Numbers updated to reflect revenue from Holiday
Quarter 2009 earnings reports.
Windows Mobile in Decline
The writing is on the wall. The world is going more and more mobile,
and Microsoft is anchored to the desktop. It had the chance to take
over cellphones, to make Windows Mobile the world non-Nokia standard,
but it fumbled the opportunity somewhere in the labyrinths of Redmond.
Now it has been passed by RIM (BlackBerry) and Apple - and in 2010 it
will probably be passed by Android.
In Microsoft's last financial year, Windows Mobile sold 18 million
licenses. This year, in an expanding smartphone market, with only
Windows Mobile 6.5 to offer, no hot cellphones, and manufacturers like
HTC, Motorola, Palm, and
even LG moving to Android, maybe Microsoft will sell 10 million
licenses. RIM sold that many BlackBerries last quarter (end November
28). Apple probably sold that many iPhones and iPod touches in the
September quarter and undoubtedly sold that many iPhones alone in the
December quarter.
As Android is a cheaper (and currently better alternative), Windows
Mobile is largely blocked in the consumer market. In the business
market, it is a question of how long Microsoft-oriented IT departments
will choose to keep Windows Mobile alive against user pressure for the
iPhone and BlackBerries. (See The Microsoft Model Isn't
Working for Smartphones.)
Microsoft Revenue in Decline
Even if the $1.5bn deferred revenue for Windows was added back into
last quarter's revenue figures, Microsoft revenue year over year (YOY)
fell for the third consecutive quarter. Head count is down too, to keep
profits up.
Microsoft is now a company tied to the world economy, unlike in the
last recession. Nearly all of its profits come from three product
lines: Windows, Office, and Server.
Microsoft's only new growth product of any size is the Xbox 360, and
that is climbing out of the $6.4bn hole it blew in the accounts and now
has to compete with a resurgent Sony PS3 for second place in the
console market.
Out of last quarter's Microsoft analyst conference call - just
before CFO Chris Liddell jumped ship to General Motors - the overall
message was: Until businesses start spending more on IT, Microsoft
won't show significant growth and will continue cutting costs.
Windows Revenue in Decline
Even if the reported upturn in PC sales is enough to stop
Microsoft's revenue from dropping further, so many new sales are
netbooks or low-cost PCs that sales to OEMs will be cheaper versions of
Windows 7. These will generate a few more dollars than the previous
stopgap of Windows XP, but basically Microsoft has lost control of
pricing in the PC market.
The onward march of Moore's Law has reduced the price of PC hardware
to less than that of a good smartphone. Today the largest components
cost is Windows, and that will come under pressure in the consumer
market from Android, Chrome, and Linux.
Microsoft has nowhere to retreat, apart from lowering prices, if it
doesn't want to slowly lose market share, as it has with Internet
Explorer. Windows simply isn't perceived as offering value for money in
more expensive PCs, which is why, according to NPD, in recent months
Apple has taken between one-third and nearly half of all the consumer
dollars and over 90% of $1,000-plus PCs in US retail.
Microsoft's overly complicated licensing will also help to drive
small and medium business customers away. So far the evidence is
anecdotal (see Windows 7
Licensing or How Microsoft Lost Our Business), but
a system that makes it worthwhile to offer Boot Camp courses is in
a state of siege.
Windows will neither attract new users nor hang on to users who
don't have to stay. This is opening yet another front for Apple
simplicity.
Apple Ascendant
How much more revenue does Apple need to catch up with
Microsoft?
|
Microsoft |
Apple |
|
|
Sales |
YOY |
Sales |
YOY |
Difference |
| Dec. 2008 |
$16.6bn* |
+2% |
$11.8bn |
|
$4.80bn |
| March 2009 |
$13.65bn* |
-6% |
$9.06bn |
|
$4.59bn |
| June 2009 |
$13.38bn |
-15.6% |
$9.70bn |
|
$3.68bn |
| Sept. 2009 |
$14.39bn |
-4.5% |
$12.25bn |
+4.5%** |
$2.14bn |
| Dec. 2009 |
$17.31bn |
+4.3% |
$15.68bn |
+32.9% |
$1.63bn |
Where will Apple gain the revenue? When will Apple pass
Microsoft?
The difference is nearly $4.4bn between Apple's excellent September
quarter and Microsoft's revenue for last December. When the $1.7bn for
Windows 7 deferred revenue is added into the GAAP figures, Apple won't
be seen as passing Microsoft this quarter. However, if Apple reaches
$15.5bn, it will be ready to do so from the March quarter onwards.
iPhone Growth
iPhones are going from strength to strength. 3.0 to 3.5 million more
in the December quarter than September, or at least +$1.8bn looks
reasonable.
In France, iPhone already has at least 40% of the smartphone market
and has sold 1.8 to 2.0 million already, according to Le Figaro.
Over the Christmas period, according to
a Les Echos interview with the CEO (Google
translation), 77% of Orange contracts sold were iPhone based.
According to a Europe 1 radio interview with Stephane Richard, this was
a little over 200,000. Already the largest French carrier is concerned
that a monopoly is developing and that the other manufacturers have yet
to develop a competitor.
In the UK, a third carrier, Vodaphone, was added this month and
promptly sold 50,000 iPhones the first day, so the competition between
carriers is likely to ramp up there too. Going forward, the exclusive
contracts in Germany and Spain should end over the next 12 to 18
months, again driving down contract prices and adding to iPhone
sales.
In Asia, according to iPhonAsia.com, KT has sold over 150,000 in
Korea since the November launch; China Unicom, after a poor start, sold
200,000 in under 20 days; and there are about 2 million gray market
imports through Hong Kong; in Japan, Softbank has sold around 3
million.
With these expanding sales, Apple can continue to sell over 10
million iPhones a quarter. That alone will drive it past Microsoft in
the March quarter in non-GAAP revenue.
Macintosh Growth
Macs have also been strong, outgrowing the PC market in 19 of the
last 20 quarters. That will continue, with Apple taking a larger bite
of the consumer market from those who look on a computer as a tool and
want one that just works. Others who love their iPhones and iPods will
also try them out in the Apple Retail Temples, where the number sold
goes up most quarters while the new-to-Mac share stays around 50%.
If Apple hadn't needed to halt deliveries of the 27" iMac for two weeks, Mac sales
surely would have been up over September. Instead, they will probably
be flat. That is around 3 million for the December quarter. That two
weeks of sales lost in the December quarter will end up adding to the
March figures if the widely reported screen issues are fixed.
iPod touch Growth
iPod unit sales may be down from last year, but many more of them
will be Touches, which is how iPod touch app downloads overtook those
for the iPhone at Christmas. This means the average selling price for
iPods will be up. December quarter unit sales are around twice those of
September, so revenue should be up by $1.5bn or more. In the March
quarter, as usual, the unit numbers will drop back, but expect the iPod
touch to show at least 100% YOY growth yet again as it takes over from the
other iPods. This steady migration to the iPod touch will keep the
YOY revenue flat to up.
iTunes Store Growth
The
iTunes/App Store last year had a $200 million jump mainly from more
music downloads, with a further 50 million in March as iTunes gift
cards were cashed in. With a billion app downloads over 98 days, if
only 25% of those were paid for at $2.50 each, that's over $600 million
from apps alone. If music downloads stayed at the same level, the
iTunes Store may see its first $1.5bn quarter. In any case, there
should be a gain of at least $300 million in December, with $50 to 100
million more in March.
Any changes in peripherals and other hardware, software, service,
and other sales are usually minor. Together they should bring in around
$1 billion.
Passing Microsoft Within 6 Months
Apple believes in maximizing publicity. This means that the
accounting change will take place as soon as it is clear that its
revenue has passed Microsoft's. This is likely to be in the March
quarter, but Apple may wait until the June quarter just to be sure.
In a couple of years, when it has a track record of being bigger,
Apple will be invited to join the Dow Jones.
Microsoft has always been about the numbers. How will it cope with
being behind Apple (and probably Google)?
Many people seemed to choose Microsoft solutions because nearly
everyone else chose them. It was a safe bet, because sooner or later
Microsoft would get the solution right - the same reason that IT
professionals used to choose IBM. Judging from the CES keynote, it
looks like the best path for Microsoft to follow will be IBM's. That
way Microsoft can still be a large company, but one oriented even more
towards business. 
