Photo: REUTERS/Rick Wilking
You may have thought that the fine that the European Commission handed out to Microsoft for screwing up the coding on the browser choice screen was hefty – €561m (£459m, or $740m) for a single bad line of code that meant millions of people weren’t offered a different browsers when they first logged on to Windows.But the research company IDC on Tuesday handed down a far more painful finding that could cost Microsoft a great deal more if it’s even close to being correct. The cost: a total of $3.3bn in direct revenues over the next four years, and about $2.3bn in profits over the same time.
That’s because IDC says that Windows 8 hasn’t been a hit – certainly not one that would spark a renaissance in PC buying – and there are now signs that emerging economies such as China, Africa and Latin America won’t be such enthusiastic adopters of PCs as had been expected. Instead, PC sales growth there is slowing as people there turn to smartphones or tablets.
Last week, IDC revised its forecast for PC sales substantially downwards. This year, it’s predicting that PC sales will drop overall for the second year in a row – the first time that has ever happened. (Shipments have dipped from year to year only once before, from 2000 to 2001; but they grew again in 2002.)
The downward spiral
In all, IDC’s revised forecast says there will be 596m fewer PC shipments over the next four years than predicted just under two years ago, in June 2011. As Microsoft historically makes about $56 in Windows licence revenue – and $39 in profit – per PC, the numbers for lost revenues and profits are straightforward to calculate.
That might not be the worst of it. Samsung’s president of its memory chip division, Jun Dong-soo, was dismissive of Windows 8 in an interview with the Korea Times last week: “The global PC industry is steadily shrinking despite the launch of Windows 8. I think the Windows 8 system is no better than the previous Windows Vista platform,” he said.
Jun added that Samsung has a negative outlook on the PC industry and is cutting its PC RAM chip production in favour of chips for tablets and smartphones, where demand is rising. (Mysteriously, the article has vanished from the Korea Times site – though a search for the URL turns up dozens of articles that referenced it before it was removed.)
In that, he’s right in line with IDC. The research company issues regular five-year forecasts about the shape and size of the PC business, and this is one to really give Microsoft, and its mainly PC-based OEM partners (hello Dell, HP and Lenovo) pause.
Though it only offers a 2013 figure and 2017 figure – suggesting 345.8m shipments this year (down 1.6%), and 382m in 2017 (from which I’ve done a linear interpolation of the intervening years) – what’s telling is how IDC’s forecasts have changed. I’ve been collecting them since June 2011 (and subsequently September 2011, March 2012, September 2012, December 2012 and now March 2013), and it’s notable that what used to be bullish forecasts about PC shipments, allied to the expectation that tablets would be pretty trivial, have turned downwards.
Contrast the June 2011 forecast (which ran to 2015): it reckoned that 2012 would see 398.5m PCs shipped, and by 2015 the figure would be 541.5m.
In fact, 2012 saw a total of 351.4m PCs shipped – that’s 47.1m fewer, or an overestimate of about 12%. By the time we get out to 2015, the June 2011 forecast was predicting 541.5m shipments; the latest number (interpolated) is just 364m, the same as the actual figure for 2012.
A zero-growth market over four years? That’s pretty serious. That would suggest that the PC business is shifting towards being just a replacement market – people buy a new one when the old one finally dies. But with PCs lasting longer and longer, and processing power shifting to the cloud, PC lifespans are also lengthening.
Here’s how IDC’s forecasts for the PC market have juddered down since June 2011 – while its forecasts for tablets keep rising. (Unseen in this is the expectation that the smartphone business will just keep growing; its upper limit is around 1.6 billion per year.)
As the graphic shows, with each new forecast IDC has chopped the expected total of PC shipments (the part of the column topped in red) more and more. And forecasts for tablet shipments (the yellow chunk) have gone up.
So why has IDC cut its latest forecast? It’s a combination of factors – some far outside Microsoft’s control, some directly under it.
Here’s the bits outside Microsoft’s control. “Emerging market growth potential [for PC purchases] is declining and coming closer to that of mature regions,” IDC says. “2012 marked the first year that emerging markets have seen a volume decline, and while 2013 will return to growth, it is projected at less than 1%, and with modest, single-digit growth through [to] 2017.”
And mature markets (North America and Europe) are going to see decline in 2013, IDC says – for the third year in a row. It thinks there might be “limited growth” in 2014 and 2015, but contraction thereafter. (I haven’t modelled that in my interpolation.)
Key reasons behind that: the tough economic times that the US and Europe are living through.
But then there are the things that are in Microsoft’s control, and where it hasn’t done itself any favours. Specifically, Windows 8.
Windows 8: the slowing
It’s hard to argue that Windows 8 has been a colossal hit with consumers. Microsoft has been rather circumspect with its figures, giving numbers that suggest it’s been selling (to OEMs) about as well as Windows 7 did. Yet given that the PC market should be bigger now than in 2009, when Windows 7 was released, that seems odd.
Enterprises certainly aren’t in love with Windows 8. The other day I spoke to a company which said that out of 16,000 enterprise clients in Europe, it had just four which were trialling Windows 8 with a view to deployment. Certainly, it’s very early in the OS’s life. Lots of enterprises haven’t yet moved to Windows 7. But slow adoption and slow consumer sales mean a problem for Microsoft. Don’t forget, Windows generates slightly more than half of Microsoft’s profits.
Here’s what Loren Loverde said in the IDC statement: “Growth in emerging regions has slowed considerably, and we continue to see constrained PC demand as buyers favour other devices for their mobility and convenience features. We still don’t see tablets (with limited local storage, file system, lesser focus on traditional productivity, etc) as functional competitors to PCs – but they are winning consumer dollars with mobility and consumer appeal nevertheless.”
In other words – to answer the oft-posed objection – yes, you still need a “proper” PC to run Photoshop. But lots of people don’t need to, and don’t need power tools like that. Desktop PCs don’t have mobility. Laptops are mobile, but they don’t have the convenience – mobile connectivity and (for the most part, so far) touchscreens.
Ultrabooks: disappointment or saviour?
Netbooks, of course, are dead. So there’s no solace for OEM PC makers there. But what about ultrabooks? They were going to be the great hope for the PC industry to get people to spend more money, though it proved impossible to pin Intel down on exactly how many ultrabooks it hoped to shift in 2012.
However, there are numbers: Jia Wu of Strategy Analytics tells me that by his estimate, 2012 saw a total of 13m ultrabooks shipped. That’s just 3.7% of all shipments, and 6.4% of all laptop sales.
For 2013, Wu reckons ultrabook shipments will hit 30m – a much more respectable 8.7% of the total, and 14.7% of all laptop sales. That’s sure to help the profitability of the laptop makers who get that business. But the overall volume of laptops will stay about the same.
Wu says that ultrabooks have a simple problem: “The pricing is clearly the key barrier. In addition, consumers were holding on to PC purchases last year  in anticipation of the Windows 8 launch. Back in the netbook times, we did not have comparable low-priced computers as we have today. Tablets were not in the equation yet. This gave the netbook the opportunity to take off as it filled an untapped market need.”
But times have changed, he explains: “Ultrabooks, in contrast, are positioned to compete in the premium PC market originally. But the premium PC category is facing growth pressure as many consumers find they don’t need that much computing power. Also, the proliferation of iOS and Android ecosystem has increased tablets’ traction, whereas Windows 8 is a very new OS with limited number of apps even though consumers can still use the conventional interface.”
The Windows 8 dilemma
Losing out on $3.3bn of revenues and a couple of billion in profits would be a problem for many companies, but for Microsoft – which has revenues of about $20bn per quarter, and quarterly profits ranging from $6bn to $7bn – it’s no big financial hit.
The hit though comes in its future revenues. Losing out on PC shipments means losing out on the opportunity to sell people Office licences. Fewer Windows licences and fewer Office licences means less money in the future.
And that “Vista” comment from Samsung won’t help any. Tim Anderson offers some encouragement for Microsoft’s long term business: Vista, as he points out, had good ideas (User Account Control, hardware-accelerated graphics) but poor implementation that was then sorted out in Windows 7. But as he also points out, the landscape was very different then: Windows was the dominant OS everywhere.
Now, it’s one of many – alongside Android (which will probably be on more devices than Windows within a year or so) and iOS (which has a shot at superseding Windows too). Will consumers have the patience to wait for Microsoft to figure out how to integrate Windows 8, and will enterprises give it time?
The PC business is big – but it’s peaking, and tablets and smartphones are taking business away.
The question is, when will we reach the point where PCs really are just a replacement business? When that happens, the real poser won’t be how big the PC business will get. It’s how small it might be as people put off new purchases longer and longer.
That will have implications too for Intel, and of course the PC OEMs. Everything presently depends on people buying growing numbers of new PCs. What happens when they don’t?
This article originally appeared on guardian.co.uk
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