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.
Yet there's the facts, notebook sales growth surpassed desktop growth in 2008. Since then desktop sales growth has flatlined and even declined, while notebooks have been experiencing 20%+ growth. That is until the iPad.
in most computer sales estimates other (which is where those shops live) account for over 25% of the sales
Take a graphic like below, "others" includes dozens of OEMs. Mom & pop is a tiny slice of that, and even they carry laptops.
Netbooks never really ate into notebook sales
Yes, they did, estimated up to 20%.
Theyre too dependent on the central server.
You've never heard of redundant servers? The average desktop/server setup gives between one and two nines. Mainframes give five nines, less than six minutes a year downtime. Couple that with a thin client giving less down time than a desktop, and you have overall saved downtime.
Anybody that spends more than 5 hours a day at the computer needs a full sized monitor
Then it's good that desktop-replacement notebooks tend to be 15"-17". People used monitors that size and smaller for decades. I remember when a 17" monitor was considered a luxury (and it wasn't 17" viewable, more like 16").
If youre first to bring a type of product to the market you run the risk of finding out nobody wants that type of product, if you follow you let somebody else take that risk.
Being too risk-averse makes for a poorly performing company.
See you just proved my point, following isnt a bad thing, you just gotta follow smart.
That's kind of what Apple does. Apple didn't invent the mp3 player, the smartphone or the tablet. Apple watched what was out there, saw what was wrong and how it could be done better, and completely reinvented them. Microsoft's problem is that they see what's out there and just put out basically the same thing.
I have no doubt that in relatively short order, assuming that isnt the case already, Windows Phones will have the easiest to use and smoothest interface for connecting to Outlook and Exchange
Apple is the expert at making things brain-dead easy, not Microsoft, and Apple already has the Outlook/Exchange thing down pretty well. Microsoft's leverage will be in XBox Live. Nobody else can do that.
According to NPD Android has 53%. Maybe theyre wrong but thats what they say.
They're wrong, mid-thirties tops. And that doesn't count that the worldwide numbers were apparently inflated by the sales of Android forks.
I don’t know how you can say “other” is a tiny slice when it’s got the biggest numbers in your chart, the 2009 “other” is bigger than any two non-others COMBINED, that ain’t tiny. And those might CARRY laptops but don’t BUILD laptops, the laptops they’re selling come from HP and Dell and Apple.
I’ve dealt with redundant servers enough to know that it’s no guarantee of 100% up time. I’ve see both sets go down repeatedly, or you find out your configuration wasn’t done right so the redundant server keeps going but half your clients can’t get to it. Thin clients centralize your failure points, and that almost always works out against you.
Laptops with 17” monitors are big, lots of people won’t carry them around. Not to mention expensive. You can get a lot more computing power for the dollar with a desktop, which is why if the worker is not mobile the computer the company gives them will 100% of the time be a desktop. It’s cheaper and more effective.
But define “too” risk averse. We’ve both now pointed out multiple companies that waited to enter a market until it was proven that it was really a market and then entered it and excelled. That’s not “too risk averse” that’s “exactly the right amount of risk averse”. Which is my point, following can be a very smart business strategy.
Even if you take the numbers that say the smart phone market is basically a 3 way tie, 0% to 27% in 15 months is stellar and proves waiting can work.
No, I said mom & pop was a tiny slice of "other," which is mostly OEMs. There aren't only seven OEMs in the world. Aside from the majors not on that list like Sony, Panasonic, MSI, Fujutsu and Samsung, there are many smaller ones that make laptops.
In any case, you have the numbers, desktop sales flat or negative for years, notebook sales double digit increases for years, and that's since notebooks became the majority of sales.
Ive dealt with redundant servers enough to know that its no guarantee of 100% up time.
That's why mainframe makers don't claim 100%. They deliver (not claim, deliver) five nines. I've seen the SLAs on desktop/server setups, and they rarely even expect two nines. Desktops kill you piecemeal. You don't often have one big outage, but the constant revolving outages add up rather quickly, and that's on top of server outages.
Laptops with 17 monitors are big, lots of people wont carry them around.
It's not just about carrying around. A lot of laptops never leave the house. They're popular because they're small, compact, easy to move from room to room, and don't need an UPS in case the power goes out. In any case, the screen size is fine for most people, as is 15".
which is why if the worker is not mobile the computer the company gives them will 100% of the time be a desktop
Nope. And most of the non-mobile ones are better served by thin clients.
both now pointed out multiple companies that waited to enter a market until it was proven that it was really a market and then entered it and excelled.
It's the "excelled" part that is a problem for Microsoft. They're not excelling when they do enter as Apple does, they're barely offering the equivalent of what's already out there. Microsoft and HP unveiled what they thought would be the future of touch tablets in Jan 2010, months before the iPad. They killed it after the iPad was unveiled. That's not excelling. That's total failure.
Even if you take the numbers that say the smart phone market is basically a 3 way tie, 0% to 27% in 15 months is stellar and proves waiting can work.
It depends on how you go, US or worldwide. Worldwide, close for first place are Android and Symbian (note, that includes Android forks that aren't actually Android). Fighting for third place are Apple and RIM. Windows Mobile is under 3%, and Windows Phone 7 isn't even on the map yet.
Android's growth is impressive, and was expected. After the iPhone, people who weren't on AT&T (or Apple's single carrier in a country), couldn't afford an iPhone, or who just didn't like Apple, were desperate for anything like it. Along came Android, available from most established manufacturers on all networks from low- to high-priced. Of course it was going to sell well. You can even get Android phones free with a contract, I'm sure that helps the numbers.
Of course there’s a lot more points of failure for thin client than just the server. Anything that dings the network will kill all your thin clients. And of course it’s even worse with the cloud (how we started this) because with the cloud it’s not your server, so not only internal network problems hose you, external ones do to. With desktop machines if the internet goes down productivity usually rises because people can’t screw around on FR, if you’re on the cloud with thin machines and the internet goes down productivity ends. This is why the cloud is a joke, and will stay that way.
Most computer sales are still for business. A laptop with a 17” monitor starts at $1000, for $1000 you can get a desktop machine with twice the RAM, 3 times the HD space, a 17” monitor and still have money left over. That’s why businesses only buy laptops for people that will be mobile, people that will do their productivity at a desk get desktop machines.
Well if MS and HP put out tablets before Apple then they weren’t following, which kills you’re whole initial point that MS is a follower.
It doesn’t matter whether your looking US or world, all the numbers point to exactly what my point was: following can be a good business practice. You just said it yourself, the numbers are impressive and were expected to be so, that is my ENTIRE point. There’s nothing left to argue, you’ve agreed with me.
But thin clients have far fewer problems than desktops. Most failures will be in the network or servers, almost none in the desktops. People forget desktops are a huge source of failure because most people only see their desktop. Hey, it's problems only cost me a day last year. Multiply that by 5,000 employees.
And of course its even worse with the cloud (how we started this) because with the cloud its not your server
When I was talking about the iPad and cloud, I didn't mean that for constant operation, as I mentioned using the cloud instead of a host PC so a person could buy one as his only computer. You may have had some vision of people hauling around an iPad still attached to its host PC. And iPad certainly doesn't become unusable when you detach it from the host PC as a thin client does when you detach it from the server.
A laptop with a 17 monitor starts at $1000, for $1000 you can get a desktop machine with twice the RAM
... Talk to the sales figures. They don't lie. Laptops have been replacing desktops for years. Desktops will certainly have their place, but their numbers are dwindling.
Well if MS and HP put out tablets before Apple then they werent following, which kills youre whole initial point that MS is a follower.
By early 2009 most aspects of the iPad were publicly known, touch screen around 10", iOS, App Store, etc. The release date was the biggest question. Microsoft demonstrated the HP tablet almost a year later, most likely to beat Apple to market for a tablet. It never hit the market because they killed the project after the release of the iPad.
You just said it yourself, the numbers are impressive and were expected to be so, that is my ENTIRE point.
Here's your problem: Those numbers are impressive across several manufacturers, none of which have been reaping the same kind of mad profits on phones as Apple has. These are the PROFITS (what matters to a business) for cell phones:
Apple: 4% of market, 51% of profit. And this includes all phones, which skews the advantage towards companies like Nokia and Samsung that sell hundreds of millions of non-smart phones.
We moved away from thin clients for a reason, as I outlined. Anytime something bad happens on a desktop that desktop has issues but the rest can continue productivity, anytime something bad happens to the server or access to the server in a thin client situation ALL the machines suffer all productivity ends. The people urging a move back to them are fighting the same forces as the people wanting us back on trains. Individual machines in the long run are better.
With or without a host PC the iPad will still be dependent on the cloud for something, even if it’s just regular server stuff. Then something bad happens to the server, or the server’s connection, or the internet as a whole and you got problems. Think about the cloud dependent businesses in Egypt last week. That’s why cloud computing, just like thin clients for the last 15 years, will never be a primary system.
Sorry but I don’t believe how you are describing the sales figures. It is quite simply the opposite of everything I see in multiple businesses. Desktop are not going away, period. There is no reason for any business to buy any non-mobile employee a laptop, that would be spending more money to get less, and since the vast majority of employees are non-mobile then the vast majority of employees get desktops.
I can’t even understand the order you’re saying things happened anymore. In one post you say MS is just following, then you say MS came out with it first, then you say what Apple was going to put out was known, then you say it was killed, but there are HP and Windows tablets available on Amazon now. Make up your mind, better yet don’t that whole part of the discussion has become idiotic.
And as for the profit chart, so what. 100% besides the point. I said being a follower isn’t necessarily bad, you’ve admitted that Androids growth from 0 to wherever they are now (depending no whose numbers you believe) was impressive, thus you’ve agreed that the last one to enter the market (the follower) has done well, the point is made, if you can’t admit it that’s not my fault. I am moving on.
Yeah, for the most part, it was a fad. I remember when my dumb terminal got swapped out for a PC. Now in addition to server downtime I had to deal with workstation downtime. Great.
anytime something bad happens to the server or access to the server in a thin client situation ALL the machines suffer all productivity ends.
The catch here is that is very rare, while workstation downtime is very common. Eliminate what is most common, save the most resources.
Then something bad happens to the server, or the servers connection, or the internet as a whole and you got problems.
Let's see, if I have an iPad, and my PC is not available, do I have problems? I don't think so. A WiFi iPad doesn't become useless when you go out of WiFi range, and a cellular iPad doesn't become useless when you're out of area. Odds are, that desktop you synch to will die before the cloud does.
Sorry but I dont believe how you are describing the sales figures.
You start here when notebook sales surpassed desktops in 2008, then you search up the year over year growth since then (way too many sources, pick one), noticing the high notebook growth and low desktop growth. People saw this trend coming back in 2006 even, as notebook growth was much higher than desktops. It just took a couple years for the actual notebook sales to surpass desktop sales.
In one post you say MS is just following, then you say MS came out with it first, then you say what Apple was going to put out was known, then you say it was killed,
I think you're having a comprehension problem. Or you just don't know much about industry trends and are refusing to learn. Microsoft didn't even get it to market, HP killed it. This wouldn't be the first time one company rushed a product to head off a known upcoming product from another company.
I said being a follower isnt necessarily bad
In the context of a business practice being successful, a "very smart business strategy." My chart shows how that worked out for the businesses involved in selling phones. Apple takes half and leaves the others to share the rest, with Android probably counting for less than a tenth of that chart. Google might be relevant in this if they actually sold Android. Their back-end income wouldn't even be visible on this chart.
Ah but when you’re dealing with workstation down time none of your co-workers are, the larger picture of productivity continues. And servers have issues a lot more often than folks want to think. Again remember it’s not just problems directly with the server, problems with the network, or even things that aren’t technically server problems like running out of hard drive space (we’re really good at that one here, of course every build of the money maker eats 2 gigs) and bang everybody is down.
If your iPad can’t get to the document you need because it’s in the cloud and your cloud has died yes it’s a problem.
Oh look right in the article you linked to “Nevertheless, desktops remain considerably cheaper than notebooks, which means they will continue to be favored by businesses with employees who don’t work on the road, Bhavnani said.” Exactly what I’ve been telling you for 3 days.
That’s just one tablet. Meanwhile HP and MS are both involved in tablets on the market right now.
Getting 51% of the profit is not the same as taking half the pie. That would be 51% of the REVENUE. 51% of the profit is as much a function of expenditures are revenue. If you manage to keep your costs way below everybody else you can get much more of the profit in a market than them without actually getting more revenue. It also helps if like Apple you have a long history of charging a bit more for basically the same thing, it’s been a key to their high profits with small margins for a long time. They spend less, they charge more and subsequently even when they have small sales percentages they have more profit per sale. It’s great if you have a customer base that doesn’t expect you to compete on price, but it still doesn’t mean they’re eating half the pie, it just means they’re getting a lot out of the 4 to 27 percent of the pie (depending on who you believe) they are getting.
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