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PCs: a tale of two divergent companies

ibm-pcTwo decades ago, there were a pair of names that really mattered in the computer business: Microsoft and IBM. With the benefit of hindsight, it's incredible to think about how divergent the paths of the two companies have been, especially in light of a new report that shows already-slowing PC sales are about to drop off a cliff. Tracking firm IDC originally thought PC shipments would be down just 1.3 per cent this year, but after seeing a free-fall in the first quarter, that estimate has now been revised to a 7.8-per-cent decline in 2013. As PC World puts it, that's "full-blown hemorrhaging." The culprit, of course, is mainly mobile - more people are doing more on smartphones and tablets and are forgoing buying a new PC until they really, really have to, if even then. No wonder that if PC vendors such as Dell, HP and Lenovo aren't already in a lurch, they're scrambling to get out of the business. Desktops and laptops may still be useful, but the truth is they've been as commoditized as toasters for a while now.

It all makes IBM look particularly smart for getting out of the business while the getting was still good, way back in 2004. The company – which did much to pioneer the PC – saw the hardware commoditization trend coming and rightly reoriented to focus on software and services. How Lenovo, the Chinese company that bought IBM’s PC business, couldn’t foresee the future is anyone’s guess. Then again, the $1.75 billion purchase may ultimately have been worth it for Lenovo, since it did much to establish its name worldwide.

Nevertheless, IBM’s stock price is the best arbiter of that decision to sell. Shares have gone from about $96 at the time of the sale to around $207 today, a 115-per-cent increase.

On the flip side is Microsoft, the long-time supplier of software to PC makers. An overwhelming majority of the company’s revenue – about 80 per cent – still comes from the PC business, whether it’s from Windows, Office or server software. In the meantime, the company has missed the boat on just about every major technology trend, from the internet to smartphones to tablets. It’s now desperately playing catch-up – and falling short – in each.

Microsoft’s share price is a also good arbiter of that decision to stay the course in PCs, and an inability to get current. At the time of the IBM sale, Microsoft shares hovered around $27 and today they are around $34, an increase of 24 per cent. Compared to IBM’s performance, that’s woeful.

Things look even worse when a third company – Apple – is brought into the comparison. At the time of its stock split in 2005, Apple shares were close to $43. Today, they’re up in the stratosphere, around $440. While back then the company got most of its revenue from computers and iPods, today the majority of it comes from the iPhone. As everyone knows by know, Apple’s performance over the past decade is the perfect example of how important product diversification and the creation of new revenue streams is.

Looking at the different performances, it really makes you wonder where Microsoft would be – and more importantly, where society would be – if the company had more of an experimental nature. Would the smartphone and tablet revolutions have happened a lot sooner if Microsoft hadn’t been so afraid to disrupt what was for a while a very lucrative business? Would we all be communicating telepathically through chips in our brains by now?

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8 Comments on PCs: a tale of two divergent companies

  1. Jean-François Mezei // May 29, 2013 at 12:42 am // Reply

    Very few established companies are able to cannabalise their existing high margin product lines to jump into a new market. It takes a CEO with vision and broad support from the board and his VPs to do that, and those are rare.

    PSION, Palm pionneered mobile OS in the 1990s. Microsoft then came in with its Windows CE, with enough potential that it scared PSION out of the business, giving its SIBO32 OS to a consortium that renamed it Symbian. First iterations of WinCE did not crush/dominate the mobile market as had been expected. And the Symbian consortium spent many yeras debating between themseves what tod do with Symbian OS (whic needed many parts rewritted because it was such a closed OS).

    But when MS restructured WinCE into Pocket PC, it allowed Compaq to develop the iPaq which did have some success. When HP bought Compaq, HP even killed its own Jornada line of pocket computers to adopt the iPaq. (iPaq and DEC’s Disk Arrays were the only products to displace existing HP products).

    Unfortunatly, MS stopped developping it and HP quickly abandonned the iPaq product line. In essece, MS pulled out of the mobile arket at the very time where it was just about to take off in a very big way.

    And now, Microsoft has decided to come back with a totally new mobile offering but has to build market presence from scratch. Whether they have the stamina to keep improving it and grow it remains to be seen.

    When MS pulled out of WinCE/PocketPC, its slaves (HP, Dell, Lenovo etc) had no choice but to also pull out of the mobile market. So you can’t really blame them for lack of vision.

    HP buying Palm may have been a an interesting twist, but it appears that it not only lacked stamina to give its products time to get known and the Palm OS time to get apps, but there have been an element of its loyalty to Microsoft which made it very easy for HP to write off its investment in Palm and start building tablets that ran MS’s mobile offering.

    Had Microsoft continued to develop WinCE at a good pace, Apple may not have had such an easy grab of market share when it came out with its iPhone.

  2. Peter, saying it was mobile that caused the shift is only partly correct. It was 802.11 and the cloud. As well, 3G/4G and wired broadband were unwitting accompanists. Back in 1997 I used to say “if you want to break the WinTel monopoly, break the Baby Bell monopoly.” http://bit.ly/ZsJZ8w Cable accomplished the latter in the late 90s/early 2000s. In the process, 802.11 scaled because of its open and generative nature and significantly improved performance/price of broadband.

    In the early 2000s something called “the cloud” developed and began to grow with the metcalfian universe of BB. Things like blogging, social media, youtube blurred the boundaries between edge and core, making the web more synchronous. But the cloud had always been around, only back in the day it was called “the mainframe”. The new cloud was the entirety of the data processing stack disintermediated and distributed at the core vs the old hierarchical and centralized mainframe model. (Funny slow and expensive from those same Baby Bells access killed the mainframe and heralded processing at the edge.)

    The smartphone’s equal access of application ecosystems to 802.11 starting in 2007 enabled the cloud to be accessed anytime, anywhere, enabling near 7×24 computing as opposed to the static time and space distributed edge-processing PC model.

    So what we’ve witnessed is the result of equal access, competition and generative, relatively open, technology ecosystems fostered by the US government and industry in the 1980s and 1990s. It’s time for you, policy makers, academics, trade management and the capital markets to understand the linkages and cause and effect this way instead of calling mobile “the culprit” and giving undo credit to the overpriced, vertically integrated service providers that were unwitting participants in the process.

    Right now, because we rely on these overpriced mon-oligopoly service providers for continued growth of this generative ecosystem we are seeing uneven and suboptimized growth. Another outgrowth is the appearance of other monopolies elsewhere in the infostack. Bandwidth is 20-150x overpriced since we killed off equal access in the mid and last mile in layers 1 and 2 about 10 years ago.

  3. I’d actually argue the other way – in both smartphones and tablets, Microsoft was there years before the current players. The problem is that the technology wasn’t there yet, so they sold poorly and their upper management gave up too early.

    This is compounded by their partner model, as they are dependent on third-parties to build the platforms their software runs on top of. The OEMs tend to stick to off-the-shelf parts, whereas companies like Apple aren’t afraid to build their own when they can’t find what they need. For instance the capacitive multi-touch display had a huge impact on mobile UI design. The underlying technology was already there, but no other market used it so it took someone willing to order a custom part to bring it to market.

    It’s understandable as the partner model is what got Microsoft to the top at the beginning. The problem is that back in the day it worked so well because those partners were hungry and had to innovate to compete with one another. Today, however, the race to the bottom on price means they only seem to care about getting their BoM as low as possible and innovation costs money.

    Apple’s strength is seeing when the underlying building blocks are there and jumping in at the right moment. The fact they build their own hardware helps, as they can jump on lower level blocks rather than waiting on component vendors. That timing and resourcefulness is largely what has gotten them where they are today.

    When you jump too early, your platform ends up with piles of baggage from kludgy solutions to hardware shortcommings of previous generations. When you go too late, you let your competitors build an ecosystem that will be hard to compete with. Microsoft somehow managed to hit both of those edge conditions – getting bogged down by the first caused them to exit the market just before it came of age, and it took them too long to realize that and jump back in. I’d argue that they don’t really have an innovation problem, it’s more of a management problem.

    • Good points, although the fact that they’re still not there even though the technology is suggests both innovation and management problems, as well as the legacy issues I wrote about above. Partners and ecosystems have something to do with it, but given that MS phones and especially tablets are big, bulky with bad battery life suggests the company is out to lunch in those departments.

      • To be fair, the “bad battery life” on the Surface Pro (which I’m assuming you’re referring to?) is because it’s a fully-functional PC, instead of a straight-up tablet. The Surface Pro seems to be getting a surprising amount of positive responses from people who’ve actually used it, too, instead of just reading “HEAVY IPAD WITH BAD BATTERIES” reviews from Apple-besotted tech writers.

        (I was shocked when I discovered the artists lusting after the thing. Artists? Abandoning Apple? Amazing!)

        Personally, I’ve been hearing a lot of unofficial comments from people who’ve bought into the tablet hype that they’re kind of wishing that tablets were more along those hybridized lines, instead of the current “smartphone with big screen” model. They’re great consumption devices, but production seems a bit beyond them, and a lot of them are sitting idle. I think that MS might well be AHEAD of the game on that one, and the strategy will end up bearing fruit when the next line of Intel chips comes out, battery life becomes more reasonable, and they iterate on those detachable covers of theirs.

        Meanwhile, the current “tablet” market seems to be moving towards something between the iPad mini and the “phablet” Samsung Note form factors. They’re similar devices; it’d make sense that they’re converging. It doesn’t mean they’re going to replace the PC. They’re doing what they’re supposed to be doing: complementing it.

  4. “Apple’s strength is seeing when the underlying building blocks are there and jumping in at the right moment.” Apple should cut a deal with US govt and say that they will invest all their money in infrastructure if they can repatriate at lower rate. With $30 billion leveraged they will have over $100bn to disrupt the service provider stack. That would be really generative.

  5. “Would we all be communicating telepathically through chips in our brains by now?”

    And of course with Apple and Microsoft dominating, I assume that ubiquitous DRM infecting these chips would be mandatory, and installing software to remove foreign control over ones own thoughts would be illegal.

  6. Craigbamford: I spent a few weeks using the Surface Pro and wouldn’t wish it on my worst enemy.

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