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Gartner has published preliminary PC unit sales for Q2. The data from Apple's Mac sales has not been published yet but based on some estimates, we can draw a partial picture of the personal computer market.

 

My estimate is that the Windows PC market fell by 1% while the Mac market grew by 15%. Gartner reports an overall flat market. I'll leave out the iPad for the time being, and show the growth of the Mac vs. Windows:

 

In terms of individual vendors vs. each other, the patterns are as follows:

It's perhaps a bit early to tell, but if the Windows PC market continues to slow or contract, it may be possible that HP and Dell will cede their market share leadership positions to Lenovo and Acer. Already "Others" account for as many units as HP and Dell put together.

If we are to believe the analyst community reflects consensus, the industry, in the aggregate, continues to treat the potential for disruption from devices as unlikely. There always seems to be a wrinkle, a quirk, or an exceptional circumstance that is to blame. I won't get into all the excuses given by analysts for the slowing of PC sales but will point out that there's been a series of initiatives put forward by the industry to act as "catalysts" for growth. So far they have not worked. The current expectation is that Windows 8 will reverse this trend.

Perhaps. But perhaps the relief, if it comes at all, will be temporary.

[UPDATE: Due to a data error, the drop in Windows was overstated in the initial version of this post as 10%. It's been corrected to a drop of 1%]

Steve Ballmer July 9th, 2012 on competing with Apple:

We are trying to make absolutely clear:
We are not going to leave any space uncovered to Apple
We are not.
No space uncovered that is Apple’s
We have our advantages in productivity
We have our advantages in terms of enterprise management, manageability
We have our advantages in terms of when you plug into server infrastructure in the enterprise.
But we are not going to let any piece of this [go uncontested to Apple]
Not the consumer cloud
Not hardware software innovation
We are not leaving any of that to Apple by itself
Not going to happen
Not on our watch.

Steve Ballmer, July 2010 on competing with Apple's iPhone and iPad:

Today, kind of I'd say one of the top issues on my mind, let alone on your minds, one of the top issues on my mind, is, hey, there is a category that we've had Windows on for actually a long time. We've had Windows 7 on, tablets and slate machines now for a number of years, and Apple has done an interesting job of putting together a synthesis and putting a product out, and in which they've -- they sold certainly more than I'd like them to sell, let me just be clear about that.

We think about that. We think about that in competitive sense. And for us, then, the job is to say: Okay, we have a lot of IP, we have a lot of good software in this area, we've done a lot of work on ink and touch and everything else -- we have got to make things happen. Just like we had to make things happen on netbooks, we've got to make things happen with Windows 7 on slates. And we are in the process of doing that as we speak. We're working with our hardware partners, we're tuning Windows 7 to new slate hardware designs that they're bringing them to market. And, yeah, you're going to get a lot of cacophony. There will be people who do things with other operating systems. But we've got the application base, we've got the user familiarity. We've got everything on our side if we do things really right.

So, we think about these devices and I don't think there really is one size that fits all. I don't think everybody wants a slate. I've been to too many meetings with journalists who'd spend the first 10 minutes of the meeting setting up their iPad to look like a laptop...

Laptops actually are well designed for a lot of things. I notice they are all light. In fact, if you look around this room, they all weigh zero pounds, because they're just sitting on the table, you are not holding them and you don't set them up when you want to type, and they prop up -- they have good attributes. But some people are going to want that form factor. Some people are going to want probably a screen that they take with them and maybe they throw it back into the keyboard. Some people are going to want a device that is screen and keyboard that spins around for inking purposes. Some people are going to want things very light or very cheap or very expensive or very powerful. All of those things are going to be important, and we've got a push right now -- right now -- with our hardware partners.

... We're coming full guns. The operating system is called Windows. No -- there's -- let me be unambiguous. A new Windows Phone for screen sizes that, let me just say, are, you know, sort of bigger than three or four inches -- the answer is Windows Phone. We are in the game. We're all in the game today with Intel architecture machines. We've got improvements coming from Intel. We're driving forward. We're unambiguous about that. Now, where we'll go and what's going to matter -- I said also in my remarks that in no way will we allow hardware to be the impediment. We will embrace what we need to embrace over time in terms of hardware evolution.

But you say to me are we going to see slate? Yes. What processor are they going to have? They are going to have an Intel architecture processor at least in any foreseeable future. Are they going to run Windows? Yeah. Will it be tuned? Yes! And we are going to sell like crazy. We are going to market like crazy. We have devices that will run more applications, that have as much content, that have anything you want on the planet.

And we have an ecosystem of developers that know how to write applications for that thing. Believe me, as I think everybody knows, you can buy two PCs for the price of one iPad -- two netbooks today for the price of one iPad. So, people are sitting there over-celebrating BOM costs and blah, blah, blah. We and Intel can get our job done and know how to make money. There's good money for everybody in the ecosystem to go make.

I talked about power. We've got work we have to do with hardware partners, with Intel. There's certainly some work to be done there. And over time where we go is where we go. But at least in the timeframe that which anybody does these models, for example, let's go. Let's go and we'll be in market as soon as we can with new devices, whether that's, you know, really, really soon or just really pretty soon. I'm going to wait until I have the device that I want to hand you and tell you to go use, or a collection of devices. I think that would be the appropriate time to say it is time. But it ain't a long time from now. Pardon my English...

On the netbook, nor the slate, if it's two weeks one way or the other, or it's a month, I mean, let's not speculate, let's merely say when you get your Windows 7 machine, it will print. Let's just start with that. I mean some people actually like to print every now and then. Ours will print. I'm not trying to say that other guys aren't doing good work. I'm not saying that. We've got to ‑‑ come on, every day. Every day you come to work you have to prove yourself, prove yourself, prove yourself. We'll prove ourselves. ...

I relish the competition. I relish holding up those couple of machines today that I wanted to hand you. It's not today. I'll relish doing it tomorrow. Bring on ‑‑ particularly if with the application base, with the tools that we have, with the user understanding and momentum and everything going on, we can't compete with ‑‑ particularly whatever the weird collection of Android machines is going to look like, shame on us.

Apple is Apple. They're always a little tougher to compete with. They're a really good competitor, and tend to be a really high-priced competitor. People worried a little bit about our bottom costs. They've got a lot of margin in those devices, which creates a lot of room in which to operate. Okay. We've competed with Apple before. I talked about that.

We've been competing with Macs, and I notice in this audience you get one profile for the 93 percent of people almost who agree with us every day about laptops. We're going to have things that should be interesting to them. That doesn't mean it's not going to be exciting. That doesn't mean you're not going to have to pay attention to shareholders. It certainly means we've got to pay attention. But, at the end of the day kind of what makes life kind of interesting, kind of fun, and you're going to see very interesting things.

Steve Ballmer, January 2007 on competing with Apple's iPhone and iPod:

Right now, well let’s take phones first Right now we’re selling millions and millions and millions of phones a year. Apple is selling zero phones a year. In six months they’ll have the most expensive phone by far ever in the marketplace and let’s see. You know what’s so special...? Let’s see how the competition goes.

In the case of music and entertainment players Apple absolutely has the preeminent position We said we want to be in this market. There’s a lot of reasons why. There’s synergy with other things that we’re doing. We’ve got some neat innovations. In particular, what we’re doing with community, with wireless networking. And we came into a market in which they’re very strong and we took, you know, about, by most estimates, I would say we took about twenty, twenty-five percent of the high-end of the market. We weren’t down at some of the lower price points but for devices 249 dollars and over we took, you know, let’s say about twenty percent of the market. So I feel like we’re in the game. We’re driving our innovation hard. Ok, we’re not the incumbent. He’s the incumbent in this game but, uh, at the end of the day he’s gonna have to keep up with an agenda that we’re gonna drive as well.

John Cox of Network World:

We asked him eight questions about the five-year impact of Apple's iPhone, and he replied from his iPad.

Q: Five years ago, people actually began to get their hands on the Apple iPhone. There were other smartphones; no prior phone products from Apple; there was no App Store, no apps "ecosystem." So what accounted for its initial success with consumers?

Read my answer and the entire interview here:

Why the iPhone matters: 8 questions for Horace Dediu

When the Macintosh was launched in 1984, computers running the MS-DOS operating system were nearing a dominant position in the market. Having launched in 1981 as the IBM PC, they were quickly cloned and four years later "PCs" were selling at the rate of 2 million/yr.  The Mac only managed 372k units in its first year.

In other words, PC was outselling the Mac by a factor of nearly 6. It turned out to be a high point. The ratio by which the PC outsold the Mac only increased from there.

When Windows 95 launched in 1995 it negated most of the advantages of the ease of use of the Macintosh and the PC market took off. The ratio reached 56 in 2004 when 182.5 million PCs were sold vs. 3.25 million Macs.

During the second half of the 90s it was already clear that Windows won the PC platform war. Windows had an  advantage that seemed unsurmountable.

I should point out that this ratio between platforms is not just an exercise in arithmetic. It's a measure of leverage. The advantage of dominance is realized in an ecosystem which creates lock-in and additional economies in marketing. Ecosystems become self-perpetuating and there is a tendency toward monopoly. The stronger you are, the stronger you get.

 Then, in 2004, something happened.

Although PC volumes continued to grow, they did so more slowly and the Mac grew faster. What coincided with this was the emergence of portable computing. The MacBook became easily differentiable as a "better" laptop. It was not faster, did not have more storage or any key metrics being used to sell PCs. It was just better as an integrated product. The integration manifested itself through a sense of quality and robustness as well as intangibles like aesthetics and "feel". I wrote about this a few years ago.

As a result the Mac began to whittle down the advantage Windows had. The ratio  of Windows to Mac units shipped fell to below 20, a level that was last reached before Windows 95 launched. It's as if the Mac reversed the Windows advantage. This was an amazing turnaround for the Mac.

But the story does not end there.

If we consider all the devices Apple sells, the whittling becomes even more significant and the multiple drops to below 2. Seen this way, Post-PC devices wiped out of leverage faster than it was originally built. They not only reversed the advantage but cancelled it altogether.

Considering the near future, it's safe to expect a "parity" of iOS+OS X vs. Windows within one or two years. The install base may remain larger for some time longer but the sales rate of alternatives will swamp it in due course.

The consequences are dire for Microsoft. The wiping out of any platform advantage around Windows will render it vulnerable to direct competition. This is not something it had to worry about before. Windows will have to compete not only for users, but for developer talent, investment by enterprises and the implicit goodwill it has had for more than a decade.

It will, most importantly, have a psychological effect. Realizing that Windows is not a hegemony will unleash market forces that nobody can predict.

According to comScore, as of end of May,  the ratio of consumer phone users in the US (aged more than 13) who use smartphones as their primary phone has reached 47%.

The question is whether this is reaching saturation. My guess has been that saturation will be at levels well above 80%. The data shows that during May the rate of smartphone adoption (first time users) was 630k/week. This number is a good recovery to above the historic mean indicative that saturation is not yet in effect.

50% penetration will happen this summer. A year ago the predicted "tipping point" date was also the same: August 2012.

The platform shares data is also returning to a historic consistency. A month ago I asked if there was "trouble with the robot"  because Android net adds dropped to a level unseen for two years and the decline in net adds had been going on for four months.

This last report shows a recovery in Android net adds to about 1.5 million new users.

[Note here too that there is no sign of saturation: The net user gains are far above net user losses. Even BlackBerry showed a gain. In a market where there is saturation, net gains and losses among platforms would balance each other out.]

In terms of share, Android shows two months of no growth. The following charts show the history of platforms in terms of share and actual units in area and line charts.

I'd say the jury is still out on whether Android has "peaked" in the US. Globally, the rate of additions seems to still be increasing but in the US we might be seeing the effect of upgrades as many first time Android buyers are reaching the end of their contracts. iPhone and Android "purchase rates" are already at parity but the install base might take some time to converge.

With half the population still not using smartphones, there is still headroom for the platforms, but the inter-platform dynamics are becoming very interesting.

The number of BlackBerry phones sold fell 41% year-on-year in the last RIM fiscal quarter. Sequentially the fall was 30%. Though surprisingly poor, I note that Nokia's smartphone business fell even more dramatically last quarter (down 50% y/y and 39% sequentially). LG also saw a 44% decline in unit shipments in Q1.

The history of smartphone shipments for the largest vendors is shown in the following chart:

From forecasts made by Huawei it's probable that they overtook RIM in the last quarter, dropping RIM to 5th or 6th ranked vendor in smartphone units.

RIM's 7.8 million units is the same level of sales as it had in early 2009. The total market was only about 250 million units per quarter then. It's around 400 million today. A quick calculation shows that RIM's smartphone market share has fallen from a peak of 22% to about 6%.

RIM's stock performance reflects this performance relative to the market.

Hardware revenues were $1.652 billion. Matt Richman calculates the average hardware revenues for the BlackBerry of $203. I include service revenues in my ASP calculations (for Nokia and Apple these are also significant values) yielding $309 per BlackBerry. The history of total revenues, revenues per phone and operating margins are shown below relative to competitors.

Operating margin tells the most sobering story. As I've often repeated, historically no company has survived dipping into the grey zone.

To reiterate, the logic of irrevocability in this industry is as follows:

Success depends on three conditions being met by the vendor's products:

• consumers trust the platform's promise
• operator see the product as creating value to their core business
• developers offer investment to innovate on top of the platform

If all these factors are present, the vendor enjoys a virtuous cycle of growth. If any of these is lost, the others are also likely to be lost as well creating a vicious cycle of decline.

Loss of operating margin is an early indicator that at least one condition is not met. Usually, a failure of consumer trust leads to a drop in purchases which leads operators and distributors and retailers to flee and then developers defect.

It's been impossible to recover from this tailspin so far. There is a procedure which works in theory: accelerate downward by investing in a new platform. The move is counter-intuitive but essential in re-building trust, quality and relationships.

However, the reason it does not work in practice is that this struggle is not with gravity alone. While spinning downward, the company is also subject to competitive attack. Competitors fill the void and take customers into locked-in ecosystems. There is neither the time nor the ability to defend.

Cash runs out and customers are divided up between the survivors. Nokia and RIM face this scenario today.

Google reported a new activation rate milestone: 1 million/day.

The rate of activations has been increasing steadily which leads to a question: how high can it go?

The answer is easy to determine. It can go no higher than the sales rate of phones and tablets and PCs. So what's that sales rate? The answer is to take sales (shipments actually) per category and cast the data as "activations".

The result is shown in the chart below:

Defined as "activations" device and computers are being adopted at the rate of about 5.6 million units per day.

As a percent of total activations, Android is running at about 15% and iOS is at 10%. Android has already overtaken Windows activations and with the new iPhone, it's likely iOS will do as well this year.

In terms of available headroom this means that iOS and Android are running at a combined share of 25% of available activations.  They both should consider that three quarters of the opportunity is left to go.

Will iOS and Android reach a duopoly in terms of activations, topping 5 million per day? Probably not, at least not without some fragmentation or platform diversification (to put it nicely). Nevertheless, 3 to 4 million per day seems an easy target to set.

This week Mr. Dediu was a guest on The Web Ahead (another 5by5 show hosted by Jen Simmons) where he discussed how the forces of disruption apply to the web. It was an interesting discussion as usual, but if you’re pressed for time you should turn your attention to the bit after the sixty-five minute mark, when Horace volunteers some of his thoughts on the web vs. native application platforms.

via Horace Dediu on HTML5 vs. native apps « uniform zulu zero zero.

A fair summary of what I said and rebuttals by @falameufilho

There is no shortage of information about what happens to companies in distress. The cause of distress varies widely and is often not well understood but the actions and symptoms of distress are very consistent. We can look at examples in each industry, even in each product category for a rich set of distressed company data.

For over a year I've been chronicling the decline of incumbents in the mobile phone industry. However, decline cannot continue indefinitely. At some point a company "exits" the industry. Either through a sale or divestiture or, rarely bankruptcy. The list of exits is already long. The length and the correlation between exit and the lack of recovery implies that Nokia will also exit.

But how, exactly?

Will Nokia be acquired? If so, then by whom? What other options exist? How can we analyze this?

The easiest way to guess is to look at what happened to other companies in similar circumstances. The clearest and easiest comparison to apply is Motorola. Motorola was at one time the largest phone vendor and it went through a violent decline. Like Nokia, it was diversified into networks and a few other businesses. Unlike Motorola it's not an American company. This matters because American companies are more comfortable targets for corporate raiders. The legal and boardroom mechanics are not "better" or "easier" in the US than in Europe but they are more familiar to those who might engage in it.

So one avenue that Motorola traveled on was the intervention of activist investors who forced management change, affected strategy and pushed some tactical initiatives. This external pressure was successful in the case of Motorola. The company was split up, it was re-purposed and re-focused and, with a bit of good luck, was acquired.

The process however still took two years. In that time the company languished but stayed alive. Its headcount was reduced by nearly two thirds. It was in a precarious situation throughout. Its story is not over but ownership did change hands and those who took a risk with it while in distress managed to get a reward.

This example (and Sony's acquisition of Sony Ericsson and HP's acquisition of Palm) cannot apply to Nokia.  An activist investor is unlikely and the company has not yet made itself attractive to a buyer. So what would Nokia need to do to  be acquired?

The first step toward an acquisition will be divestiture of its Nokia Siemens venture. The second will be a spinoff or sale of its non-smart phone division. The third might be the allocation of its IP across these separate entities or in a separate holding.

As the company is broken up, value can be released. Investors will be able to value it better and make appropriate assessments of risk. Only at this point would an acquirer perhaps buy the "rump" Nokia smartphones group.

However, even this scenario is not without huge risks. By the time the split is completed, the operating companies could have deteriorated to such a degree that they are no longer viable. Timing is critical.

So if the smartphone group is isolated and made available, who could buy it? Microsoft is always cited as the primary buyer. I've been skeptical of this as Microsoft has found it difficult to make hardware work. It acquired Danger leading to Kin which failed. It has struggled with Xbox for a decade and has yet to recover all its costs for the effort. It has failed embarassingly with Zune. It also has shown no particular success with its original Surface table computer.

But management has re-committed itself to a new hardware effort with the new Surface. This renewed potential opens up the possibility of entering into the integration of a phone again into their business, and Nokia would be remarkably well positioned to help.

At this time, the possibility still seems remote. The company has dismissed speculation of building phones again and again. Unlike PCs, the phone platform is not yet mature and volumes and distribution are very different.

However, there is one other option.

Microsoft has historically "rescued" technology companies in distress with cash infusions for minority equity stakes. It injected some cash into Apple, Barnes & Noble and even Facebook. It did so not because they wanted to own these companies but because they wanted them to survive or thrive. The move acts as a signal to the industry, partners and developers. So what I see more likely than an acquisition is Microsoft capitalizing a spun-off Nokia Smartphones company in exchange for a small equity stake.

The valuation of this stake will be huge as I expect billions of dollars for single digit share ownership. However, Microsoft would not be doing it to get a return from those shares. It would probably later sell them at a loss. But it would be buying a strategic option whose value may be far greater.

In the five years since the iPhone launched, Apple created a total of 35,852 retail jobs.

Some of those jobs came from new store openings. The total store count went from 172 to 361, more than doubling. But the growth in employment was faster: from about 6400 to 42,200, more than quintupling. This is reflected in the total number of employees per store which increased from 37 in Q1 2007 to 117 in Q1 2012.

Which brings up an obvious question:  Why did Apple triple employment at each store? One could answer that many of the newer stores are bigger, so-called flagship stores. But the vast majority of stores are in mall locations which are of limited size. Flagship stores alone cannot account for the increase. One could also suggest that perhaps the stores are open longer and there is a need for more shifts. Again, the vast majority of stores are constrained by the opening hours of malls which, as far as I know, have been steady. Anecdotally, it's also evident that there are more employees in a store at a given time. There are many more of those colored T-shirts at first glance.

One hint is in the design changes in the stores. Apple has removed shelving, registers and almost all non-Apple merchandise. It has replaced the visible stock with tables on which rest products that can be used. If there weren't any people in the store, the store would look almost completely empty, just an open space.

But that's the whole point. The stores are designed to be filled with people. The stores have an open layout because it allows more people to be inside the store at the same time. And the more people the more employees.

We have the data to prove this: The visitors per store per quarter increased from 125k in Q1 2007 to 235.5k last quarter. Nearly double the number of visitors in five years. It's this increased traffic that is closest tied to the increase in employment. This is illustrated by the following chart:

Employment is very closely correlated with total visitors. In fact, employment has risen faster even than visitors. By dividing the number of visitors by the number of employees we see how the number has declined.

[If we consider the time an employee spends working we can even guess that the average visit was served by about 14 minutes of employee interaction--this is up from 9 minutes five years ago.]

If we assume this relationship as causal, then it might be that the stores are "tuned" to ensure a reasonable if not pleasurable experience for the visitor. In other words, the proxy for a "quality" experience is the assistance of an Apple retail employee.

Taking this a step further, we can perhaps hypothesize that Apple is treating its retail stores as hired to provide a human touch to its products--not just as a service but as a way to listen and help in the most basic way. Steve Jobs once said that Apple no longer had to be present at trade shows because they have millions of conversations with their customers every day through their stores. These conversations happen with the retail staff.

Through their Apple retail staff, Apple might even be said to be putting a face on their brand. You can see it in the advertising.

The corollary to this would be that the job of the store is not primarily to sell things. This is confirmed by the fact that store employees are not on commission and there is no sales pressure on visitors. Indeed, the sheer number of employees in a store of modest size (117 employees on an average of about 8k sq. ft.) implies a brazen disregard for the economic orthodoxy of retail efficiency and incentives to sell.

And yet the stores are astonishingly efficient at selling things. The statistics are off the charts in terms of sales per square foot and overall profitability. Even though this employee time has a cost, revenues and profits have all risen in unison.[1]

Of course, the products have a lot to do with this performance. Apple stores sell desirable, popular products which are premium priced. But taking these desired products and coupling them with a "human touch" job to be done strengthens the brand as well as expands its volume of sales. It may be that Apple's retail approach could not work with a brand that was less desired. I.e. regardless of a large head count, a Sony store may not see the return on retail investment that Apple gets. Conversely, by not putting a face on Apple's brand the products may not sell quite as briskly. Ron Johnson said on the launch of the iPad that the stores were almost designed for it. Discovery and hands-on time create demand.

It's as if Apple retail has an inter-dependence with Apple, the brand. One cannot live without the other.

This is, as far as I know, a unique relationship for a technology company. If anything, most technology companies have sought the exact opposite: to put others' faces in front of customers--to break the messy process of sales and support down into pieces to be outsourced to "value adding" resellers.

A pity then that this humanizing touch takes such a long time to build.

---

Note:

1. If we take a visitor-centric point of view, the analysis of the retail business simplifies considerably.  We can even derive an "income statement per visitor". Revenues are measured per visitor (currently about $52/visit). Costs are measured in terms of employee time. A $15/hr average wage and 15 min interaction time per visit puts the service cost at $3.75/visit. Profit per visit is also measurable and it's currently at $13/visit. Therefore the employee "FaceTime" costs 7% of sales, while other costs, including the cost of goods sold, add up to 66% of sales.

HD: Apps are like the sauce in a dish. They add flavor and distinguish the dish. Increasingly they also offer nourishment. Some would argue that we can live with plain cooking but spices drove people to do incredible things like risking life to discover new continents. Being the world's best source for spices means the most innovative and brilliant minds will be attracted to innovate on top of Apple's platforms.

Read more of the interview by Markin Abras here: MacDirectory: Exclusive | Apple's iOS Market Analysis.