Microsoft's Real Problem: The Second Coming of Apple

From Silicon Alley Insider, July 18, 2008:

As Microsoft (MSFT) continues to waste time and resources figuring out how to win a sideline game it has already lost--Internet media--its shareholders have bigger things to worry about. Namely, the future of the Windows and Office cash cows.

It has been so long since Microsoft had anything real to worry about in these businesses that it's easy to take their perpetual domination for granted. Don't.

We've written frequently about the cloud computing threat: Google, Yahoo, Amazon, and other web-based services companies offering functionality and apps for free that Microsoft currently charges a boatload for. Microsoft is aware of this threat and is moving to try to combat it. But if it smoothly navigates a technology paradigm shift of this magnitude, it will be one of the first dominant technology vendors in history to do so. (Think IBM's transition from mainframes, DEC, etc.)

The second major threat, however, comes from a company that Microsoft once left on the edge of death: Apple (In fact, Microsoft actually helped save Apple once, by becoming a shareholder, so it could demonstrate to regulators that it did, in fact, have a competitor. At the time, it didn't).

One-Third Of US PC Market Growth In Q2 Was Apple Macs

SAI's Dan Frommer recently noted a startling statistic: In personal computer sales in the US in Q2, Apple outgrew HP and Dell by a wide margin, continuing to regain market share it lost in the late 80s and early 90s. More surprisingly, Apple outgrew HP--the world's largest PC vendor--on a unit basis as well:

• Apple (AAPL) shipped 1.4 million computers in the US during Q2, representing 8.5% market share and 38% year-over-year growth. Mac shipments grew 9 times faster than the overall U.S. PC market (4.2%) in Q2.

• Q2 U.S. Mac sales grew by 386,000 computers year-over-year, handily beating No. 2 HP, which sold just 222,000 more computers in Q2 2008 (4.17 million total) than it did during Q2 2007 (3.94 million). Dell outsold HP and maintained its top U.S. market share; it shipped 5.25 million PCs last quarter, up 557,000 units/11.9% year-over-year, and representing 32% of the U.S. market. Meanwhile, HP (HPQ) maintained its no. 1 position worldwide

Looked at differently, the Big Three sold 1,165,000 more computers in the US in Q2 than they did last year...and Apple sold a third of these additional units. It is safe to say that the majority of these units won't be running Windows. It's also probably safe to say that most won't be running Excel, Word, or Outlook, either.

Apple's Rise Is Not Just About Steve Jobs: Microsoft's World Has Changed Forever

Is the return of Steve Jobs the only thing that has shifted the competitive landscape in favor of Apple? No. If Steve Jobs were Microsoft's only problem, the company would be fine. Steve Jobs is actually less important to the second coming of Apple's Mac business than the decline of the Windows hegemony.

Five years ago, with the exception of a handful of niche markets (academia, graphic design), it would have been inconceivable for a company or business to go Apple. As muchas people hated being shackled to Microsoft, the inability to exchange documents, buy compatible software, and find engineers and support personnel made the decision a non-starter. Now, however, with the rise of cloud computing, Google Apps, and cloud-based email and IM, choosing Mac is an ever more viable alternative. An increasing number of small companies are Mac-only shops. And even large companies are starting to give their employees a choice (also inconceivable five years ago).

Apple still has small market share (8.5% US, much less globally), so Microsoft is not going to fold up the tent overnight. But at the rate Apple is gaining share, it won't be long before Microsoft begins to feel a real bite. It is this threat, combined with the increasing attacks on its Office franchise, that Microsoft and its shareholders should really be worrying about.

See Also:
Microsoft: Prepare To Be Disrupted By Cloud Computing