Microsoft and the PC industry
Steve Ballmer is a casualty of the personal computer’s rapid decline
Aug 31st 2013 |From the print edition
UNTIL August 23rd few people would have described Steve Ballmer as “retiring”. Microsoft’s chief executive has played both tiger and Tigger: snarling (toothlessly, as it turned out) at Apple’s gadgets; and bouncing, with a whoop, onto conference stages to extol his company’s wares. But retiring he is, within a year.
Mr Ballmer’s departure is a surprise. He had announced a reorganisation of the company only in July and had hoped to oversee much of the change. Some celebrated his going: Microsoft’s share price went up by 7.3% on the day the news broke. Mr Ballmer has plenty of critics, although Microsoft’s revenues have trebled on his 13-year watch, to $77.8 billion in the year to June, and profits have grown similarly, to $21.9 billion. The critics point at the rise of Apple and Google, and say Microsoft should have done better—or handed some of its $77 billion of cash to shareholders. In an interview with the Seattle Times, Mr Ballmer denied that pressure from ValueAct, a fund with a small stake in the firm, helped push him out.
Microsoft sits atop a pyramid of companies that prospered from the long boom in personal computers (PCs). The vast majority of PCs run on Microsoft’s Windows operating system and are powered by Intel’s processors. They bear the brands of Dell, Hewlett-Packard (HP), Lenovo and others, and nowadays are mostly made by Taiwanese contractors. The trouble is that people increasingly prefer to buy mobile devices, made by Apple or running Google’s Android operating system. Sales of PCs have been falling at double-digit rates. From the pyramid’s apex to its base, companies are desperate both to refresh the PC and reduce their reliance on it. Few are having much success.
Frank Gillett of Forrester, a research firm, reckons that Windows’ share of the market for personal devices, once 95% or more, has dropped to around 30%. Microsoft responded belatedly with Windows 8, a new edition intended for touchscreen PCs and tablets launched last October, with variations for cheaper tablets and phones. Applications lie behind oblong tiles designed for fingertips rather than icons for mouse-clicks. Microsoft’s successful Xbox entertainment system was given the same look. The idea was that this uniform style would help to transfer Microsoft’s dominance of the desktop to mobile devices, and refresh the PC too.
It has not happened yet. Few businesses were likely to hurry to buy Windows 8 anyway; some have yet to switch to its predecessor, Windows 7. Consumers have not taken to tiles on PC screens: a new version, Windows 8.1, due in October, will make it easier for them to stick with the old look. Only now is a wide choice of touch PCs and tablet-PC hybrids appearing.
Microsoft’s own tablet, the Surface, has been a flop, forcing it to make a $900m write-off in its latest results. Windows phones, mostly made by Nokia of Finland, are far behind iPhones and Android devices, with just 3.3% of the world market according to Gartner, another research firm. They have ousted BlackBerry from third place, but that is not saying much.
Next to Microsoft at the apex, Intel has also done poorly in smartphones and tablets, though it is striving to catch up and in June unveiled a new chip that it hopes will bring new zip to PCs. Among the PC-makers, HP pondered quitting altogether in 2011, then sacked the chief executive who suggested it. Meg Whitman, his successor, chose to stay in, as well as pushing into services and software and shedding 27,000 jobs. She has plenty still to do: HP’s latest results, on August 21st, sent a share-price rally into reverse. At Dell, which is scrapping for much the same ground, Michael Dell, the founder and chief executive, still hopes to win a battle to take the company private. Of the leading PC-makers, Lenovo has coped best. Its home market, China, is slowing but growing, and it is selling plenty of smartphones.
Despite its slow start in mobile, Microsoft remains hugely profitable. “It’s easy to get focused only on Windows,” says David Cearley of Gartner. The firm was quicker than its rivals to provide cloud services to big companies. Although Google’s free word-processor and spreadsheet threaten its Office software, Microsoft still has most of its customers, to whom it can sell improved services online. The direction Mr Ballmer has set “makes a lot of sense”, Mr Cearley says. Had he set out sooner, he might have seen the journey through.