Where Is the Money in This Technology Revolution?

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The last couple of years have been a nightmare for the PC industry. The falling PC sales have hurt both OEMs and semiconductors. It seems as if the time is here when the Personal Computer will be replaced by the tablet. According to recent sales data by IDC, PCs are way behind the tablet in term of sales growth and within a year tablets just might overtake PC sales volume.

The Threat

The world’s largest operating system, Microsoft’s (NASDAQ: MSFT) Windows, is now available in a touch based user interface. This is a giant leap from the earlier ‘mouse’ interface on Windows 7 and earlier versions of Windows. Microsoft was forced to give up their classical system due to an imminent threat by Google’s (NASDAQ: GOOG) Android and Apple’s (NASDAQ: AAPL) iOS. The threat from Apple is limited to their hardware sales, but Android poses a much larger threat.

While Apple jealously guards the use of it iOS, Google freely lends it to third party manufacturers. This makes it a potential threat to Microsoft because Android is also available to Microsoft OEMs, such as Hewlett Packard and DELL. The fear that its own OEM would take up Android was one of the key factors behind the revolutionary overhaul of Windows. While this strategy has stemmed the tide for now there are already Android based handhelds by HP and Dell. Dell has also shut down its Android smartphone business, mostly due to bad sales figures and not any weakness with the Android.  

PC Shipments

According to data by IDC, worldwide PC shipments were 89.8 million for the 4th quarter of 2012. This figure represents a decline of 6.4% which is way higher than a 4.4% decline anticipated by the street. The market did not stabilize due to Windows 8 as was expected by some analysts. A major reason behind this inability to drive sales is the worsening economy and results that do not represent a full quarter impact. According to IDC, this is the first time in more than 5 years that there is a y/y decline in PC shipments during holiday season.

Tablets Shipments

Unlike the PCs, the tablets have seen a stellar year. According to IDC there was a 75% y/y increase in tablet shipments, which were reported at 52.5 million for the quarter. There was a massive push by the iPad mini in the last quarter of the year resulting in a 74.3% q/q increase in tablet sales. The smaller version of Apple’s iPad sold a massive 22.9 million units during the quarter, inducing a 48% increase in iPad sales. While Apple has been enjoying the benefits of the handheld revolution, Microsoft is thus far missing out, despite its foray into handheld hardware in the form of Surface RT and Surface Pro. The Surface Pro will hit Microsoft store shelves this month, but the cheaper predecessor has disappointed with sales of a mere 0.9 million units. A major reason behind low sales was the restriction of Surface to only Microsoft outlets.

Winners and Losers

Apple and Google are the biggest beneficiaries of rising handheld demand. Microsoft has not impressed with its sales figures for Surface RT but the pro would be an entirely different story. The premium Windows 8 tablet would hit stores this month and in my opinion would easily outshine Surface RT sales. It will be competing with not only iPad and Nexus, but also with dozens of cheap generics available in the market. The following two factors make me believe that it is too soon to write off Windows 8:

I. Ultrabooks are available at very high price points, which reduce their attractiveness to commercial users. The reduction in the prices will increase demand and greatly benefit Windows 8 sales. This will also improve Microsoft's valuation due an increased inflow of licensing revenues.

II. The Windows 8 has been developed for a touch based operating system, which makes it useless on regular PCs. The product has not been able to create a buzz because a very small portion of the consumer base has used it on touch devices. As these devices are upgraded to hardware that supports full usability of Windows 8, it will start to gain traction.

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