Microsoft wins, even if the PC loses

I am simply stunned by the ridiculous number of "Microsoft will be dead in four years" stories, following Gartner's grim PC forecast three days ago. I offered brief analysis then and promised something later, and this is it. Yesterday, colleague Alan Buckingham posted first: "Microsoft is nowhere near death's door" -- and he absolutely is right.

Throw a rock, and you can't miss a doom-and-gloom armchair analysis. Among the many are "Gartner: Microsoft is dead, Windows has expired, Office has ceased to be" (Computerworld); "How long can Microsoft go on like this?" (InfoWorld); "Apple's ultimate victory over Microsoft" (Motley Fool); and "Gartner may be too scared to say it, but the PC is dead" (ReadWrite). For the most part, all these armchair pundits are mistaken. Hugely.

Counting is Bad Math

By the numbers, the PC's future looks grim compared to rising smartphone and tablet shipments. But the data misleads. Gartner sees PC shipments falling from 315 million this year to 271.6 million in 2017 -- that's a 13.7 percent decline. Mobile phones rise to 2.1 billion from 1.9 billion, a 13.5 percent increase. Tablets: 197 million to 468 million, or 137 percent growth. Microsoft's presence in both latter categories is negligible. Windows mobile operating systems had 3 percent smartphone sales share in fourth quarter (Gartner) and Windows on tablets 4.7 percent forecast this year (IDC).

The numbers and pundit analysis about them ignore several key factors:

1. The addressable computing market isn't growing gangbusters. For the four categories -- ultramobiles like Microsoft Surface Pro is the other -- total shipments rise from 2.4 billion this year to 2.96 billion in 2017. That's just a 22.9 percent increase. It's healthy growth but not large expansion, which reflects something not expressed in the data (see #3).

2. The overall market actually changes little in four years compared to today. Based on Gartner's data, mobile phones will account for 77.7 percent of shipments in all four categories this year but only decline to 72 percent in 2017. Handsets are most important among the devices, and that's not a new situation. Microsoft's mobile OS position is equally as weak two years ago as it could be in 2017, if not better then.

Armchair pundits fixate on a couple data points. Android is one of them. The operating system rises from 35.7 percent of all devices shipped this year to 49.5 percent in 2017. There's presumption this rise will shift developers away from Windows, establishing a new dominate ecosystem. That's absolutely true for mobile phones. But most people, not even in emerging markets, will replace PCs with smartphones. In some markets, buyers will take smartphones instead.

Something else: Gartner's numbers are for all mobile phones. The analyst firm expects 1 billion smartphones sold this year, for example, out of 2.4 billion handsets. Dumb phones aren't really viable PC replacements, or displacements.

3. Shipments don't reflect install base. A category's actual size matters more, particularly when assessing the ecosystem of applications, services and other things. This is important addressing tablets' real impact on PCs. Cumulative tablet ships are forecast to be 1.05 billion between 2012 and 2017, which would be the install base increase if every unit sold (unlikely). PCs: 1.23 billion -- more when adding ultramobiles.

The personal computer starts out with a larger install base (well over 1 billion, according to combined analyst and Microsoft reports). I don't have data for tablets, but guesstimate a couple hundred million (based on analyst shipment data). If overall PC shipments are greater, and from a larger install base, the category is by no means dead. Nor is Windows, which still has 90 percent PC market share.

4. The PC is more like the television 15 years ago. By the 1980s, most people who wanted a TV had one. The market saturated and sales slowed to replacements and younger adults buying for the first time. HDTV changed everything, by giving consumers reason to replace their sets. Larger screens and clearer audio and video made replacement attractive. Suddenly existing TVs weren't good enough.

There was a time, during these lackluster TV sales days that some analysts started comparing PC shipments to televisions, and some tech companies (Microsoft among them) bought into the popular idea that personal computers would replace televisions. That didn't happen for many reasons. Yes, the PC displaced some TV-watching behavior, but in certain contexts, such as bedroom or dorm room or where the consumer could afford one device and chose the PC's utility. The number comparison and talk about future trends back then remains of PCs and tablets today.

Once big-screen TVs hit the market, roles reversed. Television sales rebounded and newer models took on PC-like capabilities, which is particularly common during this decade. I can see several scenarios where the PC could equally revive and survive any competition smartphones or tablets pose.

That's excellent segue to the next section, about context.

Worldwide Devices Shipments by Segment (Thousands of Units)

Device Type

2012

2013

2014

2017

PC (Desk-Based and Notebook)

341,263

315,229

302,315

271,612

Ultramobile

9,822

23,592

38,687

96,350

Tablet

116,113

197,202

265,731

467,951

Mobile Phone

1,746,176

1,875,774

1,949,722

2,128,871

Total

2,213,373

2,411,796

2,556,455

2,964,783

 

Context is King

As I've repeatedly expressed here: There is no post-PC era. It's a fiction coming from the minds of analysts (looking for things to count and sell), Apple cofounder Steve Jobs (when alive looking to sell more devices) and people pretending to know more than they really do but who can shout, be heard and be believed across the Internet's vast reaches of fools. They are many.

We have entered the contextual cloud computing era, where the PC's role moves from the center to being one of many devices connecting to the cloud as hub. The PC is unique for being a Swiss Army Knife -- a device that does many things, and not often all of the well. Single utility is more commonplace, with products designed to one thing, sometimes a couple, really well. Cloud services and supporting apps pick up the Swiss Army Knife role, delivering what people want, or need, in context. What the device is matters less.

Take watching a movie as example. Most people would prefer to do so on their big-screen TV. But when traveling smartphone or tablet will do, in that context. The film you start at the airport can be finished at home. Location and device change, but content stays the same. The example applies to music or personal interactions.

What changes in the new era is the PC's relevance, which decreases as the cloud -- and some apps, too -- enables other devices' broader contextual usages. Granted, smartphones, and to lesser degree tablets, are more personal than PCs because they're carried more frequently and act as gateways that matter most -- everything from family and friends to new "Game of Thrones" episodes.

Microsoft's problem is two-fold, and obvious: Windows Phone is a market loser, and legacy Windows has no perceptual market share on tablets, which are the two biggest computing device categories. Neither's situation likely changes for Microsoft in four years.

But that's okay. As I explained on March 25 and last week, there's a new Microsoft. The company already executes on CEO Steve Ballmer's pledge to reinvent as a "devices and services" company. Signs are everywhere, as Microsoft updates products faster and moves more of them to the cloud. Think Office 365 and server hosting, for example.

The company is transforming from a developer of PC applications and platforms to to a provider of middleware -- products and services that bind any platform to its server and datacenter software and services and major applications, principally from Office System. Think glue. Cloud middleware isn't sexy, but it's platform independent and provides essential contextual services that can be consumed on any device, anytime, anywhere.

The best mobile apps on Android or iOS should be from Microsoft, not Apple or Google, and leverage the established enterprise stack. That's how Microsoft solves the mobile and PC problems. Ballmer clearly is leading the company that way, which can preserve its relevance even as the PC declines.

Worldwide Devices Shipments by Operating System (Millions of Units)

Operating System

2012

2013

2014

2017

Android

497,082

860,937

1,069,503

1,468,619

Windows

346,457

354,410

397,533

570,937

iOS/MacOS

212,899

293,428

359,483

504,147

RIM

34,722

31,253

27,150

24,121

Others

1,122,213

871,718

702,786

396,959

Total

2,213,373

2,411,796

2,556,455

2,964,783

 

Bring Your Own Service to Work

Microsoft is wed to the PC, for better or worse. The company saw the better days, now they're worse. But the aggressive contextual cloud services approach can take Microsoft where Windows doesn't reach widely enough -- aforementioned smartphones and tablets.

Gartner's data -- and most certainly little of the punditry about it -- fails to ask and answer question: Why? And why now? The mobile phone trend isn't new, as I explained above. Tablets are the bigger encroachers on PC turf, starting three years ago with iPad's release, and they are more likely than smartphones to displace new computer sales.

There, changing purchasing habits in emerging markets is one factor displacing PC sales. Gartner and IDC both call out this trend in reports released within the past month. The so-called BYOD -- bring your own device -- to work is the other. BYOD is not a new trend, contrary to perceptions analysts, bloggers and other pundits foster. Cell phones, BlackBerries, laptops and PDAs all found there way into offices in employee hands during the last century, for example.

Following the 2008 stock market collapse and, coincidentally, as iPhone created more demand for Apple products and other smartphones, many enterprises grew more permissive about BYOD. With IT budgets slashed, managing new device categories employees owned took on a money-saving role.

According to "Good Technology’s 2nd Annual State of BYOD Report", 76 percent of enterprises with more than 2,000 employees have programs in place, and the total is expected to reach 88 percent this year. However, in half the companies with BYOD programs, employees pay for devices and supporting services, such as cellular data for cell phones, tablets and some laptops. You want a new laptop, or to use a smartphone or tablet -- "bring your own" is the new trend. The devices are cheaper to manage than to buy.

Where device-counting comes up short: Explaining why bring anything. Contextual cloud, and apps supporting it, is the answer. BYOD is a misnomer. The acronym should be BYOS -- bring your own services. Even BYOA, bring your own apps, applies.

Microsoft is in process of using its enterprise entrenchment to become the defacto standard for managing BYOD and BYOS. If that strategy succeeds and is contextual, which includes separating work and personal spaces and behavior, Microsoft will easily be highly relevant during the next computing era. Let other companies sell devices, while Microsoft provides contextual end-user experience leveraged first from core market of businesses then extended to organizations serving consumers.

The problem: Apple controls the most direct user experiences on its devices, as do Android device manufacturers. Unquestionably, Microsoft needs to up the game in smartphones and tablets, but because of other software and services strategies, it's not game over.

Think Apple, Not IBM

Many pundits compare Microsoft to IBM, and I've made some allusions myself. They see similarities between Microsoft today and Big Blue at the dawn of the PC era. But Ballmer, who has made many strategic mistakes the last 13 years, gets context enough and steers the Good Ship Redmond on a path that preserves the core enterprise business while opening relevance in the cloud. Seas ahead are stormy enough to sink even this mighty monopoly, however.

Microsoft already is in process of reinvention, such that Apple applies more than IBM as comparison. How often before 2007 did pundits predict Apple's decline? Now look at what has become the most profitable tech company on the planet. Apple was near bankruptcy in 1996 and looked like a goner to grim reaper pundits in 2001, too. Jobs and Company stood against Microsoft's monopoly and the impenetrable 90-percent PC market share. There was no hope. Yet Apple adapted, by opening up new product categories and revenue streams with them. Microsoft does likewise (see paragraph after next one for more). Now the grim reapers talk of another death -- and they're wrong.

Microsoft's fortunes are less tied to PC sales than the armchair pundits would have you believe. If consumers and businesses choose not to buy new personal computers for sake of, say, tablets, OEMs lose out. But not necessarily Ballmer and Company, and that is one explanation why a new Windows version ships this year. Upgrades -- Microsoft can trigger a new software upgrade cycle on existing PCs. Remember, the install base is huge and most of it on Windows 7 and hardware that will run 8, and presumably 8.1, just fine.

There is much Microsoft can do to trigger upgrades and even co-opt rivals in the process. Windows RT runs on ARM processors. Microsoft and OEMs distribute the software on new computers, but it doesn't have to be this way. Suppose the company tweaked RT for ARM tablets, like Google Nexus 10, and allowed upgrades. Users could bring Windows along, allowing Microsoft to gain faster foothold on tablets for its connected cloud services.

Something else: Microsoft puts subscription revenue first in the most recent product cycle. Office 365 is at least partly platform and device independent. The cloud service runs in different browsers on multiple operating systems, although Office 2013 still needs an OS X or Windows PC. As more consumers subscribe, the more Microsoft revenue smooths out -- status already achieved among enterprises. Sixty percent of Business division (aka Office) revenue comes from annuity licensing contracts -- 50 percent for Server & Tools. That's money in the bank.

Microsoft isn't dead yet and nowhere close to it. The company has a clear strategy that can and will transcend the PC. Unquestionably, the company's position would be stronger if more smartphones or tables shipped with some Windows version. That said, Microsoft can win, even if the PC market loses to other devices.

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