Adrift in the Post-PC Era
Phil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The PC allegedly expired 2 years ago, ever since the Apple (NASDAQ: AAPL) iPad was set loose upon the earth. According to some analysts we are now squarely in the post-PC era. Recent performance by the PC OEMs seems to leave little doubt of it. Dell’s first quarter earnings were weak across the board in all divisions. Hewlett-Packard is laying off 27,000 employees, 8% of its workforce. Where does all this leave the Redmond giant?
Over the past decade Microsoft’s (NASDAQ: MSFT) quarterly revenues have steadily increased from $7 billion to over $20 billion while profit margins consistently averaged 29%. Annual net income rose from $5 billion to over $23 billion, and annual earnings per share climbed from $0.50 to $2.75. Seemingly great performance, yet Microsoft’s P/E ratio has steadily declined from over 58 to under 11. The share price briefly flirted with $36 in 2007/8 before bottoming at $15 in 2009, averaging $26/share throughout the decade.
One might easily be led to believe Microsoft is a bargain at this level, but don’t let the low P/E ratio fool you. As demonstrated in the chart below, most technology stalwarts have exhibited a similar pattern.
Apple has seen its P/E ratio compressed from over 105 to less than 14, while generating massive revenue and cash growth. IBM’s P/E ratio has fallen from 50 to under 14. Intel (NASDAQ: INTC) went from 60 to 11, while their earnings per share climbed from $0.41 to $2.39, and their dividend from $0.02 to $0.21 per share .
Throughout most of its history, Microsoft’s strategy was simple -- Windows and Office on every desktop everywhere -- and it worked pretty well. Since the 80’s the Wintel duopoly of the PC era brought great fortunes to Microsoft, Intel and their OEM partners. But unimaginative PC and laptop designs haven’t changed in 20 years. The PC OEMs are as culpable as Microsoft for commoditizing PCs and abandoning innovation.
The PC era was characterized by cheap Intel based X86 hardware and expensive software dominated principally by Microsoft. The post-PC era is characterized by higher-priced hardware but the software is cheap, free or rented. A significant departure from the typical PC buying experience where consumers shell out multiple times the cost of the hardware on productivity and specialty software.
But Mr. PC isn’t ready to jump off a cliff and land in the museums just yet.
Despite dire predictions, defections from the PC haven’t been so breathtaking. IDC estimates 2012 sales at 383 million, about 5% greater than 2011, and further predicts annual sales of 528 million PCs by 2016. NPD estimates the great exodus was merely 14% in 2011, and further believes the cannibalism rate is actually slowing down.
PC sales growth has in fact slowed from highs of 20%-30% growth over much of the past decade. Not great for Mr. PC, but hardly the death spiral foretold by the wizards of Wall Street.
While iPads have displaced a small number of PCs, mostly in the mobile netbook category, they are not an adequate replacement for most PCs. Mobile devices aren't well suited for processor intensive tasks like photo or video editing, graphic design, hard-core gaming, or for storing large volumes of data. Consumers are buying iPads to compliment their computing needs, not to replace their PCs.
The industry is undergoing a tech renaissance, which is changing the way we think of computers. Some may credit the iPad as the deathbringer to the PC, but the ubiquity of the Internet, broadband access everywhere, the advent of Cloud services and improving mobile technology are co-conspirators in the plot to end the PC’s rein. Enter the era of computing as a service.
In this dawning era high-end computing and processor intensive applications will be running in the Cloud, and all you need is broadband access and a low-powered device to interact with it. Broadband access is already a basic utility today, and WiFi has achieved gigabit speed with the new 802.11ac IEEE standard. We’re not quite there yet with Cloud apps, but once we cross the threshold of trust, performance and reliability the Cloud will be the new PC of the people, and the exodus will commence.
Losing the War
Microsoft will do what they can to counter, but they have been losing the battle on just about every front in the consumer market war. Windows Phone has never been a significant factor, and I don’t see anything compelling to change that. In the browser wars Google’s (NASDAQ: GOOG) Chrome is rapidly gaining on Internet Explorer, and will likely surpass I.E. if it hasn’t already. Windows Media Player is losing to Apple iTunes, Pandora and a host of other players. Microsoft Office is the next battleground.
OpenOffice and Google Docs are luring large numbers of Office users, proving to be viable alternatives. Google Docs is also integrated with Google Drive, giving customers 5GB of free online storage. In education and SoHo, Google Apps are surging and some large companies and divisions of government have also made the switch. Microsoft is countering with Office 365, their Office suite in the Cloud, but Microsoft’s pricing model is still reflective of the departed PC era.
When Microsoft releases Windows 8 this fall we should see sales tick up, but don’t expect the new release to revive sales the way Windows 7 did upon its release. Windows 7 sales were outsized because Windows Vista was such a lame release that most people skipped it and jumped from Windows XP directly to Windows 7. Ultrabooks and the new Microsoft Surface aren’t the catalysts for a revival either, they will find their niche but not much more.
Microsoft has diversified extensively over the years, especially in the enterprise, and it is investing significantly in developing its own brand of Cloud services -- Windows Azure. These will help cushion the crash into a soft landing, but it won’t save Mr. Softee from the inevitable outcome. Betting on a Redmond revival is destined to disappoint.
With their vast cash reserves, Microsoft might stumble into a silver bullet to keep them relevant in consumer markets, but it doesn’t look promising. They will throw their cash around, as they did with the Skype and Yammer acquisitions, and they’ll try new ideas like Surface. But short of a drastic shift in strategy and a change in senior leadership, Microsoft will continue to lose consumer share as quickly as consumers retire their PCs.
Invest wisely, my friends.
FoolSolo owns shares of Apple and Intel. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.