The market trend that, slowly but surely, is eroding one of the greatest business monopolies of all time–Microsoft’s Windows–is now visible enough that general business columnists in the mainstream media are writing about it. Consider the latest from Joe Nocera of the New York Times:
Windows is already dying a death by a thousand cuts. Yes, Microsoft still makes billions by selling pre-installed Windows via computer manufacturers. But ever-so-gradually, the Internet is upending its business model just as surely as it has upended models for the music, television and newspaper businesses… Bill Gates saw this coming many years ago — and sounded the alarm in a famous memo to Microsoft’s executives. But in the subsequent decade-plus, the company has been unable to keep it from happening.
Think about it: do you really care anymore which operating system you use? I don’t. For years, I owned both a PC and a Mac. I could use Microsoft’s Internet Explorer, Apple’s Safari or Mozilla’s Firefox, more or less interchangeably, to access the Internet. I could write an article on one computer, send it via an email message to the other one, and it worked just fine. Ditto for PowerPoint, spreadsheets, and many of the other applications most people use — including Apple’s iTunes.
Even my teenage sons, who stuck with Windows because most computer games were written for PCs, stopped caring. They could play games over the Internet, and all the most popular games were made for the Mac as well. I’m convinced that iTunes and the iPhone are not the only reasons Mac is gaining market share. The other is that people have come to realise that they do not really need Windows anymore. Any ol’ operating system will do. The browser and the Internet have already rendered them largely irrelevant.
Does this mean Microsoft going to keel over tomorrow? Of course not. But as the rise of the Internet, Apple (second coming), mobile computing, Google, et al, are demonstrating, PC operating systems are a lot less important than they used to be. And that’s really bad news for the long-term cash flows of the Microsoft Corporation.
Run a discounted cash flow valuation analysis, and you’ll note that the “terminal value”–the value of the company’s cash flows after the explicit forecast period–accounts for a far greater share of the company’s overall value than the cash flows you are projecting for the next five to 10 years.
And as you think about the terminal value of Microsoft Corporation, ask yourself whether, in 10 years, PC makers, corporations, and consumers will still care what software runs their device’s plumbing. We know we won’t. Just give us a clean, customisable desktop and the ability to run apps and access the Internet, and we’ll never buy an “operating system” again.
And then ask yourself again whether you’re really comfortable predicting that Microsoft will grow earnings at, say, 6% a year into the hereafter…
Business Insider Emails & Alerts
Site highlights each day to your inbox.