By John Gruber
Work at Atoms. Make the best shoes ever.
There were two interesting Windows-related news stories last week. First, Joe Wilcox’s story on a report from NPD claiming that 91 percent of $1,000-and-higher retail computer sales now go to Apple. Second, Microsoft’s quarterly financial results, in which revenue fell $1 billion short of projections and declined 17 percent year-over-year.
To be clear, Microsoft remains a very profitable company. However, they have never before reported year-over-year declines like this, nor fallen so short of projected earnings. Something is awry.
What is particularly alarming about Microsoft’s numbers is that revenue from its Windows PC division suffered an even greater year-over-year revenue decline than the company as a whole: 29 percent. One explanation for that is that Windows 7, a major new update, goes on sale in October, and so it’s expected, somehow, that Windows revenue would decline in the months preceding its release.
But Microsoft’s operating system business is not new, and it has never been particularly cyclical. Windows revenue, prior to this just-completed quarter, has only ever gone in one direction: up.
Windows is at the core of everything Microsoft does that makes money. They sell Windows, then they sell software that runs on Windows. As Windows goes, so goes Microsoft, and right now Windows is heading south.
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, and Apple reported record non-holiday-quarter numbers for its just-ended quarter.
Apple operates in the same economy Microsoft does, and Mac sales are up. 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. 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.
Apple has always only competed in the middle-to-high range of the computer market. But it was never the case, historically, that Apple sold a majority of middle-to-high-end computers. Even given that NPD’s numbers represent only retail sales, is there any reasonable doubt that Apple’s share of the non-retail market for $1,000+ computers is also growing?
Apple’s strong growth in this segment is a sign that the market is turning against Windows. If for no other reason than that Apple has never entered the low-cost computer market, it’s always been the case that the most budget-conscious computer buyers were Windows users. But the converse wasn’t true — not all Windows users were cheapies.
Today, though, Microsoft is increasingly left only with customers whose priority is price.
During the late-’90s dot-com boom, it was standard operating procedure at many companies for professional web developers and designers to have two computers on their desks: one Windows, one Mac. One for primary development, one for testing in browsers on the “other” OS. (Virtualization wasn’t yet practical.)
But which to choose as the primary platform? Many chose one, many chose the other. But it was an interesting test group, because they were exposed to both platforms. These web developers were not like the people who, in a form of tribalism, claim to despise one or the other platform without having actually used it. Web developers had to know both the Mac and Windows, at least with passing familiarity, and the truth is that many, if not most, preferred Windows.
Today that is simply no longer the case. Microsoft has lost all but a sliver of this entire market. People who love computers overwhelmingly prefer to use a Mac today. Microsoft’s core problem is that they have lost the hearts of computer enthusiasts. Regular people don’t think about their choice of computer platform in detail and with passion like nerds do because, duh, they are not nerds. But nerds are leading indicators.
This is true in many markets with broad appeal, not just computers. Microsoft is looking ever more so like the digital equivalent of General Motors. Car enthusiasts lost interest in GM’s cars long before regular people did; the same is happening with Windows.
Or consider cameras. Companies like Canon and Nikon make most of their money from consumer-level point-and-shoot cameras. But they are intensely competitive at the high end of the market, too. Enthusiasts are valuable customers not just because they themselves buy expensive products, but because they, as enthusiasts, tend to recommend products in their area of expertise to others. The photo nerd who’s delighted with their $2,500 Canon SLR is likely to recommend a lot of $250 Canon point-and-shoots to friends and family.
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. That it’s something XP users will actually want to upgrade to. Something that, when it comes pre-installed on a new machine, will not prompt questions about how to downgrade to XP.
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 switch back. 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.
Microsoft seems to have conceded that the enthusiasts who’ve switched to the Mac in recent years are gone for good. Their apparent goal for Windows 7 was merely to make something better than Windows Vista. If Microsoft were a healthy, functional, competitive company willing and able to honestly assess its own shortcomings — like the Microsoft of the ’90s that conquered the entire industry — their goal would have been to make something not just better than Vista, but better than anything else on the market, including Mac OS X.
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.
Two weeks ago Microsoft held its annual Worldwide Partners Conference. There was a much-reported bit from the remarks of Kevin Turner, a former Wal-Mart executive who is now Microsoft’s COO. What caught people’s attention were Turner’s comments regarding having gotten a phone call from a lawyer at Apple regarding Microsoft’s “Laptop Hunter” ads. From Microsoft’s transcript:
And so we’ve been running these PC value ads. Just giving people saying, hey, what are you looking to spend? “Oh, I’m looking to spend less than $1,000.” Well we’ll give you $1,000. Go in and look and see what you can buy. And they come out and they just show them. Those are completely unscripted commercials.
And you know why I know they’re working? Because two weeks ago we got a call from the Apple legal department saying, hey — this is a true story — saying, “Hey, you need to stop running those ads, we lowered our prices.” They took like $100 off or something. It was the greatest single phone call in the history that I’ve ever taken in business. (Applause.)
I did cartwheels down the hallway. At first I said, “Is this a joke? Who are you?” Not understanding what an opportunity. And so we’re just going to keep running them and running them and running them.
That’s interesting insofar as it proves that Apple has an eye on Microsoft’s ads. But I’ve always imagined that this is pretty much what corporate attorneys do all the time when a competitor runs an ad that claims things which are not true. This is why you don’t often see direct price comparisons in TV commercials — prices change. And, in fact, a week later, Microsoft changed the ads to remove specific mentions of Mac prices.
That silly lawyer.
But the really interesting part of Turner’s remarks from the conference is what he said immediately preceding the above, when he first broached the topic of Apple:
Now let’s talk about Apple. What are you going to do about those Apple ads? That was a year ago. Gosh, when I went home for the holidays, brothers, sisters, cousins — hey, hope you don’t have anything to do with marketing over there at Microsoft. What are you guys going to do about those Apple ads?
Stay tuned, stay tuned, stay tuned. Wow. Did we punch right back? The PC Hunter ads, the PC Rookie ads clearly have been winners in the marketplace.
Such winners in the marketplace that Apple’s laptop sales went up last quarter, and the rest of the industry’s declined. (Perhaps Microsoft would do better to measure the efficacy of their ads by their effect on sales, rather than by the number of phone calls they prompt from Apple lawyers.)
Then comes the real insight into Microsoft’s thinking:
I pulled this out of my Sunday newspaper. I have an old habit because I came from retail looking at the Sunday tabs and circulars that are in newspapers. This is straight out of my paper last Sunday. This is a comparison out of a leading electronics retailer that you can get a 13.3-inch Macbook for US$1199 from that retailer. Guess what. That same retailer, you can get the same PC with more RAM, a bigger hard drive, and almost a three-inch bigger screen for US$649. What an incredible opportunity.
And so Microsoft’s official stance regarding Apple’s growing domination of the $1,000+ market is that Apple is charging hundreds of extra dollars in pure margin — $500 in the case Turner cited in his prepared remarks. The computers that Microsoft chooses to brag about on stage at a major conference are the $650 17-inch laptops advertised in Best Buy Sunday circulars.
There’s no question that retailers sell tens of millions of cheap Windows laptops every year. But no one with a pair of eyes thinks such machines are of comparable quality to Apple MacBooks. Even without turning the machines on, anyone can see the difference in design and build quality. In fact, you don’t even need eyes — just pick them up and see which one squeaks. Apple is selling more MacBooks every quarter. Microsoft thinks it is sitting pretty because Best Buy has a 17-inch Dell for $650.
Turner is not alone. Back in April, when the new PC Hunter ad campaign started, David Webster, general manager for brand marketing at Microsoft, said the following in an interview with Newsweek’s Dan Lyons:
He says the idea was to turn Apple’s “I’m a Mac” campaign to Microsoft’s advantage. “We associate real people with being PCs, [but then Apple] ends up looking pretty mean-spirited, the way they go after customers,” he says. “It’s clear that’s who they are insulting.” At the same time he can’t resist taking a crack at the preciousness of some Mac users. “Not everyone wants a machine that’s been washed with unicorn tears,” he says.
Quoting the above, I wrote:
It seems clear that Microsoft’s stance on the Mac’s sales growth is that there’s nothing wrong with Windows or right with the Mac, but rather that there’s something wrong with Mac users.
Microsoft is no longer ignoring Apple’s market share gains and successful “Get a Mac” ad campaign. But the crux of these ads from Apple is that Macs are better; Microsoft’s response is a message that everyone already knows — that Windows PCs are cheaper. Their marketing and retail executives publicly espouse the opinion that, now that everyone sees Apple computers as cool, Microsoft has Apple right where they want them.
They’re a software company whose primary platform no longer appeals to people who like computers the most. Their executives are either in denial of, or do not perceive, that there has emerged a consensus — not just among nerds but among a growing number of regular just-plain users — that Windows PCs are second-rate. They still dominate in terms of unit-sale market share, yes, but not because people don’t recognize Windows as second-rate, but because they don’t care, in the same way millions of people buy metric tons of second-rate products from Wal-Mart every hour of every day.
That’s the business Wal-Mart wants to be in — selling a zillion cheap low-margin items and turning a profit on volume. That’s not the business Microsoft is in.
And in mobile software, the fastest-growing segment of the computer industry, Microsoft’s platform is both inferior and unpopular. Their plan to address this is to change its name.
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.