    this wouldnt be a big deal to anybody whos a geek but to “joe sixpack” it is, and to people who have to support joe….its a big deal…..trust me…you dont want to try and explain to joe how to download and install some random program on Linux….I have done it….its part of why I dont push or even offer linux installs for most people anymore….

    5. great selection of software to protect systems from malware/viruses free….and if they do get infected, theres tons of free cleanup options as well!!!!

    6. you mention ms making their own tablet…..hows this different from Google having their own phones(nexus line)?
    Please note this wont really hurt sales of non-ms versions, just like when MS had their own stores they really didnt impact sales of PC’s online or at other stores to any noticeable degree(infact, a buddy of mine worked across the parkinglot from an apple store and an MS store…..they saw more sales due to the 2 moving in then they lost…..because people would shop around and find what to them was a better deal)

    I agree with some of your points, but some of them are…..illogical if you know the whole story behind whats gone on and have been watching whats gone on for decades now in the pc market.

    OH i gotta mention this.

    yes the xbx360 had RROD issues, but the PS2 had optical drive issues that where muchmore comon, and RMA on them took up to 3 months to get the drive replaced….(not kidding, i had to rma one 3 times due to optical drive failing) the first xbx didnt have any of those issues…infact, msot of them are still chuggin along today, many with hdd upgrades and mods so they can run emulators for other consols games.

    the 360 rrod was bad, BUT if you had one that hadnt failed yet, and didnt want to rma, you could just do a very easy mod to fix the cooling issues(google a bit, i have done mods on 20+ units for people who didnt want to rma….very very easy!!!)

    “Another issue is that as a manufacturer, you never, ever, buy anything from a competitor. If you do, you are helping to finance your competitor, and give them an advantage against you in the marketplace.”

    huh, you should tell asus, msi, corsair, antec, hp, acer, sony, dell…and pretty much every other major and most minor names in the pc industry that……hey all buy from competing companies and rebadge stuff….

    asus does it with optical drives, monitors, videocards, laptops and more….

    HP does it with HDD’s,monitors and Optical drives(among other things)

    Dell does it with Monitors and other devices.(all dell monitors are made by other companies and just rebadged for dell, samsung and benq made the dells i have around here…..)

    MSI does it with optical drives and Laptops(and other things ofcourse)

    Antec does it with quite a few products easiest to see is their liquid cooling kits that are ASTEK models rebadged same as corsairs and Zalmans and Intels and and and……

    the long and short of it, tech companies rebrand all the time buying from companies they are competing with, so your assertion that “Another issue is that as a manufacturer, you never, ever, buy anything from a competitor. If you do, you are helping to finance your competitor, and give them an advantage against you in the marketplace.” is off base.

    add to that the fact that MS wont be discounting their OS on their own hardware sales(because the MBA’s wouldnt allow that…..) and they are competing but they arent really a threat to their partner companies.

    I get where your coming from on that, I just know that in computers and software, its not really true…..rebranding or buying from a competing company and bundling are quite common practices these days.

    Android would be an alternative for web browser and lite app users but in no way at this point can it replace windows for a workstation/business OS…..(just like OpenOffice and iWork really cant replace MS Office in the work place….even apple admits that!!!)

    I love the idea of stuff like the raspberry pi a small cheap computer anybody can afford that will hook to any hdmi ready display…..but even if you scale that up to a laptop size, ti cant replace a windows or osx laptop/desktop….not today……years from now….it may be a valid alternative…..at least android has a stable driver api/abi rather then the mess that is linux…..

    you should watch this

    linux lovers who each year have a symposium on why linux still sucks(watch it, you will get it i think)

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