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 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 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:
- Attempt to compete with Microsoft while being a Microsoft customer.
- 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.
Tuesday October 16, 2012