Microsoft Troubles XVI: Hard Data is emerging

Horace Dediu of asymco has written two recent posts on Microsoft:
I find Dediu's work outstanding: he provides hard data for the points he argues...

"The evolution of the computing value chain" - the graph, although log not linear sales, seems to show three things:
  • Past product rarely 'plateau', they move from growth to decay in a single, sharp step.
  • PC's as a proxy for MS-Windows + MS-Office has had decades of ramp-up and seems to have plateaued. Already, the longevity and plateauing mark PC's as 'different'.
  • Other products, smartphones and tablets, are in strong growth phases and surging past PC sales.
What the graphs can't show is "what will be?": predict the future.

My view is that Desktops aren't going away, especially the Corporate Desktop, but they will morph and take on characteristics of competing, new devices; competition will cause further evolution, diversity and evolutionary 'trials'; and as we push closer to The End of the Silicon Revolution, sales of PC's and laptops will sag because as fungible consumer devices, they will be expected to have long lives: the refresh cycle, both Domestic and Corporate will increase, automatically reducing sales but not market share...

Consumer and Corporate sales naturally decline in a Mature Market, even though the market is saturated.

That's the price of a Mature market: Rate of Growth becomes a maintenance function.

Dediu's next piece, "Who will be Microsoft's Tim Cook?" poses some hard questions: How can Microsoft survive just with licensing expensive software in a post-PC world?
According to Gartner, in 2011 there were about 336 million Windows PCs sold and that this too is a fairly stable and mature business. 
If we simply divide revenues by PCs sold we get about $55 Windows revenues per PC and $68 of Office revenues per PC sold [1]. The total income for Microsoft per PC sold is therefore about $123. If we divide operating income by PCs as well we get $35 per Windows license and $43 per Office license. That’s a total of $78 of operating profit per PC. 
Now let’s think about a post-PC future exemplified by the iPad. Apple sells the iPad with a nearly 33% margin but at a higher average price than Microsoft’s software bundle. Apple gives away the software (and apps are very cheap) but it still gains $195 in operating profit per iPad sold. 
Fine, you say, but Microsoft make up for it in volume. Well, that’s a problem. The tablet volumes are expanding very quickly and are on track to overtake traditional PCs while traditional PCs are likely to be disrupted and decline. 
So Microsoft faces a dilemma. Their business model of expensive software on cheap hardware is not sustainable. The future is nearly free software integrated into moderately priced hardware. 
For Microsoft to maintain their profitability, they have to find a way of obtaining $80 of profit per device. Under the current structure, device makers will not pay $55 per Windows license per device and users will not spend $68 per Office bundle per tablet. 
Price competition with Android tablets which have no software licensing costs and with iPad which has very cheap software means that a $300 tablet with a $68 software bill will not be competitive or profitable. 
However, if Microsoft can sell a $400 (on average) device bundled with its software, and is able to get 20% margins then Microsoft is back to its $80 profit per device sold. This, I believe, is a large part of the practical motivation behind the Surface product. 
The challenge for Microsoft therefore becomes to build hundreds of millions of these devices. Every year. Sounds like they need a Tim Cook to run it.
The demise of our current incarnation of the "PC" is inevitable, the only questions are "when?" and "what next?".

Gordon Bell updated his classic "Bell’s Law of Computer Classes" paper in 2007 [wikipedia entry] after the iPhone had redefined smartphones, but before the impact was fully apparent. He finishes [reformatted]:
Bell’s Law explains the history of the computing industry based on the properties of computer classes and their determinants. 
The paper posits a general theory for the creation, evolution, and death of various priced‐based computer classes that have come about through circuit and semiconductor technology evolution from 1951. 
The exponential transistor density increases forecast by Moore’s Law (1965,1975) being the principle basis for the rise, dominance, and death of computer classes after the 1971 microprocessor introduction. 
Classes evolve along three paths:
  • constant price and increasing performance of an established class; 
  • supercomputers – a race to build the largest computer of the day; and
  • novel, lower priced “minimal computers”.
A class can be subsumed by a more rapidly evolving, powerful, less expensive class given an interface and functionality. 
In 2010, the powerful microprocessor will be the basis for nearly all classes from personal computers and servers costing a few thousand dollars to scalable servers costing a few hundred million dollars. 
Coming rapidly are billions of cell phones for personal computing and the tens of billions of wireless sensor nets to unwire and interconnect everything. 
In 1951, a man could walk inside a computer and by 2010 a computer cluster with millions of processors has expanded to building size. 
More importantly, computers are beginning to “walk” inside of us[1].
[1] Courtesy of Dag Spicer, Curator, Computer History Museum 
If Ballmer stays wedded to his "Everything is a PC" mantra, either Microsoft  will fail quickly or he will be replaced. Ballmer has presided over a decade of the Microsoft shareprice "going sideways". While he had great insight and strength-of-character in building the Microsoft brand (and PC sales) for 2 decades, he hasn't shown any capability in dealing with the New World Order where the economics have fundamentally shifted. PC's are no longer the cheapest market segment, they've become "the Old Status Quo", just like Mainframes, Mini's and (Unix) Workstations before them.

Technology Evolution is driving down the price of computing functionality: Microsoft has to adapt or die.

As Dediu points out, when the Software costs a substantial fraction of, or more than, the hardware, people will actively look for substitutes. Which will create a mid-term crisis for Microsoft: it's far, far easier and cheaper to retain a customer than to win one.

Markets where this doesn't matter so much: servers, workstations and long-life Corporate Desktops; won't see a catastrophic collapse.

Does the as yet unpriced Surface from Microsoft signal a change in direction or "more of the same".
MSFT Shareholders, hang onto your hats! you are in for a wild ride.

No comments: