Microsoft's new strategy: Pray
It's not a pretty sight, watching an industry in freefall. But 35 years after companies began mass producing what came to be called the personal computer, the decline of the PC industry, which began with the introduction of the iPad three years ago, is accelerating faster than even many pessimists had expected.
Yesterday, two research firms that have long tracked the health of the PC industry offered snapshots of the latest damage. IDC said only 76 million units shipped in the first quarter of 2013, a decline of 13.9 percent from the same quarter a year earlier. IDC may have thought it was being bearish by forecasting a 7.7-percent drop, but the actual decline was twice as severe. Gartner, meanwhile, reckoned shipments in the quarter fell 11.2 percent to 79 million units. When an 11-percent drop becomes the optimistic view, you know things are getting bad.
Looking at those numbers, it's easy to overstate how bad things are for PCs. There were still somewhere between 76 million and 79 million PCs shipped in the first quarter, a seasonally slow one. Companies and consumers alike are still using them, although many are waiting longer to replace aging machines. This is still a big business, even if it's getting less big by the quarter.
More importantly, if you consider that the term “personal computer” has evolved to embrace tablets as well as smartphones, then the PC industry is thriving. IDC and Gartner's PC figures have always focused on desktops and notebooks and more recently netbooks. But viewed from the vantage point of users, the personal computer is a bigger part of our everyday lives than ever before.
What's really in freefall is the Wintel PC, typically machines powered by an x86 processor and running Microsoft Windows. (As for Apple's desktops and notebooks, IDC said their shipments fell 7.5 percent, while Gartner saw them rising 8.6 percent). Intel is responding by trying to push into data centers and taking on ARM processors. Microsoft's response was Windows 8 - the dramatic, built-from-scratch upgrade that was supposed to make Microsoft relevant again.
Instead, we have comments like this from IDC analyst Bob O'Donnell.
At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market. While some consumers appreciate the new form factors and touch capabilities of Windows 8, the radical changes to the UI, removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices. Microsoft will have to make some very tough decisions moving forward if it wants to help reinvigorate the PC market.This is a frank enough assessment of what's happening with Windows 8, but what is striking about it is that it is a carefully composed and vetted statement in a PR release from a research firm that is typically restrained about dishing out criticism. By the genteel terminology of a tech-research shop like IDC, this is a suckerpunch to the nose. In plain language, O'Donnell is saying what critics have been thinking about Microsoft for some time: Steve Ballmer appears to be screwing things up royally.
No one ever expected Windows 8 to make Microsoft a dominant force in the post-PC market. Still, early reviews of Windows 8 were positive enough to lead Microsoft bulls to believe the company could hold its own in a world where tablets and traditional PCs were converging. At this point, unfortunately, it seems clear that Windows 8 is doing the opposite. It is “slowing the market.” It is a sleek, radically designed handgun that Microsoft pointed straight at its foot. And then pulled the trigger.
Microsoft began selling Windows 8 last October 26. After a month, the company said it had sold 40 million licenses, and by early January the figure had risen to 60 million. Microsoft will likely update that figure when it reports its financial earnings next week. For now the quarter is looking like a disaster: During the first full quarter when Windows 8 was on the market, PC shipments saw their worst three months since IDC began tracking data in 1994. Gartner said the quarter was the slowest since early 2009. In other words, the economy may have pulled out of a recession, but thanks to Windows 8, PCs might as well still be in one.
Microsoft took the unprecedented step of making its own tablet, the Surface – a move that seemed bold because it risked alienating Windows-PC manufacturers like Dell and HP. Instead, it's looking like the real risk to Dell and HP was Windows 8 itself. Last quarter, Dell's PC shipments fell 11 percent and HP's dropped 24 percent.
Microsoft's stock is down 5 percent today, worth $13 billion less than it was before the PC-shipment numbers came out. Its bulls remain faithful to the stock, with some arguing that Windows 8 needs more time to gain traction with businesses and consumers. Raymond James issued a note this morning arguing that lower-cost touch devices later this year would boost Windows 8 sales. Earlier this week, Citigroup reminded investors that Microsoft's non-PC areas like Xbox and enterprise tools were still strong.
Over at Goldman Sachs, analyst Heather Bellini imagined a more dire future for Microsoft, including longer-term options like cost-cutting, going private and breaking up the company. A contributor to Seeking Alpha revived an old idea: firing Ballmer, the way JC Penney fired Ron Johnson after an ambitious plan to turn around the retailer backfired.
In the short term, the best option for Microsoft is the one it's most likely to choose: Wait. And pray. Hope that longtime Windows users will climb the learning curve necessary to upgrade to Windows 8, that cheaper touch screens will boost new sales, and that in pushing to remain relevant in computing Microsoft didn't try to accomplish too much too late in the game.
The personal computer is far from dying. The more it evolves, the more important it seems. It's Windows that's withering. Microsoft's best option is to hope that Windows 8 catches on in time. Hope is a good, even necessary thing for a company to have. It just doesn't make for a very good business plan.
[Image in reference to Wired]