View From Above

Jul 23 2013   11:31AM GMT

Maybe Microsoft was always just a one trick pony

Ron Miller Ron Miller Profile: Ron Miller

Microsoft CEO Steve Ballmer standing in front of a giant projection of Windows 8.

As PC sales decline, so has Microsoft’s market dominance.

Did you ever consider that maybe Windows and Office was all Microsoft ever really had. They were the quintessential one-trick pony, only the pony was so lucrative the company could stumble on for years even after those two products increasingly became less relevant.

That could be the period in we are now.

By now you’ve probably all heard about the Microsoft reorganization and its less than stellar quarterly earnings report. There were lots of takes on this, but however you looked at it, it was the company’s first quarterly loss ever and didn’t bode well. Some people saw it as the beginning of the end of Windows, while others said it wasn’t so bad because the loss wasn’t as big as the so-called experts on Wall Street thought it would be.

But I saw a couple of posts this week that really got me thinking that perhaps Microsoft is in bigger trouble than even this quarter’s numbers might suggest. The first was Benedict Evans’s post The Irrelevancy of Microsoft in which he makes a case that Microsoft’s dominance peaked in 1995 with the release of Windows 1995.

Since then it has been all downhill. Meanwhile PC sales since 2007, when the first iPhone hit the market have remained almost flat with a decline starting at the end of last year. In contrast, iOS and Android devices have been on a steady growth path since the middle of June 2009.

You can click through to the story and see all of his graphs, and the bottom line is it shows that the decline of Microsoft is not just a perception thing, it’s a reality supported by numbers over long periods of time.

Microsoft obviously recognized this trend as well as anyone, or at least they should have, and that could account for its attempts to turn the company toward the cloud, develop Windows 8 as an all-purpose multi-platform OS, release Windows Phone 8 and develop its own tablets.

But as we’ve pointed out before in this space, so far these attempts have been futile. The Surface RT was a disaster resulting in a $900 million write down. Windows phones, mostly due to the success of Nokia, have passed Blackberry, but that doesn’t mean much when both companies combined marketshare doesn’t equal 10 percent of total share.

Microsoft’s share of the tablet market is negligible at this point and Windows 8 sales have been slow to develop, probably due in large part to the decline of PC sales and the desire for many companies to stay put with Windows XP or Windows 7.

Office 365 is starting to gain some traction with $1.5 billion in annual revenue, but if Office/desktop starts to decline as would make sense over the long term as PC sales decline, it’s not clear that Microsoft can make up the lost revenue online where the competition is much steeper than on the desktop.

This all harkens back to an even earlier era when Microsoft recognized it needed to shift to the internet in the 1990s, and while it it did it, it never made much money from its online divisions. Even today when you consider so many people are accessing services online, Microsoft reported that while the online division grew a respectable 9 percent for the quarter, it only accounted for $804 million in revenue, pittance when you consider the company total revenue of more than $19 billion.

It’s not easy to say that a company that makes that kind of money is in decline, but more than half that was from Windows at $4.411 billion and the Business Division, which prior to the reorganization included Office and Office 365, accounted for $7.213 billion. It’s worth noting another $5 billion or so came from the enterprise division, which you could argue developed specifically because of Windows dominance in the enterprise. If that were to decline, then it would make sense the reliance on Microsoft enterprise products would decline with it.

But as PC sales continue to drop, the revenue from those two cash cows, Windows and Office, are going to drop as well. And as employees increasingly choose their own devices, they are foregoing Microsoft and choosing other platforms. ¬†Microsoft’s one-trick pony will no doubt continue to trot along for years, but unless it learns another trick or two quickly that generates significant revenue it can’t go on forever like this, and sooner or later the reality of the numbers will catch up with it.

Which is not to say that Microsoft or the PC is going away tomorrow. Both will survive for a very long time yet, but if PC sales continue to decline, and every indication is that that they will, there is strong reason to believe Microsoft’s dominance will as well.

Photo Credit:¬†¬†Dell’s Official Flickr Page.

7  Comments on this Post

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  • FTClark
    One trick pony? Get real! Not a valid comparison. However, Microsoft is losing its position as Top Dog while the desktop PC is losing its market dominance. If they can learn to function without being Top Dog, then they will do well. If they destroy their dominant product, the desktop PC, while trying to morph to the new Top Dog, tablet and mobile, they will demonstrate a new level of incompetence. IBM got smart and dropped the PC to focus on its core business. Those who forget history and fail to learn from it are doomed to failure. (Apologies to Santayana)
    1,280 pointsBadges:
  • Michael Tidmarsh
    It made me curious when you said "unless it learns another trick or two." With Surface and Windows Phone not making huge strides in their different markets, what tricks would you have Microsoft come up with?
    62,160 pointsBadges:
  • Ron Miller
    Michael: Well, those would be the obvious ones. Even though Microsoft has poured money into services like Bing, Windows Phone and tried to produce a tablet like Surface RT, it's just not getting very far and it really needs mobile or online services to start to pick up a bigger chunk of the revenue pie. It's not clear that's going to happen though and that's the problem it faces moving forward. We've already seen Oracle give in a bit to the inevitable after several losing quarters by teaming up with What will Microsoft do to stop a potential slide? Remains to be seen.
    580 pointsBadges:
  • Ron Miller
    FTClark: You seem to be agreeing with my basic premise that Microsoft is a company with diminishing authority in the market. IBM has actually managed to reinvent itself as a software and services company. Can Microsoft find a similar path?
    580 pointsBadges:
  • CarlCioffi
    I don't see the decline in PC sales as a real problem.  I know plenty of people that surf the net and look at email they never really need a desktop or laptop so having an android tablet or yuck expensive iPad is all they want.  I have all 3 and an android phone and need to use them all.  I can't develop software on my tablet but I can take it to the local watering hole and surf the net or go out to the pool.  I use the laptop for portable development and business travel.  Another thing that was not mentioned is how much life you can get out of a PC today.  There haven't been huge increases in CPU speed recently which in my opinion was the driving force for people to be buying new PCs, that and the fact they just didn't last as long.  Kind of like keeping up with the Joneses.  It used to be you went maybe 2 years with a PC before it was just too slow, that number now is more like 6 years.  I have a 5 year old dell desktop which I just upgraded to windows 8 and it still works fine.
    345 pointsBadges:
  • TomLiotta
    The 'dropping' of the PC business by IBM had numerous additional advantages that are still developing.   One interesting element is that IBM freed itself of contractual agreements to use Intel processor chips in current and future products. (They might use some in numerous cases, but you can be sure they will be very controlled cases.)   The freedom to develop, use and sell only their own processor chips has potentially large future implications. IBM's patent portfolio has a lot of stuff in it and nobody's is growing faster. They seem to have a number of 'tricks' to play as the future unfolds.   Microsoft has... Windows.   With alternatives like Google Docs, or even LibreOffice, etc., for individuals, available, I'm not convinced that MS Office 365 can be counted on in ways that past Office incarnations have been.   Tom
    125,585 pointsBadges:
  • Obedia
    It is true microsoft has not made serious impacts with Surface RT and internet business but that is only because they haven't put in enough to make those ventures successful. In the making of tablet devices and venturing into the internet space, microsoft has focused more on the development of the product and not as much spending and the right people have been brought in to popularizing and selling more of those products/services.
    Perhaps the single biggest distraction that is preventing Microsoft from making the necessary inroads with these forays is the huge revenues they still rake in from Windows and Office. They can actually afford giving Windows and Office a little less attention and redirect the attention to Mobile and Internet as that is by obvious analysis going to stay as the future of computing for a long time. In any case most businesses have felt the new wave and so no one is really going to compete with Microsoft on Office and Windows and therefore, they can afford to give it a little less attention. With the amount of Cash Microsoft has accumulated over the years, I believe they can make it in the new wave and even climb to the top dog position if they put in more than they are currently doing and they can afford to do so too.
    10 pointsBadges:

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