Dear Ed Bott: No, Windows 8 is not the new XP
October 22nd, 2012
Daniel Eran Dilger
Windows Enthusiast Ed Bott of ZDNet compared the skepticism and apathy facing Windows 8 to the gradual adoption of Windows XP just over a decade ago, making the case that nothing has changed in over ten years and that everything is fine and there’s nothing for Microsoft to worry about. He’s wrong, here’s why.
Pay no attention to the revenues behind the curtain
Microsoft certainly has reason to hope Bott is right: that Windows 8 will be critiqued and complained about but that eventually everyone will buy it anyway, one way (upgrading) or another (buying new PC hardware bundled with the Windows 8 “we won’t say Tax but that’s what it is when you levy a fee on all products within a market because you exercise dominion over it as a quasi-authority”).
Bott is right that people have complained about Windows as long as Microsoft has sold it. But he appears to be oblivious to a signifiant new problem facing Windows 8: people and businesses aren’t buying as many PCs as they once were. They’re buying iPads.
In 2001, Microsoft reported annual net income of $7.35 billion on sales of $25.3 billion, while Apple actually lost 25 million on revenues of just $5.36 billion. But something has happened since then: OS X developed and cloned itself into iOS, hitting Microsoft on two fronts: in profitability on the high end of PCs and in volume with mobile devices.
Apple surpassed Microsoft last year, earning $25.92 billion on revenues of $108.25 billion in comparison to Microsoft’s $23.15 billion in profits on sales of $69.94 billion. Things have only gotten worse for Microsoft this year, while Apple’s earnings are projected to hit north of $40 billion on revenues of over $140 billion – an unfathomable increase of nearly 40% over its blockbuster 2011.
It might be soothing to Bott’s Windows Enthusiast audience hear that Windows XP also had adoption issues at its launch in 2001, but it’s not honest to say that Windows 8 is fated to restore Microsoft’s former position or that all this doom and gloom for Microsoft will evaporate once the money starts flowing again.
The problem with the PC isn’t that the market desperately wants a new version of Windows that looks different and has a higher version number. The real problem is that the well has run dry, and new versions of Windows won’t fix this. And really, if they’re too different, they’ll just accelerate the shift to Post PC devices.
I’ve already written a bit about the magical new layer of Metro that is supposed to be an improvement in Windows 8, so I’ll limit myself to one overloaded summary sentence here: remember when people flipped out when iTunes 10 stacked the close/dock/zoom window buttons vertically? Well Metro makes slightly more substantial changes to how Windows works than that.
But for now, let’s focus on money, the primary reason why anything happens or fails to happen in the realm of capitalist enterprise.
Prices slashed, Windows smashed
In 2001, Microsoft was selling Office for $500 and offering Windows XP Pro upgrades for $199 on Amazon (non-upgrade package started at $299, and more if you wanted to connect to a company network).
Microsoft can’t command those prices anymore because of competition. Apple now hands out OS X upgrades for $29, forcing Microsoft to sell its new Windows 8 Pro upgrades for just $40.
But it’s worse that that. iPad sales have hit conventional PCs so hard that Microsoft has been giving away Windows 8 coupons for $15 with the purchase of a new Windows 7 PC just to induce sales.
It’s actually worse than that. Because PCs have peaked. There is not going to be huge annual increases in PC shipments anymore. Everyone knows this. What they don’t always seem to see as clearly is that you can have a personal computer without having a box under your desk blowing hot air away from an Intel CPU. It just takes a little more engineering savvy to build these “post PC” devices.
Microsoft’s historical of disruption of Apple’s Macintosh in the early 90s was caused by Microsoft shifting the value of the Macintosh (software, including its own Office apps) off the Mac and onto the generic PC. Apple disrupted the PC by shifting its value (an easy to target software platform) off the generic PC and onto mobile devices that don’t even use windows, let alone Windows.
You say PC, I say Post-PC
Microsoft likes everything to be called a PC because the two letters have been closely tied to it every since it appropriated the consonants from IBM. Steve Ballmer even referred to Apple’s iPad as being a new form of PC, no doubt hoping to associate its credibility with Microsoft and suggest that just because the Windows XP Tablet PC and Slate PC and Windows 7 Tablet PC had all failed didn’t necessarily mean that an iPad-like tablet couldn’t run some form of Windows in the future.
Apple prefers to call these devices “Post-PC,” highlighting the change that’s occurring in their design, economics and software (particularly their operating system).
Rather than quibble semantics, let’s just note that Apple’s Post-PC iOS devices lack an Intel CPU, a hard drive, very much RAM, and are extremely simple to operate and manage. They are also cheaper, but (at least for Apple) remain very profitable. More so than typical PCs or even Macs.
PC-era think tanks like to credit PC shipments to Microsoft, so they sort smartphones, the iPod touch, and “media tablets” into separate silos, praying that soon Microsoft will awake from its slumber and return to its former position of owning all these markets (despite these predictions being false year after year).
Apple also likes to separate iOS devices from PCs, for different reasons of course. In reality though, Apple’s “post-PC” fixation is just one way of looking at the market. It’s also useful to realize that Apple didn’t just introduce new mobile device categories to disrupt the conventional market for PCs. What Apple essentially did is reexamine its prospects for the Macintosh, and then make a huge course correction.
The Mini Mac
Apple (and by that I mean Steve Jobs) realized that no matter how good the NeXT/Mac was, it would remain in a niche position while industry-standard Windows PCs continued to rake in the majority of available revenues and profits, due to vast economies of scale.
In 2001, the Mac was essentially starving itself to death (a problem exaggerated by the post dot com recession that helped to derail what progress Apple had been making). Jobs realized Apple needed revenues and economies of scale, so he initiated three major strategies: retail for selling Macs; iApps for selling more Macs; and the iPod for selling greater volume.
There were a finite number of Macs Apple could sell, particularly given the competitive constraints of a market saturated in low priced commodity PCs. Introducing the iPod allowed Apple to sell a new product broadly, using the same ease of use and design savvy it had put into the Macintosh. Five years later, iPod was generating more than half of Apple’s revenue.
More importantly, rapidly increasing iPod sales were supporting vast economies of scale, allowing Apple to take a controlling position in the global flash memory market. This helped position Apple for stage two: deploying a mobile version of the Macintosh as a smartphone.
Rather than just being a well designed bit of hardware like the Mac, the iPhone was a Mac, running the same core software. Apple rapidly went from selling fewer than a million Macs each quarter to selling a few million Macs per quarter, but added tens of millions of iPhones and iPod touches, and later iPads.
In first two quarters of this year, Apple sold over 50 million devices running OS X and iOS, each quarter. Ten years ago, it was selling fewer than one million Macs per quarter. So Apple is now consistently shipping more than 50 times (actually more like 67 times) as many devices as it was a decade ago. More profitably, to boot.
What’s happened to global PC shipments in the last ten years? They went from 128 million in 2001 to nearly 353 million last year. That’s growth of 2.75 times (across the entire PC market, including Apple) compared to growth of over 50 (67) times, just at Apple.
But iOS isn’t a PC!
Don’t think iOS devices aren’t PCs. They are personal computers and they are replacing PC sales. Microsoft recognized this would happen too, and in fact had plans in place to embrace this market and extend Windows over it. It just failed to execute.
In 2001, Microsoft was hatching plans to launch PlaysForSure (essentially a Windows for MP3 players) and it already had in motion an intent to create Windows-branded smartphones, nearly five years ahead of Apple.
However, after years of failure with PFS (and its Zune replacement) and despite its lengthy first-to-market position with Windows Mobile, Microsoft has expanded into the “post-PC” market by a figure really, really close to zero.
It has since completely given up on copying the iPod, and despite its perseverance in refashioning Windows Mobile as WP7 and now WP8, hasn’t gained any traction in smartphones. In fact, it has lost its once significant smartphone market share, plummeting from above 20% to its current share of less than 3% and shrinking.
Windows Phone is doing so badly that Nokia, Microsoft’s largest and staunchest mobile partner, actually sold more of its abandoned legacy Symbian devices (3.4 million) than its new Windows Phone Lumia phones (2.9 million) in the last quarter. Windows Phone is not just unpopular, it’s so toxic it lethally crippled what was not too long ago the world’s leading smartphone manufacturer.
Microsoft hoped its partnership with Nokia would give Windows Phone a footing in the market, but its incompetence in mobile software has instead taken Nokia out of the market, making it that much easier for Apple to expand (not just in phones but in maps, just wait and see).
Big expectations for Windows 8
Not to worry, the Windows Enthusiasts tell us. Microsoft doesn’t need a lack of competition, high ASPs, expanding revenues, nor even any support via Post-PC devices. The legacy pile of PCs out there will magically blow money in Microsoft’s direction once Windows 8 hits because that’s what happened in the past.
Well here’s something else to consider. Back in the day, I liked to point out that Apple’s Mac sales were unfairly compared with global PC shipments because lots of PCs were selling for uses that weren’t really competing against the Mac.
In particular, I liked to point out, tremendous numbers of Windows PCs were being used for cash registers or for terminal emulation, tasks that didn’t require a PC (and certainly not a Mac). The “PC market” of IDC and Gartner wasn’t comparable to the Mac market; it was a bunch of markets gerrymandered together to minimize Apple’s relevance.
In one sense I was right, but at the same time, Apple was still competing against the effect of those non-desktop PC boxes, because those millions of PCs were creating vast economies of scale that benefitted Microsoft but not Apple.
Over the last decade, Apple’s switch to Intel helped the Macintosh platform to also benefit from this scale. At the same time, however, Apple has now created vast economies of scale, first with iPods and then iOS devices, that solely benefit it and not Microsoft nor its Windows PC partners.
And today, you’re already seeing cash registers, terminal emulation, and other dummy tasks being performed by iPads rather than PCs. This is profound.
The value of this new economy of scale has been channeled into the development of iOS/OS X, Cocoa dev tools and third party apps and has funded the ongoing development of hardware that has enabled Apple to build extremely popular and profitable products like iPhone 4/5, iPad and the MacBook Air.
Volume value that once supported Microsoft and Intel (enough to coin a popular portmanteau) is now increasingly, and exclusively, benefitting Apple. This is enormously important.
A for effort, but no paycheck
Intel has desperately tried to get its Windows PC partners to clone the MacBook under its “Ultrabook” program, even as Microsoft has floundered in duplicating the iPod, the iPod touch, the iPhone and now the iPad. Turns out it’s really, really hard to match the efforts of a competitor that is already selling in such quantity that their economies of scale put you at a tremendous disadvantage.
This reality is what drove Atari, Commodore, Acorn and everyone else (apart from Apple, but nearly so) out of the PC business once Windows ramped up with too much volume to buck against. In the history of personal computing, we’ve only seen Microsoft win. But that history hasn’t been very long.
Windows Enthusiasts have a lot of faith that Windows 8 will turn Microsoft around by giving the company an alternative to the iPad to sell in comparible volumes, leveling the playing field. But they are assuming a lot about the simple appearance of a new product.
Microsoft was late to market with PFS, but by 2004 there were a large number of iPod competitors offering “choice.” Microsoft was also a bit late with the Zune and Zune HD, but didn’t gain a damn worth of traction with either over several years. The same could be said of Windows Phone. And the original Surface (the big ass table).
Ask any sports enthusiast: showing up is not the same as winning.
Scratching the Surface
There are tremendous problems facing the Surface. The first: it’s based on a lie. It’s called “Windows 8 RT,” but consumers associate “Windows” with two things: a familiar interface and the ability to run Windows apps. Surface RT supports neither. I pointed this out from the start and was ridiculed for it right up until the critics realized they had to agree.
The non-RT, Intel x86 version of Surface not only isn’t available yet, but it’s going to be too thick, expensive and heavy to compete with iPad, just like any other Ultrabook or previous Windows Tablet.
So Microsoft is giving users a choice: a tablet that advertises itself as more powerful than the iPad when it’s really not, and a netbook that’s less powerful than a MacBook. Two phony products that will leave users unhappy, just like the Zune and Windows Phone.
More problematically, even the cheaper Surface RT isn’t profitable. It’s a desperate move by Microsoft that is very similar to Amazon’s loss leader Kindle Fire or Google’s loss leader Nexus 7: try to get established at a competitive price point and then somehow convince buyers to start paying profit-supporting prices at some point in the future. That’s a stupid plan, but beggars can’t be choosers.
Hardware is hard
On top of this, recall that the Surface comes from a company that only has had one moderately successful hardware product: the Xbox. That success has been in volume sales, not in profitability, as Microsoft has shoveled more than $8 billion into its Xbox program and is now only barely turning a profit on it.
Now consider that four years after the 2005 launch of the Xbox 360, Microsoft’s customers were still dealing with a 54.2% failure rate due to the Red Ring of Death, the result of sloppy manufacturing.
Apple also has dealt with a series of manufacturing issues, but it has been making hardware for more than 30 years. And for all the coverage of Antennagate and melting batteries, Apple hasn’t ever had to write off a billion dollars in warranty expenses as Microsoft did on the Xbox 360.
In contrast, Apple has become particularly adept at making razor thin, super light, incredibly precise, impressively engineered devices over the past decade, the result of those vast economies of scale in iPod, iPhone, iPad and Mac shipments that Microsoft doesn’t have.
Microsoft’s Surface is a 1.0 hardware experiment following a series of dismal Zune failures and the Xbox 360, which was the worst consumer hardware product in the history of consumer hardware.
Soft on software
But Surface also runs software. Microsoft has over 30 years of experience in creating software, but not necessarily good software. Unlike pundits creating a list of Apple failures, we don’t need to go back to the early 80s to discover Microsoft’s blockbuster turkeys. The last decade is chock full of them.
Outside of Server products that can command high profits, Microsoft’s consumer software history over the past decade has included such memorable events as the Windows XP security meltdown that wasn’t mitigated until its fourth Service Pack (a problem big enough for Apple to drive its “Get a Mac” bus through).
There’s also: every release of Windows Mobile; a series of bungled, belated Windows Phone releases that have viciously pummeled the fragile remains of Nokia; a web browser so bad it couldn’t hold on to half of its market share, despite being free and tied to a monopoly platform; Silverlight, an Adobe Flash competitor that couldn’t survive the onslaught of iOS either; Windows Vista; a series of Office for Mac titles so terrible Apple had to develop its own iWork suite and, of course Bing, that incredibly popular search product nobody uses because it’s awful.
Saying that the Surface is a combination of Microsoft’s Xbox 360 hardware savvy and its Windows Phone software savvy is like one of those jokes about a train engineered by Italians, serving English food, managed by Portugal and financed by Greece.
Microsoft needs to focus on what it is good at, and stop chasing Apple just because it wants to be good at what Apple is good at. Because as much as Steve Ballmer and Bill Gates want to be Steve Jobs, they are not.