Last week, Microsoft released the first public test version of Windows 8, its next operating system.It’s got a very tough job. It has to beat back three threats at once: the iPad, the Mac, and potential indifference among businesses.
But even in the worst case scenario, Windows 8 will probably sell hundreds of millions of copies, and generate tens of billions in revenue for Microsoft.
Here’s how we’d break it down.
Windows 8 vs. iPad
Apple’s iPad is now equal to 17% of the overall PC market, and is outselling desktop PCs. Tablets running earlier versions of Windows did not sell well. That’s why the main feature of Windows 8 is a new interface (“Metro”) designed specifically for touch screens.
But Microsoft is also planning a separate version of Windows just for the type of low-powered chips used in most tablets today (ARM processors).
Shipping two types of tablets around the same time creates a lot of risks:
- Windows On ARM could ship later than Windows 8. Microsoft’s “goal” is to ship both versions of at the same time, but if it misses this goal, the first Windows 8 tablets that come out will be running on Intel-type chips. That means they’ll probably fare poorly against the iPad in battery life.
- Consumers might be confused. Windows On ARM tablets won’t run old apps — eliminating one of the big historical advantages of Windows. Microsoft says it will label the two kinds of tablets clearly, but that kind of labelling hasn’t worked so well in the past, like with Windows Vista.
- Hardware makers might not be able to match the iPad on style, quality, or marketing. Microsoft can issue guidelines and specs for Windows tablets, but in the end it has to rely on its hardware partners to make and sell them. HP, Lenovo, Acer, and all the rest of these companies have to execute well.
Worst case scenario: Windows tablets suffer the same fate as every other tablet that isn’t the iPad — all those Android tablets, the HP TouchPad, and the RIM BlackBerry Playbook.
Or, to put it another way, Microsoft may suffer the same fate in tablets that it’s suffering in smartphones, where it also came from three years behind. After more than a year on the market, Windows Phones are still stuck at less than 2% market share.
That sounds like a disaster, but it wouldn’t be obvious immediately, since Microsoft will probably still do very well among traditional PCs.
Windows 8 vs. The Mac
Windows 8 also has to attract consumers who want a full laptop or desktop, but are choosing Macs instead of PCs.
Last quarter, Gartner saw overall PC sales worldwide decrease 1.4% from the previous year’s Q4, to 92 million. Microsoft says that consumer PC sales are falling even faster — around 6% last quarter.
Meanwhile, Mac sales during the quarter grew 26% from last year, to 5.2 million.
To please traditional PC customers, Windows 8 works with old apps and also has a more traditional Windows desktop “hidden” underneath the new Metro interface.
Here, Microsoft has a better chance. Nearly every single past version of Windows has created a spike in PC sales as consumers rush out to buy the latest and greatest. (For instance, PC sales were up about 14% in 2010 in the wake of Windows 7, which came out in late 2009. The economic recovery also helped.)
PC makers know how to design and sell Windows computers, their sales channels are well established, and so on.
So a similar spike is almost definitely going to happen in the first few quarters on the market.
Worst case scenario: that spike is short-lived, and Windows tablets can’t make up the difference. By 2014, the Windows PC market could resume its decline among consumers, falling another 5% or more every year.
Windows 8 vs. Business Indifference
The biggest threat to Windows in the enterprise is “good enough” — businesses who have recently bought new PCs with Windows 7 and don’t see any reason to upgrade.
Microsoft has only just started talking about business scenarios for Windows 8, focusing on things like security and remote access. So far, these sound like typical incremental improvements — nothing that will suddenly cause companies to throw their old PCs out and replace them with brand new ones.
But here, Microsoft’s prospects are pretty good. The company points out that only one-third of businesses have upgraded from earlier versions of Windows to Windows 7. The remaining two-thirds of businesses are probably going to replace their PCs on a normal refresh cycle of every three to five years — they might to go Windows 7 first, but Microsoft will be selling them a Windows licence regardless.
That’s probably why sales of PCs to businesses were up 5% last quarter from the previous year.
Worst case scenario: businesses could stretch out their PC upgrade cycle even longer, instead focusing their investment on supporting employees who are bringing non-Windows devices (iPads and smartphones) to work. In this case, business PC sales might flatten or even start to decline by 2013.
Even The Worst Case Isn’t That Bad
Say that Windows 8 hits the worst case scenario in all three spots.
That would mean PC sales would probably stay flat or drop through most of 2012, rise something like 10% in 2013 in the wake of Windows 8, then start falling again in 2014.
- 2012: 350 million
- 2013: 385 million
- 2014: 380 million
In that case, Microsoft will still sell more than 1 billion Windows licenses over the next three years. Not all of them will be Windows 8 licenses, but they’ll all put money into Microsoft’s coffers.
No wonder Steve Ballmer says that Microsoft “will always be” in the Windows era.
Of course, the past is no guarantee of future performance. There could be a sudden tipping point where PC sales decline faster than they ever have before. The economy could collapse again.
And no matter what, Microsoft eventually has to make Windows broadly relevant again, or a decade from now the situation will look very different.
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