Skip to comments.No, the iPad Is Not Killing Microsoft's Business
Posted on 02/01/2011 12:12:05 PM PST by SeekAndFind
The iPad is killing Microsoft (MSFT), at least if you believe the meme that has been spreading in the stock market.
After Microsoft reported its second-quarter earnings last Thursday, the stock fell 4% despite stronger-than-expected financials and several analysts raising their price targets on the stock. But investors were taken in by the idea that Microsoft's future earnings are so much roadkill in the iPad Era.
Microsoft's quarterly revenue came in at $19.95 billion, above the $19.14 billion estimated by analysts, and its earnings of 77 cents a share beat the analysts' expectations of 68 cents per share. Revenue was especially strong in productivity software and gaming devices.
But the only thing investors seemed to focus on was the rise of the tablets and the decline of the netbooks.
It's true that tablets are eating into the market for netbooks and PCs in general. Gartner reckoned that PC shipments grew by 3.1% in the fourth quarter to 93.5 million units, a slower pace than the 4.8% it had estimated. But tablets are growing much, much faster: Strategy Analytics estimates sales of nearly 10 million tablets last quarter (77% of them iPads), up from virtually no tablet sales a year ago.
Don't Believe the Meme
But while memes are wonderful for culture, they may not be so great for financial markets. Microsoft may be a big, sprawling company, but it's hardly acting like a deer in the headlights facing a speeding Steve Jobs at the wheel. Given the decades-old and often bitter rivalry between Apple and Microsoft, that narrative is tempting. But a deeper look into Microsoft's report reveals a company that's surprisingly nimble for its size.
First of all, the idea that Microsoft can't create a phenomenon like the iPad anymore simply isn't true. The iPad sold 2 million units in its first 60 days. The Kinect sold four times as many, tapping mainstream interest much sooner. "Kinect is the fastest-selling consumer electronics device in history," Microsoft CFO Peter Klein said in a conference call with analysts.
What's especially interesting is that the Kinect sold so well despite the lack of buzz in the tech media. Comparing Google search and news trends for the word "Kinect" with that of "iPad," and you'll find that the iPad attracted much more of the public conversation. And yet the Kinect's 8 million sales in November and December surpassed the 7.3 million iPads that Apple sold in the entire fourth quarter.
True, the Kinect's $149 price tag is significantly less than the iPad's $499 starting price. But the Kinect's strong launch suggests that Microsoft hasn't lost its ability to produce innovative products that resonate with consumers.
In the fourth quarter, Microsoft also demonstrated its ability to maintain strong sales in a highly competitive market. Google (GOOG) has made it clear that, as its business customers grow more comfortable housing data and applications online (or "in the cloud," as it's colloquially called), it plans to go after Microsoft's business software. But Office 2010 sales were surprisingly strong, with license sales up more than 50% higher than the pace Office 2007 had at the same point after its launch.
Investors seemed put off by the 30% decline in revenue and the 40% drop in operating profit for Microsoft's Windows division, the segment that contains operating software for netbooks and PCs. The drop exacerbated concerns that Microsoft's core product was in decline.
But as Microsoft pointed out in its conference call, the 30% revenue drop was largely the result of deferred revenue that was recognized a year ago during the launch of Windows 7. Factoring out the effect of the Windows launch, Microsoft estimated growth around 3%, "in line with PC market growth." Again, 3% growth isn't terrific, but it's nowhere near as bad as the headline figure suggests.
Even if Microsoft's Windows revenue does start to slide in coming years, the company can weather the blow. Sure, Windows revenue makes up a quarter of Microsoft's total sales. But its business-software division -- including Office, as well as SharePoint and Exchange -- contributes 30% of its revenue, and that division expanded its profit by 35% last quarter.
Other divisions are seeing similarly strong profit growth. Microsoft's server and tools division, which makes up another 22% of revenue, saw its profit rise by 21%. And the entertainment group, which makes Xbox and Kinect and accounts for 19% of revenue, posted profit growth of a whopping 86%.
Is Microsoft Undervalued?
In spite of all this growth, Microsoft's price-to-earnings ratio lounges at 12 on a historical basis and a mere 10 based on estimated earnings for the current fiscal year. That's well below the average P/E ratio of 18 for the Standard & Poor's 500 Index. Such is the power of the meme in the minds of Microsoft investors.
None of this means to play down the challenges that Microsoft faces as tablets and smartphones become more integrated into consumers' lives. The company faces an uphill battle in those markets. Windows Phone 7 is good enough to compete with Android and iOS, but Microsoft waited too long to enter the smartphone race. The same seems to be happening with tablets, as early reviews of Windows Phone 7 tablets haven't been promising.
But we've been hearing for years that PCs are on the decline in an era of cloud computing. And in response, Microsoft has been positioning itself for a post-PC world for some time, building on areas of strength that could serve it in the future especially business software and video games.
The threat of tablets to Microsoft is real and shouldn't be trivialized. But neither should Microsoft's ability to keep sales and profits growing in other areas of its broad-based businesses.
Was considering an iPad to try.
Since Jobs replaced himself with a sodomite, don’t think I’ll be sending money apple’s way anytime soon.
Watch for the new iFag coming your way next year.
I thought a person’s sexual preference is his private business... Is he touting this to the whole world?
First, notebooks started taking over for desktops, but MS had a solid position in notebooks.
Then netbooks started taking over for notebooks, and Microsoft wasn’t in that market. However, Microsoft was quite successful at reusing its old Windows XP and later Windows 7 in netbooks.
Now we have tablets. Microsoft can’t leverage Windows anymore, because it doesn’t work. Microsoft can no longer take advantage of the massive application base, because it doesn’t run on Windows Phone 7.
Microsoft is starting off in a market dominated by Apple with Android coming up fast. Microsoft is going to need some leverage. I’ve already seen they’re trying to leverage in business with connectivity with their enterprise software.
But for the consumers Microsoft only has two things. They have a large base of Microsoft developers for whom a switch from desktop Windows to WP7 won’t be too difficult. But even then that will just get WP7 up to app availability parity with the competition, not put Microsoft ahead. Then they can hope tying to XBox Live can give the platform a much needed boost.
It’s going to be a tough uphill climb for Microsoft in this. Microsoft will fail if they don’t finally get management that can lead instead of follow. They obviously have enough smart engineers and developers.
Tim Cook has been running the day-to-day of Apple for four years. And the gay thing is just a rumor. Apparently being a single fitness freak makes you gay these days.
That all sounds nice but you’ve got a basic problem:
notebooks still haven’t actually replaced desktops, nor have they been replaced by netbooks or tablets. There’s still a very strong market for full sized desktop computers, and a strong market for nearly full sized notebook computers. Netbooks and smaller are nice for casual use, but they’re too small to be primary computers for real use.
Following is often a good market position, keeps you from wasting money on fads that go away quickly. This is by no means the first time people thought tablets were going to take over. Certainly they’ve been more successful this time, but they still aren’t taking over.
Tim Cook is a sodomite? I thought he was a married man with a family!
Oh, and anyone who uses ANY Apple product is gay. I hear it here all the time so it must be true.
Forget that Bill Gates Foundation spreads all sorts of gay/AIDS propaganda all over the place. Deep pockets.
It's been sliding that direction for years. Year after year, notebook sales eat into desktop sales, so that they are now over half of computer purchases. Netbooks are eating a bit into notebooks, but I think they'll start getting replaced with tablets doing the same thing.
but theyre too small to be primary computers for real use.
If an iPad could stand on its own, that is talking to the cloud out of the box instead of tethering to a PC, I know many people who could use it as their only computer. They need web, email, photo organizing, playing their small music collection, and maybe some Hulu and Netflix. The iPad does all of that, and more.
Following is often a good market position, keeps you from wasting money on fads that go away quickly.
The trick is to invest in R&D for things you know won't go away quickly, or be able to divert. The iPhone was supposed to be the iPad, but the technology wasn't there at the time for a tablet, so Apple diverted the R&D to become the iPhone. Then Apple diversified the use of the technology to become the iPod Touch. Then technology advanced, and you have the iPad.
You should never be allowed to use any Apple product. Go with MSFT which funds 100,000s of abortions worldwide.
You can’t go wrong there.
RE: Following is often a good market position, keeps you from wasting money on fads that go away quickly
Microsoft has most often been a follower and not the original innovator of products.
Their singular talent is to leverage their dominance in Windows and then use that and the tremendous cash they have to kill the competition who comes up with the product first.
Count them -— Word Perfect, Lotus 1-2-3, Netscape, Novel Netware, etc.
The above products were the originals in Word Processing, Spreadsheet, Internet Browser and PC Networks. Then came Microsoft who overcame them with Word, Excel ( eventually all bundled into Office ), Internet Explorer, Microsoft Networks, etc, which all but killed or dominated the competition.
Even in the games space, they first came out with crappy products but had enough money to improve them to a point where they became competitive against original leaders Ninetendo and SONY, eating up market share ( Kinect/XBOX ).
In the Software Development area, Companies like Borland and Symantec had their software development tools until Microsoft came up with Visual Studio and then, .NET which relegated the rest into also runs.
In the database field, SQL Server is now King in the Windows environment, relegating Oracle into second place (of course Oracle runs on other operating system environments which makes them still the #1 database provider in the world, but not in the Windows space ).
The only difference I see this time when it comes to the Smart Phone and Pad business is THEY HAVE REAL COMPETITION IN THE OPERATING SYSTEM BUSINESS.
Notice that Microsoft succeeded in dominating the opposition in most of the other businesses by virtue of their dominance in the Operating Systems space.
Not in the Smart Phone and Pad business they aren’t any longer. Apple and Google have their own OS which developers are now getting to be familiar with. It looks like a different ball game this time.
And yet when I walk around my workplace I see desktops out numbering notebooks at least 10 to 1, same around my wife’s workplace, and even people’s homes. Desktops have certain conveniences that notebooks can’t fight with: you get more computer for less dollars, a bigger monitor, and a bigger keyboard. All notebooks offer is portability, which not that many people are actually interested in. I doubt highly notebooks are over half the total sales, maybe within individual computer makers, but that ignores the large and highly difficult to track local shop custom built which are going to be all desktops.
Meanwhile netbooks aren’t eating into notebooks for two primary reasons: they’re even smaller than notebooks so they have all the same problems even more so, and tablets have seriously stolen the netbooks’ thunder.
The cloud is a joke. It’s an attempt to get us back to the dumb terminals of the 90s. The iPad might “do” all that, but it does it on a screen smaller than any desktop monitor on the market. The smaller the screen the less generally useful, especially for things like watching Netflix, people just aren’t going to be signing up to watch the latest Michael Bay explosion festival on an 8” screen, maybe as a supplemental when they’re traveling, but not as a primary when they’re home.
The trick is to not waste money on R&D which leads to a technology that has no market niche. Lots of car companies right now are real happy they didn’t bother with the tech track that lead GM to the Volt. Back in the days of the failed Newton plenty of companies were glad they were ignoring tablets. There’s a lot to be said for letting other people flush their money down the toilet. Especially in the high cycle world of computing, with technology generations now coming in months being in on the second or even third wave isn’t a death sentence. Just look at the other tech article here about Android crossing the 50% line in smart phones, 3rd in, 1st in sales.
Microsoft will do fine with tablets. Remember, it is an emerging market.....you do not need to be first to dominate in the long run.
Microsoft is planning its next version of Windows to be optimized for touch. It is also planning on supporting the Tegra chips (Tegra 3 is rumored to be wicked!) which are optimized for tablets.
Once Microsoft can offer a tablet that appeals to enterprise users and runs Office applications smoothly, it will do just fine.
Remember, tablets have been around for a long time, Apple did not invent the segment, they just applied their iPhone OS to a large screen as the starting point. A great idea in the short run, but like any new product, nobody really knows where it will go in the long run.
That all sounds nice but youve got a basic problem:
notebooks still havent actually replaced desktops, nor have they been replaced by netbooks or tablets. Theres still a very strong market for full sized desktop computers, and a strong market for nearly full sized notebook computers. Netbooks and smaller are nice for casual use, but theyre too small to be primary computers for real use.
The iPad’s niche is different than most computers. Its competition is things like the Kindle & Nook, and smartphones.
Nobody that is doing serious work with their computer is dumping it for an iPad. Can you imagine writing a book on an iPad?
It’s interesting to note that the story compares iPad sales to XBox Kinect sales. That pretty much sums up the market niche of both. They are pleasure devices, not work devices.
If you want on or off the Mac Ping List, Freepmail me.
Where on earth did you hear that????
Dominating the desktop OS could still help MS in the micro-portable (smartphone/ tablet) market though. Because in the long run what makes the micro portables useful as anything other than a toy is their ability to get data from an actual computer, or better still the network. You might not want to write a Word doc on your micro but you’ll probably want to read it, which means getting that doc to it in some way, which means the micro has to communicate with Windows eventually. Want to sync up your calendar? That probably means talking to an Exchange server, or the very least an Outlook client.
It’s funny because the Apple fans always talk about how Apple products form this continuum that works together like it’s some unique thing. That’s how MS has been leveraging products forever, if you want to stick a page of a spreadsheet in a document and email it MS has the apps that talk to each other very smoothly so you can do it often without even realizing how many different apps you’re using. And if you want that thing to get picked up by a tablet you can pretty much guarantee it’ll be easier if that tablet is running still more MS code.
Anybody whose job involves more than 5 hours a day of working on a computer will very quickly, especially if they have corrected vision, want the biggest monitor they can get their hands on. Even if all they do is e-mail and webforms and other things the tablets can handle easily, they’re still going to want it attached to a real monitor and real keyboard.
For people that need to be portable, for people whose productivity is in meatspace but they still need access to info on computers I can see the tablet becoming their primary silicone, probably replacing a laptop that they’re constantly dropping and breaking because too big and cumbersome. But much like how the laptop didn’t replace the desktop for us full time desk jockeys there’s no way we’ll be trading desktops for tablets.
If it’s ‘just a rumor’ then Tim can sue the following media outlets:
Apples OS is *nix based, and developers have been familiar with that for years. And I'm still waiting to see the open-source Exchange killer.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.