The Dell Buyout: Storm Warning for the Tech Industry

Michael Dell is engaged in a lengthy struggle to take his company private, and if you’re focused on the smartphone and tablet markets, you probably don’t care. It’s hard to picture an old PC company like Dell pushing the envelope in tech, so from one perspective it doesn’t really matter who runs the company or whether it stays public or private. But I think Dell’s situation is important because it shows how the decline of Windows is changing the tech industry, and hints at much more dramatic changes that could affect all of us in the future.  In this post I’ll talk about what’s happening to Dell, why it matters, and what may happen next.


Why is Dell going private?


I should start with a quick recap of Dell’s situation: Michael Dell and tech investment firm Silver Lake Partners have proposed to take Dell private in a transaction funded in part by a $2 billion loan from Microsoft. The proposal has angered shareholders who believe the company is worth more than what was offered, and two competing proposals have emerged from Carl Ichan and Blackstone Group. Dell now apparently faces an extended period of limbo while the competing proposals are evaluated.

Given how messy this process could be, it’s reasonable to ask why Michael Dell started it in the first place. I’m surprised at how many conflicting explanations have surfaced:

—The deal is largely a tax avoidance scheme, according to Slate (link). Like many tech companies, Dell has accumulated a large pool of profit overseas which it can’t bring back into the United States without paying 35% income tax on it. If Dell takes itself private, it can use that money to pay off the interest from the buyout without paying tax on it.

—It’s a financial shell game according to some financial analysts, including Richard Windsor, formerly of Nomura. His scenario is that after Dell takes the company private, it will sell or spin out the PC half of the company to pay off the buyout. That will leave Michael Dell and his partners owning Dell’s IT services business at low cost (link).

—It’s a way for Michael Dell to get some peace. In this scenario, Michael Dell is a sensitive man who’s grown tired of taking criticism from investors. The buyout is a way to get away from them. This explanation showed up in a large number of press reports immediately after the proposal. For example, here’s PC World: “Michael Dell apparently grew tired of running his company to the whims of a stock market that often favors immediate return over long-term investment.” (link)

—It’s a necessary prelude to broad organizational changes at Dell. The Economist put it this way: “Making the kind of wrenching operational changes Silver Lake typically prescribes would be tricky for a public company anxious not to panic shareholders.” (link)

—Michael Dell did it to save his job. According to BusinessWeek, Michael Dell was afraid that an activist shareholder might take over the company and force him out as CEO. So he proposed the deal as a pre-emptive strike. (link).

The problem with analyzing a company’s motivations is that you tend to assume there’s a logical explanation for the things it did. Often there’s not. Company managers are frequently fearful or misinformed, and sometimes they just make dumb mistakes. It’s possible that’s happening with Dell. But if we assume a basic level of rationality, then we can probably discount some of the proposed explanations. For example, I personally doubt Dell can pay off the deal by selling the PC business, because I don’t think anyone would buy it. It’s not like there’s another Lenovo out there hungry to get into PCs, and Google already bought one floundering hardware company; I doubt it has the appetite for another.

I’m also skeptical that after a lifetime in business Michael Dell is so thin-skinned that he can’t stand shareholder criticism. If you have the ego and drive to build up a company from scratch to the size of Dell, you usually don’t care much about complaints from puny mundane humans.

And I find it hard to believe that Dell had to take the company private in order to reorganize it. If Dell took a machete to the PC business, I think most investors would cheer rather than panicking.

The explanation I lean toward is that Michael Dell was afraid he wouldn’t be left in charge long enough to finish transforming the company. You can make a case that as 15% owner and with a base of investors focused on long-term gains, his position was secure from takeover threats. But after I looked in more detail at the company’s finances, and some market trends, I started to suspect that he felt a lot less secure than you’d expect. There are big storm clouds on the horizon for Dell, and they’re darkening rapidly. Those trends also threaten the rest of the PC industry.


A storm’s a-brewin’

Dell’s problems have been developing for years. The company’s power probably hit its peak in about 2005, when it was the world’s #1 PC vendor with about 17% of the market. Dell was the upstart beast that had dethroned the PC powers like Compaq, HP, and IBM. But after 2005, the PC industry adapted many of the flexible manufacturing practices that had made Dell so powerful. PC sales also shifted toward notebooks, which are much less customizable than the desktop computers that made Dell successful. The company’s market share started to erode. Dell tried for several years to turn around the PC business through innovation and new product categories, with no effect. Then in late 2008 it changed strategy and started evolving itself into an IT services company (like IBM, but supposedly aimed more at small and medium businesses). Starting with Perot Systems, Dell made a long series of IT services acquisitions, a process that has continued to this day.

Throughout this process, Dell gradually lost PC share, dropping to 12% by 2011. But because the PC market was growing, Dell’s actual PC shipments were more or less flat, giving the company a financial cushion to fund its transition to services.

Then in 2012, the situation changed. For the first time in years, overall PC unit sales shrank. What’s more, Lenovo (the new upstart beast in the PC market) was taking share from the other leaders. The combination of a shrinking market and a growing Lenovo caused a big drop in Dell’s PC sales.

Worldwide PC (desktop and notebook) unit sales

This chart shows worldwide PC revenue for calendar 2006-12. Until 2012, PC sales were growing fairly steadily, and I'm sure the management of Microsoft and the big PC companies found that reassuring. But in 2012, total PC unit sales dropped while Lenovo (the green wedge) continued to grow. This combination put huge pressure on sales of the other PC leaders, including Dell. (Source: Gartner Group)

Dell revenue (fiscal years)
This chart shows what that did to Dell’s revenue. The new parts of the company -- storage, services, and software -- were flat to slightly up last year. Servers grew as well. But they couldn’t grow quickly enough to offset the major declines in desktop and notebook computers. Dell’s total revenue dropped substantially. (The chart shows Dell’s financial years, which are about a year ahead of the calendar. So FY 2013 in this chart is roughly calendar 2012. Note that Dell did not break out its revenue by product line in FY 2010.) (Source: Dell financial reports)

I think the most disturbing thing for Dell about this revenue drop is that it happened in the face of the launch of Windows 8. Traditionally, new Windows launches have usually led to a nice uptick in PC sales as customers buy new hardware to go with the new software. Even the unpopular Windows Vista didn’t reduce PC sales. I’m sure Dell was expecting some sort of Windows 8 bounce, or at least a flattening in any decline. Instead, as we learned from the latest PC shipment reports, PC shipments dropped after the launch of Windows 8 (link). That indicates that the channel was probably stuffed with new Windows 8 PCs that have not yet sold through.

People who live in the world of smartphones and tablets are probably saying “so what?” But I doubt that was the reaction at Dell.

If you haven’t worked at a PC company, you’ll have trouble understanding how profoundly disturbing the current sales situation is for Windows licensees. The PC companies married themselves to the Microsoft-Intel growth engine years ago. In exchange for riding the Wintel wave, they long ago gave up on independent innovation and market-building. In many ways, they outsourced their product development brains to Microsoft so they could focus on operations and cost control. They trusted Microsoft to grow the market. Microsoft is now failing to deliver on its side of the bargain. Unless there's a stunning turnaround in Windows 8 demand, I think it’s now looking increasingly likely that we’ll see a sustained year over year drop in PC sales for at least several more quarters.

This is an existential shock for the PC companies. It’s like discovering that your house was built over a vast, crumbling sinkhole.

Prior to the PC sales decline, I think Michael Dell probably assumed that his PC business could continue to fund its growth in services for the foreseeable future. He has probably now reconsidered that assumption. If Lenovo continues to grow and the market continues to shrink, Dell’s revenue will drop further, and the company could be in a world of financial trouble a year from now. It’s the sort of trouble that can get a CEO fired even if he does own 15% of the company.

So here’s the sequence of events: By fall of last year, the troubles with Windows 8 were already becoming clear to the PC companies (remember, the Windows licensees have much better information on customer purchase plans than we get from the analysts). Michael Dell must have realized that he was headed for a significant decline in revenue. At the same time, we now know, one of the company’s major shareholders approached Michael Dell to float the idea of a buyout. That was apparently the trigger that started the whole buyout process.

Put yourself in Michael Dell’s shoes: the shareholders are getting restless already, and you know the situation is likely to get worse in the next year. Proposing a buyout now would be a pre-emptive strike to keep control over the company you founded. That’s what I think happened.

What happens next? After more confusion, someone will eventually win the bidding Dell. All of the bidders seem to agree that Dell should continue to invest in services, so the real debate is over what happens to the PC business. Michael Dell says if he wins, Dell will re-engage with the PC market (link):

“While Dell's strategy in the PC business has been to maximize gross margins, following the transaction, we expect to focus instead on maximizing revenue and cash flow growth.”

In other words, Dell will cut its PC prices.

It seems strange that Dell would want to refocus on PCs after treating them like a cash cow for years. If the business was unattractive when PC sales were growing, why would it be attractive now? Maybe Dell decided that it needs strong PC sales to get its foot in the door to sell services. That seems like a reasonable idea. But shouldn’t the company have known that years ago?

Or maybe Dell feels that the interest and principal payments on its buyout will be smaller than the profits required of a public company. That might allow Dell to compete more aggressively in PCs while it still invests in services.

Maybe that’s the purpose of Microsoft’s $2 billion loan, to let Dell stay in PCs while it also grows services. It says something sad (and alarming) about Microsoft’s business if it now needs to pay companies to stay in the PC market.


What it means to the rest of us

I think the Dell deal is just the beginning of the Windows 8 fallout. There are several other, bigger, shoes waiting to drop.

What will the other major PC licensees do? If you’re working at a company like HP or Acer, everything about this situation feels ugly. Your faith in Windows has been broken, you’re losing share to Lenovo, and now Microsoft is subsidizing one of your biggest competitors. I’d be tempted to fly out to Redmond and demand my own handout. And I’d also be willing to look at more radical options. There are several possibilities:

—Exit the PC market. HP considered this in 2011, but backed away after a change in CEO. I wonder if the company will think about it again. Meg Whitman says no, that the PC business is important to HP’s other businesses, such as servers, because they buy many of the same parts. Exit PCs and you costs will go up because you won’t have the same purchase volumes. That’s a pretty backward endorsement of the PC business, but I guess it’s possible.

Acer doesn’t really have the option of dumping PCs. They make up most of its business, so it has to stay in computing hardware, one way or another.

—Find a new plough horse. In this option, you replace Windows with a platform that has better growth prospects. That lets you continue to use your clone vendor skills, but in a market that’s growing. Acer and HP are both dabbling in Chrome netbooks (link) and Android tablets. I wouldn’t be surprised to see many more experiments along these lines. But it’s not clear how much market momentum Google can generate for its tablets and netbooks. HP and Acer could easily spend a lot of money for very few sales, and in the meantime create a rift with Microsoft that would be hard to return from if Windows 8 does eventually take off.

—Reinvest in creating differentiated devices. This is the other option: get off the clone treadmill and be more like Apple, a device innovator. The trouble with this is that many years ago, the PC licensees laid off the people who knew how to build new markets and new categories of computing device. Recovering those skills is like trying to grow a new brain – very slow, and hard to do when your head is stuffed with other things. You need to be incredibly patient during the learning process, and accept that there will be failures along the way. It’s hard for public companies to show that sort of patience.

So maybe you buy a company that knows how to make new-category devices. For example, you could have bought Palm. As time goes on, HP’s handling of that transaction looks more and more like a business Waterloo.

There aren’t many other hardware innovators that you could buy. RIM, maybe? Or HTC? But then you’re in a meatgrinder smartphone market dominated by Samsung and Apple. The PC market, even if it’s shrinking, might look more inviting.

Personally, I’d look at buying Nook. Not necessarily because I want to be in the ebook business, but to get a team that knows how to design good mobile devices and is familiar with working on a forked version of Android.


I don’t think any of these three options look very attractive, but the slower the takeoff for Windows 8, the more desperate the Windows licensees will get, and the more likely that they’ll try one or more radical “strategic initiatives” in the next year.


What if Microsoft gave a party and nobody came?  The situation for Microsoft is becoming more and more complicated. Windows is not dead. It has an enormous installed base of users who are hooked on Windows applications and won’t go away in the near future. However, Microsoft faces some huge short-term and long-term challenges, and many of its possible responses could make the situation worse rather than better.

I think it’s pretty clear that we’ve entered a period of extended decline in Windows usage, as customers use tablets to replace notebooks in some situations and for some tasks. The tablet erosion may be self-limiting; I don’t think you can use today’s tablets to replace everything a PC does. If that’s the case, Windows sales may eventually stabilize and even resume growing once the tablet devices have taken their pound of flesh.

On the other hand, it’s equally possible that tablets and netbooks will continue to improve, gradually consuming more and more of the Windows market. That’s certainly what Google is hoping to do with Chrome. What would happen if Apple made a netbook and did it right?

Microsoft had hoped to head off all these problems with Windows 8. By combining the best of PCs and tablets, Windows 8 was supposed to stop the tablet cannibalization and also set off a lucrative Windows upgrade cycle. Unfortunately, at least for the moment, Windows 8 is looking like the worst of both worlds – not a good enough tablet to displace the iPad, but different enough to scare away many Windows users.

This puts Microsoft in a nasty dilemma. If it believes that Windows 8 sales will eventually rebound, then Microsoft should invest heavily in keeping its PC partners engaged. In that context, the $2 billion loan to Dell is a reasonable stopgap to prevent the loss of a major licensee.

On the other hand, if Windows sales are entering a long-term period of gradual decline, Microsoft should be doing the exact opposite. Rather than spending money to keep licensees, it should be allowing one or more of them to leave the business, so the vendors that remain will still be profitable and willing to invest. It’s better for Microsoft to have seven licensees who are making money than ten licensees who all want to leave and are investing heavily in Chrome or Android or other crazy schemes.

Microsoft also faces a difficult challenge with Lenovo. Even if Windows sales turn up, Lenovo has been taking share so fast that it will be hard for other Windows licensees to grow. At current course and speed, Lenovo is likely to end up the largest Windows licensee. In the past, Microsoft didn’t care if one licensee replaced another; they were interchangeable. But Lenovo has close ties to the Chinese government, which has repeatedly shown that it’s willing to lean on foreign tech companies. That has to make Microsoft uncomfortable.

In that case, the $2 billion investment in Dell starts to look like a defensive measure to get someone to compete against Lenovo on price. But if Microsoft subsidizes a price war in PCs, that might give the other licensees more reason to disinvest, enabling Lenovo to gain share even faster.

This is the true ugliness of Microsoft’s situation. It is in danger of falling into a series of self-defeating actions:
—To combat tablets, it creates a version of Windows that accelerates the Windows sales decline.
—To keep its licensees loyal, it makes Windows overdistributed, which increases licensees’ incentive to leave.

The situation is becoming more and more fragile. As I said above, I don’t expect Windows to collapse instantly. But many companies are reconsidering their investments in it, a process that is likely to eventually give customers second thoughts as well. We could end up with an unexpected series of events that combine to break the loyalty of Windows users and start a migration away from it that Microsoft couldn’t stop.

The key question is whether Google, Apple, or some other vendor can give Windows customers and licensees an attractive place to run away to. So far they haven’t, but the year is still young. I’ll talk more about the possibilities next time.

23 comments:

Chan said...

Interesting thoughts Mike! On the spot, lovely!

I do not know where I do belong in this dilemma soup, whether to feel good or bad, I had been and still have too many legs in PC or rather software business not to feel pathetic about my once loved and hated Windows - Dell, Wintel curtailed world.

Then ironically I had long love for Apple, Palm clan so naturally became a very good observer of the mobile revolution so was able to put few other tentacles then and there, enough to survive myself in a Wintel apocalipse of ever crumbling world of Windows.

The again, as you say PC world is far from over and dead may revive a surprise comeback attack of some form I hope.

So it's not quite likely Google Chrome OS, Apple's iOS or Android are the sheer winners for what they seem.

Then we are all again at it, when it boils down to Mac OSX and Windows for a foreseeable future to define it.

For the recode: (which still 90% rely on Wintel/ Mac)

1. My friend doesn't seem to give up or done with his Adobe Illustrator/ Photoshop/ Dreamweaver based design business yet.
2. Neither do I or my parent company which makes Java software for it's bread and butter.
3. So is my next door composer or your Hollywood/ Bollywood man
4. Or at least my bro-in-law doctor who is so obsessed with iPad marvel.

It seems to me, the same industry old fight, repeating for another decade in a different turf as it seems now, ironically for the same old two famous frenemy companies of mammoth MS and Apple.

Boy, while Google shakes MS leg, Samsung keeps pulling Apple's nerve… While Dell, HP may be some the victims of it, there had been aplenty to count.
and there's a third intelligence that Google try to be "All In One" future for us, I feel its ambitions are far way too big, it may crumble and nose-dive like Dell sometimes leaving us again at the mercy of another Steve Jobs and Bill Gates.

May be Mark (Facebook) is so young and full of energy he may pull a differently string.

Oh.. what on earth time to be witnessed with…

BTW: Mace I need a piece from you on Facebook Home. Done right, I feel, it's bit of a plague, a virus for all of the industry. Anyone?

ghenne said...

For example, I personally doubt Dell can pay off the deal by selling the PC business, because I don’t think anyone would buy it.

Microsoft. They already have $2Bn into the game. From their viewpoint, they are tired of their flakey partners screwing up the Windows 8 launch. (Not that I agree!)

peter said...

You don't mention XP. Support ends next year and there are plenty of businesses still using it. Even if those businesses opt for Windows 7, that's still a big chunk of revenue flowing into Microsoft's coffers. (And presumably those companies will need new PCs, too.) That all buys time for Microsoft to figure out where to go with Windows 9.

Otherwise, it was a great post.

Dave said...

Wouldn't it make sense for the clones to splinter -- in the same way that the Android 'clones' are starting to go their own ways. Mainly, Amazon and Facebook are subverting Google's business plan for their own purposes. It makes sense to me for companies like Dell and HP to introduce versions of Win 8 that boot into the Desktop and put the Start menu back.

TDC123 said...

It has been often reiterated that tablets can't do everything and PC's are needed fro some tasks. Has anyone ever studied, or broken this down to what a Tablet can do and cannot do or should not do ? The way things are going Windows looks destined for enterprise only ? does there really need to be a desktop say at home ? if yes who needs it ?

Professionals ? would this be ? the kind who take work home ?

School kids who do assignments maybe? don't think they really need a desktop. College student's I think would like to have best of both worlds desktop and tablets ?

Maybe from this study it could be worked out what what microsoft really need to do and who they need to market their product too and they don't seem to be doing a good job of it ? I thought Microsoft seemed to stand for productivity and all they seem to be showing is some surface tablets which cool screens and beautiful colours ?



Michael Mace said...

Thanks for the very interesting comments, everybody.

I like all of your ideas. For a long time, major change in the PC market wasn't really possible, because Microsoft's position was too strong. Now, as Microsoft's control erodes, more radical change is becoming more and more possible. That doesn't mean it will happen, because that depends on the actions of other companies, but at least now it could.

Chan and TDC, I think you're on the right track that the ultimate market for PCs is related to work, although I'd call it "prosumer" rather than enterprise or business. Individual user choices are likely to drive the development of that market, rather than IT managers. Enterprise = IT in the minds of many people, so I am trying to steer away from that word.

I think there's a huge untapped opportunity in computing for prosumers.

Peter, very good point about XP, but I think the issue for the moment isn't Microsoft revenue, it's Microsoft's ability to command the attention of developers and licensees. That's what seems to be at risk for now.

But yeah, they still have time and money to make changes. But do they have the vision?

ghenne, Microsoft buying Dell's PC business is an interesting idea, but I think it would drive away other licensees pretty decisively. To me, it would make sense only if Microsoft has decided that licensing its OS is a dead end, and I doubt Microsoft is at that point in its thinking. But as pressures on its business increase, weirder and weirder business deals could happen.

Fasten your seat belts!

Chan said...

Well, when I get in to my bit of designer shoes and think of doing Illustrator/Firework/ Dreamweaver work, even if I would have given Apple made tablet with a Wacom Stylus with truly touch enable Adobe Creative Suite iOS version.

Or when I think of just typing a long Word article (Apart from Voice Dictating), may be it's me, but I still feel it's bit awkward to do so precise on iPad with various positions or even with a firm stand.

But consuming information on these touch gizmos feels quite addictive.

Even my 3 year little angel who throws away all button phones and so obsessed with her touch enable Apple gizmos, She still like to play her ABC & 123 typing on my beloved Mac physical keyboard.

So sometimes feel it's not what is technologically possible on alternating platforms like iPads but what we are most comfortable doing as humans. I think I still miss my beloved Treo keyboard even after 5 years so consumed with iPhones and Galaxy Swipe.

So it's just matter of someone figuring out to do the same to PC what Steve did to mobile phones, tablets so far seem to me just an extension to the iPhone revolution, not a part of the content creation, work or most of the services world

The real revolution for the PC may yet to come, also Apple may be right for not fully converging Mac OS and iOS together yet even though MS tried to kill two birds in one stone with Windows 8

So obviously as Mace puts it MS seem to lack the real vision and throwing things at the wall, of cause they can and buy time as well.

Mace: you have slipped through my request on Facebook :-D.

I don't know what business case Mark Z can make on it, but with 1 billion IDs anything is possible, except Apple make some smart use of it's iTunes accounts. It's a wild wild imagination to see the possibilities. But with bit of LinkedIn, Quora, Spotify, Amazon in the mix I would rather like to bet a future on Facebook.

Chan said...

Well:

http://cdn.redmondpie.com/wp-content/uploads/2013/04/FacebookGoogleCominc.jpg

Anonymous said...

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name99 said...

@TDC123
Who needs a PC? Anyone who wants:
- a large screen
- decent keyboard support (which means more than half-hearted arrow keys working in some apps)
- fine touch support (eg photoshop type work)
- control of a TV (ie HTPC)
- LOTS of storage (ie TB or so of photos, movies, music)

Obsessing about whether PCs will be replaced by laptops is as stupid as obsessing about whether ovens will be replaced by microwaves.
Both are cheap enough (and getting cheaper every year) that most people will land up owning both, because neither is a perfect substitute for the other, and why put up with the pain of using a tool that is not optimal?
This gets back to the fundamental flaw in Win8 --- it's a stupid idea to force limitations which make sense in the mobile environment on the desktop environment. It would be like, I don't know, creating a Windows for servers that can't run under VMWare and saying this is a good idea because desktops don't use use VMWare, and "obviously" it's in everyone's interests to have a "converged" Windows.

The thing that a company SHOULD be focussing on is not creating a UI that sucks for both mobile and desktops, it should be on asking:
"IF users all have multiple devices (mobile AND desktop) then what can the OS do to make their lives easier?"
Look at the world with THAT question in mind, and everything Apple has done over the past five years makes a lot more sense...

Andy Symonds said...

Great thoughts Mike and I really like your "prosumer" follow up comment regarding the likely future market for traditional desktop / laptop users (Note PCs = Personal Computers IMHO and inc tablets & smartphones etc!).

My prediction though is true convergence between all these devices (like Ubuntu for Android is trying to do) which will allow you to both create and consume content no matter what device you are using as your editable information will be in the cloud. This will mean desktop and laptops will likely become more like fancy docking stations for your phone with extra storage etc for content you need / want offline.

Anonymous said...

If the IDC is correct, that tablet growth will grow by over 150% in the next 5 years while PC growth will be nearer 0%, I think it is pretty clear what Dell have to do.

Michael Mace said...

>If the IDC is correct

Never trust a third party forecast; they are created using a rear view mirror.

Walt French said...

Thank you yet again for your musings.

There are two points I hope somebody—somebody with your combo of experience and strategic thinking—will address.

First, as you say, the manufacturers and Microsoft have extremely better access to customer buying plans. But perhaps using Jobs's “faster horses” reasoning, Microsoft seems with Win8 to have gone 180° the other way from buyers plans, trying to leverage their desktop strength into a tablet space. How can we square Microsoft's past ability to meet customers' needs, with (what I take to be) such a colossal misread of customers' plans to buy easy, lightweight-in-most-senses iPads, as being a desire to have Windows on a flat slab?

Second, I have the thesis that nobody is watching this debacle more closely than Google, which now has a whole range of “free” online services that it can easily “houseclean” to only be available on proprietary products. That'd be the type of asymmetric competition that they're famous for. But life as an Android OEM is not a happy one, either (Samsung excepted); it seems what you are talking about is not just an implosion of the “value” of the desktop OS, but an accelerating implosion of the value of desktop and laptop hardware, as well. That'd open the floodgates for a slew of non-US names, into which you'd plug the latest Chrome personality module, taking away the last bit of leverage that Dell & HP have.

So, a bit of a historical lookback and a couple of years into the future, can do?

Michael Mace said...

Thanks for the very interesting comment, Walt.

I don't have any access to Microsoft's internal thinking, but often times it takes a big company a very long time to respond to a particular market situation. By the time you ship, conditions have changed so much that you find yourself behind again. Microsoft has a long history of this sort of situation in mobile (look at the history of Zune for an example). Add to that Microsoft's understandable desire to leverage Windows as its secret weapon and you can easily get a product that's out of step with the way the market is evolving.

As for the future, I think the key task if you want to stay in the personal computer business is adding new value, something that none of the personal computer companies (Apple included) seem to be thinking about. That's the thing I want to write about next...

Wayne Borean said...

I've been forecasting problems at Microsoft for the last three and a half years based on their SEC filings, so the current situation isn't any surprise to me. You've missed one major component of Microsoft's dilemma - the major cash cow, Office, only runs on Windows, and Mac OSX.

Since Windows is at less than 24% of OS market share now (including mobile) and OSX is about 1%, the market for Office is limited. With Windows sales dropping, Office sales will drop too.

That will start a nasty self reinforcing cycle.

Wayne

Wayne Borean said...


Most devs I know are running Linux or Mac OSX, so I don't see any real issue.

Wayne

Michael said...

Interesting article to understand the changing trend of technology.

Bradley said...

name99 said: "...and 'obviously' it's in everyone's interests to have a 'converged' Windows."

Interesting point. There definitely is a desire for a seamless experience, but seamlessness doesn't have to mean convergence. However, Microsoft thinks the two must be synonymous or at least wants them to be so it can justify its attempts to make Windows the center of the universe.

This makes you wonder whether Microsoft approaches problems with the solution (Windows) already in mind, which can limit creativity and innovation and also result in misinterpreting the core issue. Sometimes Windows might be the right solution; but what about when it's not? Will MS be able to see that (or admit it)?

At times, it feels like Microsoft is still trying to figure out what role it wants to play in this "post PC" or "PC plus" era. It says it wants to be a "devices and services" company. What does that really mean? Devices and services that do what? Why should anyone care about its devices and services over anyone else's? A "vision" or "mission" like that is hard to define, execute on, and measure.

Mike, you mentioned "prosumers," and that points to one thing that's been consistent across Microsoft's history: developing solutions for people who need to Get Things Done. I think Microsoft needs to return to seeing itself as an applications company instead of an OS company and define its mission around "enabling productivity." In this new world, "application" might mean a device or it might mean software running on someone else's device. It should have released Office on iOS and Android devices the minute they became available, and it's lucky Office has such inertia that Google or someone else didn't already make it irrelevent.

The convergence of entertainment and productivity onto the same device has given Apple and Google a leg up, and the perception of them as competitors to MS makes it difficult for MS to reconcile with ceding the entertainment space. It might not have to, but either way, there's ample greenspace for innovation around productivity. And MS has dabbled in it with R&D around things like handwriting recognition and the Courier concept. Heck, the Surface Pro has an active digitizer. MS's inability to make that a "killer app" epitomizes its long-standing challenge, one that Apple does well: turning "features" into new markets.

Todd said...

I think the shaky launch of Windows 8 had an impact on sales. Users are less willing to go through that trial and error period. They tend to wait until the glitches are resolved or look to other platforms.

Wayne Borean said...


You need to shut down comments. The last five have been spam.

Wayne

Michael Mace said...

Thanks, Wayne.

I've been deleting the spam comments pretty quickly as they come in, but I presume you had subscribed to comments and so you received them anyway. Sorry about that. I just shortened the time until my posts go to automatic moderation; let's see if that helps.

Thanks!

Mike

Wayne Borean said...


Just mentioned it because I wasn't sure you'd seen them - should have checked.

I hate spammers!

Wayne