I am, you’ll have noted, an argumentative sod. This is a great source of irritation to my dear other half, who rolls her eyes as I shout at the television or Internet. But sometimes, you read something and… well… you just have to respond.
Such is the case with John Gruber’s post on “Microsoft’s long, slow decline“. Now I should make this clear: John’s a very smart fellow and a terrific writer. I have huge respect for him. But his post is also riddled with more than a few canards and non sequiturs which make it sound like something is happening which, honestly, isn’t.
John conflates two key pieces of data. First Microsoft’s (pretty rubbish) recent financial results, and secondly Apple’s apparent dominance of the $1,000+ PC market, and makes of them a salad of doom for Microsoft. He concludes:
“I’m not arguing that Microsoft will collapse. They’re too big, too established for that to happen. I simply think that their results this quarter were not an aberration, but rather the first fiscal evidence of a long, slow decline that began several years ago.”
First, let’s look at the arguments about Microsoft’s financials. As you may have noticed, there’s a bit of a global recession going on at the moment. Microsoft claims this is the reason for its issues. Of course, they would say that wouldn’t they – and John makes the reasonable point that other parts of the “tech market” aren’t suffering:
“One argument is that the fault lies with the global economy, not Microsoft itself. (This seems to be the argument Microsoft’s executives are making.) But not every tech company is suffering. Google is doing just fine, andApple reported record non-holiday-quarter numbers for its just-ended quarter.”
We can safely ignore Google. Google isn’t a tech company, it just gives the appearance of being one (as I’ve said many times before, it’s really in the business of ad sales, like any publisher – it doesn’t sell technology). It doesn’t make operating systems, except for Android (from which it receives no revenue) and the vapourware non-OS Chrome. Comparing the performance of Microsoft to Google is like comparing Microsoft to General Motors, and claiming that Microsoft is doing super-well in the recession.
And then we come to Apple:
“Apple operates in the same economy Microsoft does, and Mac sales areup. And the numbers from the aforementioned report by NPD are simply astounding. It’s worth noting, though, that NPD’s report is specifically about retail computer purchases; Wilcox’s story doesn’t make that clear. But that they don’t represent all computer purchases doesn’t mean they aren’t astounding figures.”
That “retail” thing is a massive issue, and the key to comparing Apple with Microsoft. Because, of course, a huge swathe of Microsoft’s revenue comes direct, either via direct sales of computers with Windows (Dell, which sells a quarter of all the computers sold in the US, doesn’t show up in these figures because it doesn’t have a significant retail presence) or volume licensing of Windows upgrades and Office to business. Compare that to Apple, which has aggressively grown its retail presence – it now has over 200 stores worldwide, in premium locations.
(As an aside, retail doesn’t just help boost Apple’s sales – it boosts margins too. According to ifoAppleStore, Apple’s overall sales in 2008 came to $32.47 billion, with $4.84 billion profits – a margin of about 15%. For the stores, though, revenues came to $6.31 billion and profits to $1.33 billion – a margin of 22%. In other words, retail customers are not just buying lots of stuff – they’re buying stuff with higher margins.)
The limits to growth
But growth is growth, right?
“Things have not always been like this. NPD conducted the same survey at the beginning of 2008, and at that point Apple’s share of the $1,000+ retail computer market was only 66 percent. Repeat: Apple’s share of this segment has grown from 66 to 91 percent in a year and a half.”
Now I don’t have the numbers here. But fundamentally, there’s two ways to achieve share growth: Sell more yourself, or your competitors sell less. A startling change in share like that is usually a combination of both – it’s incredibly rare for one company to outpace everyone else to that degree while everyone is growing sales.
So what the NPD figures reveal – if anything – is that Windows PC buyers are more price sensitive than Apple buyers, and that they are either deferring new purchases or buying cheaper computers. The overall market for $1,000+ computers isn’t growing much, but Apple is taking a bigger proportion of the pie.
But the key thing is this: the price a PC is sold at retail doesn’t actually matter much to Microsoft. The pricing of Windows is somewhat opaque (hence the long drawn out anti-trust cases on both sides of the pond), but the cost to someone like Dell is effectively flat, whether they sell a PC for $500 or $1,500. Only if they upsell between versions of Windows does Microsoft get more money, so if a PC comes with Vista Business it will get more than Home Basic.
John labours this point later:
“The evidence is staring Microsoft’s leadership in the face that they have lost the most lucrative segment of the market, but, judged by their actions and public remarks, they seem to think it’s all a big joke. They should be sweating this but they’re laughing it off.”
He’s forgetting that this “most lucrative” part of the market isn’t the most lucrative part for Microsoft – and it never has been. For Microsoft, the difference in margin between Dell selling a $500 PC and a $1500 one is probably in the order of $20. Is it any wonder they aren’t losing sleep over it?
In other words, for Microsoft it’s much better if lots of people buy cheap PCs than fewer people buy expensive ones. For the hardware makers, that’s not necessarily true – but for them, Windows is the only game in town anyway.
From these tenuous foundations, John ends up here:
“Today, though, Microsoft is increasingly left only with customers whose priority is price.”
This is a great slogan, but it’s also a big leap – and it’s really a non sequitur. At best, John has shown that during a recession some customers are more price sensitive than others, and the price sensitive ones tend not to buy Macs (they aren’t buying Linux either, but that’s beside the point).
Vista vs 7 vs OS X
Of course, the biggest impact on Microsoft’s revenue has been the complete failure of Windows Vista as an upgrade for business, and that’s something that Windows 7 goes a long way towards fixing. John is dismissive:
“But no one seems to be arguing that Windows 7 is something that will tempt Mac users to switch, or to tempt even recent Mac converts to switchback. It doesn’t even seem to be in the realm of debate. But if Windows 7 is actually any good, why wouldn’t it tempt at least some segment of Mac users to switch? Windows 95, 98, and XP did.”
Harry McCracken has the best response:
“History suggests that people don’t like to switch operating systems and the most striking significant shifts in operating-system market share have happened when one OS has been on alarmingly shaky ground. Back when the exodus from Macs to Windows 95 and Windows 98 that Gruber refers to happened, Apple’s OS was floundering and it wasn’t clear that the company was going to survive. And Apple has made major inroads over the past couple of years in part because Windows Vista was such a mediocrity.” [My emphasis]
Windows 7 isn’t a mediocrity. It’s good. It’s not going to get Mac users to switch, but it is going to stop a lot of Windows users from switching. And, more importantly from Microsoft’s perspective, something that will persuade the legions of their most important customers – IT managers – that it’s time to move on from Windows XP.
“Vista was a disaster for Microsoft. Windows 7 is, supposedly, the light at the end of the tunnel. But the best consensus about Windows 7 is only that it’s not going to be a complete and total clusterfuck like Vista.”
This might be the consensus amongst Mac users, but it’s a long way from the consensus amongst everyone else. When Walt Mossberg, who’s recommended Macs on many occasions, notes that 7 “leaves Vista in the dust” you know it’s more than just a minor update. As Walt says:
“It’s also a serious competitor, in features and ease of use, for Apple’s current Leopard operating system.”
Of course, Snow Leopard will be out in September and offers a lot of extremely exciting technology (enough to tempt me into buying a new Mac – but that’s another story). But the fact that Microsoft has moved from the disaster area that is Vista to a serious competitor to Leopard is a long way from 7 just being “not a clusterfuck”.
I could go on. There’s plenty more “does not compute” in John’s article. I can see exactly why he’s ended up with the points he’s made, and it’s simply that he’s looking at Microsoft through the prism of being a Mac buyer, without considering the wider context of the industry.
It’s understandable. But it also means he’s over-egged the pudding.