Microsoft

My thanks to Kirk Burgess for providing this transcript:

Horace Dediu interview on CNBC Asia Cash Flow show - 10th September 2013

Chloe Cho (CNBC): Take us through what Apple is exactly trying to do?

Horace Dediu: Well, this is the first time in the six years of this competition in the smartphone market that Apple has broadened its portfolio. We have seen only a single product launch every year--this is very unorthodox in the industry. Normally each competitor [ranges] dozens of devices. Apple's entry has been asymmetric from the start, and now in its sixth year we are expecting to see, finally, a broadening perhaps into two separate products. The question will be whether [there will be] a significantly lower price point for the so-called 5C and whether that will change the average selling price overall for the portfolio. The average selling price has been remarkably steady, and remarkably high, typically around $600 for the duration of this products life. Something, again, unprecedented. My expectation is the new price point will be quite a bit lower than $600, starting with about $450, it might drop a bit further, [which] would cause the overall price range to come down as we have seen with the iPad; [where we] also had a price erosion happen as the smaller version came out.

Q: Horace, do you think they have got the timing right? Should they have done this a little bit earlier when the market wasn't so saturated and filled with cutthroat competition?

A: Indeed, I think. As I said, as a product with six years in the market it's a bit late; I expected this to happen last year. I think a lot of the momentum that has been lost in the past year in terms of sales growth has been because of the lack of low end. To note also will be whether they indeed expand their carrier footprint. We are expecting something new in Japan and possibly China Mobile. There is a second announcement happening with a few hours delay in China. This is again the first time that has ever happened.

Q: Horace, do you think they didn’t move down the value chain fast enough largely because they didn’t have a deal with China Mobile?

A: Well that's always a good question whether they are driven more by carrier channels or are they driven more by consumer market expectations. I think it's a bit of both. We do have this hybrid approach where they continue selling this older product for one or two years after the new product is launched--so the 4 and 4S are still available while the 5 is being ranged. This strategy is hybrid I say because this isn't truly a low end product, it is a stale product that is being put out there. This [strategy] may be driven more by consumer demand, not so much what operators are asking for. With the 5C we might be looking at a solution for operators in particular.

Q: Horace, how much do some these incumbents like Apple and Samsung need to be worried about Microsoft approaching their space?

A: I believe Microsoft will not be competitive in the near term. I don't think [during] the next year we are going to see a very impactful entry from Microsoft. What Microsoft is likely do is lower prices significantly on Nokia's portfolio and their pipeline as it is. That might cause more pressure on the pricing, but the problem has been that consumers have not really been taking up the Windows Phone platform very aggressively. It has been somewhat successful in Europe but not taking off elsewhere. I think Microsoft will be in an integration mode with the Nokia assets into 2014, but I would expect in a year from now we might see some new entry product that would be exciting. I think 2-3 years down the road we might see something from Microsoft that would excite consumers as well.

Q: There has been a lot of focus on which companies have a more integrated house, Apple or Samsung. In light of the fact that they are having to move into lower price points, in your view which is doing the better Job, Apple or Samsung?

A: Well Samsung is a great industrial enterprise and they are doing very well by broadening as much as possible their portfolio, even before the smartphone race started for them, which was in 2010, they were known for being one of the most prolific product creators out there. They actually had over 100 different mobile phones, not smartphones, just regular mobile phones that they would range, and Nokia were extremely concerned by this pressure they were getting from Samsung.

What they have seen since 2010 is the same thing, except with smartphones, and so they’ve been really prolific and covering the spectrum of price and screen and every other possible variant that could be made. I think however that Samsung hasn’t got a software platform under its belt. They could become a software player by taking over some of the control of Android as we have seen Amazon do, and thus really establish themselves as a platform player. They are doing so to some degree with the "Gear" product, and they might be doing something like this by launching their development conference this year.

But they aren't yet a platform player whereas Apple is, but then again we just don’t know what the politics of Android are with respect to forking it by an OEM as large as Samsung.

In the "Race to a Billion" there is a graph showing Android reported activations and iOS cumulative unit sales alongside cumulative console sales. The contrast between mobile phone platforms and game consoles is striking, with an order of magnitude difference in consumption. The best performing console to date is the Wii with about 100 million units sold so far.

[UPDATE: Thanks to Danny Nemer cumulative sales of Sony's PlayStation 2 (using production shipments from FY 2000-05 and recorded sales for FY 06-12) is 155.81 million units]

However, that is an incomplete picture of the game platform business primarily because consoles are not the entirety of the business. Mobile (but dedicated) gaming platforms have been sold for some time.

To give a better picture of the game business we prepared the following graphs. The first shows Nintendo's product lines with actual unit shipments (shown as colored dots in millions of units per quarter) and the trend (shown as trailing twelve months' average trend lines).

Note that fixed and mobile products are both shown on the same graph. The picture that emerges is that for Nintendo, its mobile platforms combined are more popular than its fixed consoles with a total of 186 million mobile devices sold since 2003.

There is also a pattern of generational change. The GBA, DS and GameCube era was superseded by the DS Lite, DSi, Wii era. The Wii era (or generation) was significantly more popular than the GameCube generation. If there is a problem however, it seems to be that the new generation devices or consoles are not forming a new era. The Wii U and 3DS are not growing nearly to the level of the previous generations and have faded quickly.

To summarize, the unit volume graph for Nintendo is below. ((This is a smoothed graph showing what sales would have been if they had been evenly spread out over a 12 month period. The actual sales would total to the same area but would be much more seasonal and thus noisy.))

To confirm that this is indeed disruption we should look at the pattern for another competitor in the console market: Sony. ((We would like to show the pattern for Microsoft but there is no regularly reported Xbox shipment data.))

The graphs above combine both Nintendo portable/consoles and Sony portable/console sales. Note the similarity in patterns of growth. It's one thing to suggest that Nintendo consoles have "failed", it's another to show that Nintendo consoles and portables have failed, and yet another to show that two competitors in the games business seem to be failing in unison across all their product lines.  The cyclicality is also over a long period of time: The peak for the combined Sony/Nintendo was in 2008, five years ago.

The chief criticism to the industry-wide view of decline is that there is a new generation of consoles right around the corner. This is the eighth generation of consoles which, it is presumed, will bring growth back to the industry.

But the Nintendo 3DS, launched two years ago, was meant to kick off the eighth generation, and the PlayStation Vita was Sony's response. Then the Wii U was also billed as the successor to the Wii. They have so far failed to re-ignite growth. One might reply that they were merely appetizers and that the main  course of the next gen are the PS4 and Xbox One.

Will they create growth again? Surely not for Nintendo, but I would argue that not for Sony or Microsoft either. There might be a burst of sales at launch as the hard core gamers upgrade, but they are unlikely to recruit new gamers the way the Wii did. In other words the PS4 and Xbox One are unlikely to win against non-consumption.

That is where mobile is the clear winner. More people will hire mobile devices for their primary gaming activity.  And as mobile devices get inexorably better, they will be hired for use in the setting where consoles have been king: the living room.

The implications are that Nintendo, Sony and Microsoft are beyond the point of no return in this industry. Gaming, as a business, cannot be sustained as a platform independent of a general purpose computer. Like other "applications" that used to have systems built around them conforming to their needs (( Applications such as word processing, financial calculation, media editing, music playback, etc.)) the dedicated-purpose solutions came to be absorbed into the general-purpose platforms. And the modern general purpose computer is the smartphone. (( One interesting question is why didn't the general purpose personal computer absorb console gaming. My answer is that personal computers could not conform to the experiences around the "10 foot" interface and still function well at their main jobs. In contrast, mobile devices through screen sharing have the ability to be much more malleable.))

UPDATE: I added Microsoft console shipment data which became available after 2008.

A special episode in three parts: 1) Too many variables: The mechanics of the Microsoft Nokia deal 2) Climbing Everest without oxygen: The implications for Microsoft and 3) Post-abyss: The implications for Nokia.

via 5by5 | The Critical Path #95: Catharsis or Anticlimax?.

This one starts slow but ends with a flurry.

In February I asked Why doesn't anybody copy Apple?

Put another way: Why is it that everyone wants to copy Apple’s products but nobody wants to copy being Apple?

Being Apple means, at least:

• Insourcing all aspects of operations which affect the customer experience. Increasingly that has meant insourcing everything, a toxic idea to every MBA-trained professional since forever.
• Organizing functionally and having no product level P/L responsibility. That also means removing almost all incentives for employees to climb ladders and thus prove their worth.
• Developing products using integrated "heroic" efforts which shun  every best (or even adequate) process for product development.

I asked somewhat rhetorically because it's an open question. Apple's operating model and devotion to integration have been asymmetric to technology dogma for decades. To the casual (read: naïve) observer, pursuing the Apple way seemed also to be tied to one individual. You could not "be Apple" unless you were also Steve Jobs and there was only one of him.

But it seems I did not give enough credit to other observers.

According to Microsoft, they began negotiating the buying of Nokia assets in earnest (coincidentally) in February. It has, also since February, been planning a massive re-organization along functional lines. Thus, by owning significant hardware operations and organizing functionally, Microsoft might go about two thirds toward "being Apple-like". The development process is the final hurdle and it may be a bridge too far, but my thesis that nobody wants to copy Apple is now in tatters.

And it gets worse. We can see a similar, though far weaker, example in Google's approach to integration. Their purchase of Motorola did not result in an integrated business, with Motorola being kept at arm's length and allowed to wither on the vine. Crucially, while Google bought Motorola's IP, Microsoft only licensed Nokia's. Microsoft clearly valued Nokia for something different than  what Google valued Motorola for.

Nevertheless there is a semblance of similarity. We can generalize enough and say that Apple (iOS), Google (Android/Chrome) and Microsoft (Windows (Phone)) are all becoming near facsimiles of each other. They are all producers of Software, Services and Hardware. Each came from a different basis but expanded into areas which were missing.

• Google started with a service, expanded into systems software and bought into hardware.
• Apple started with hardware running its own software, expanded into application software and is developing services.
• Microsoft started with software, expanded organically into services and bought into hardware.

All three major platform companies are now racing to offer that which completes them as an integrated producer and eliminates the dependencies on others as a modular producer.

This is re-integration of the computing industry--a reversal of the dis-integration brought about by the personal computer. Mobility, it turns out, was as important to the evolution of the computing value chain as microprocessors were to the previous era. It just had the opposite effect.

I should point out that Apple was more lucky than enlightened through this sea change. Having always been integrated, Apple was out of favor during one period of the computing epoch, but, simply by surviving, its model came back into favor in the next. I don't think anybody there foresaw just how dramatic the shift would be and how important their structure was to being successful.

But there is one company which seems left out of this discussion. Samsung is absorbing a large part of the available profits in computing today and it's not an integrated hardware/software/services player. Does this mean that there is room to be a module in an interdependent world?

I argue that no, there isn't. Samsung must either stretch into becoming one of the ecosystem contenders or be relegated to a commodity hardware company--a path clearly visible when looking at Chinese entrants. Samsung itself benefited from disrupting from below and should be aware of the threat it faces as it races up-market. More importantly though there is the ability of creating new markets altogether. This new market creation and rapid iteration due to integration is what the Google/Microsoft/Apple trio are seeking.

Without the components of software (ecosystems included[1]) and services, Samsung will depend on the good graces of suppliers. They may not be as keen to share when profits accrue to the whole rather than the part.

 

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Note:

[1] e.g. BlackBerry

When a prosperous company buys a struggling company you have to wonder what they're really buying.

Here's how to think about it. A company is defined as the sum of three values: resources, processes and priorities (RPP). Everything of value can be classified into these three categories.

When one company buys another it's the equivalent of one set of RPPs trying to engulf or swallow another set of RPPs. The simplest (naïve) interpretation is that an acquisition is the purchase of Resources in terms of customers, sales, profits, etc. It might be of assets like employees, intellectual properties, brand etc. I say this is naïve because Resources are the easiest to value because they can be measured and valuing only what can be measured while ignoring what can't be measured is deeply mis-pricing.

So most people look for the "R" value or the value of Resources in an acquisition. It's may be naïve but it is what markets typically value because it's what they can price. But what happens when the "R" is flimsy or fleeting?

The answer has to be that it's  the processes or even priorities which are valued by the acquirer.

These are difficult to value which, as I've argued in The Innovator's Curse, is why they are not reflected in a share's price. When there is a price paid for these fuzzy assets, they are often interpreted as a "premium" to the market price. But that may not be the way a buyer sees it.

When buying a set of Processes, a buyer may see a bargain because their costs for building a similar process could be enormous, even infinite. In the case of Nokia, the process of building hardware may be infinitely valuable to Microsoft as they have had dreadful luck doing it themselves. But they're seen as value free to the market because it seems that there are many others who are building hardware.

The trickiest thing to perceive though is the value of a set of Priorities. Priorities are the answers to the "Why" question as much as Resources are the answers to the "What" and processes are to the "How." If you were to think in terms of software engineering Priorities are the "Specifications" where the Resources are the data and Processes are the algorithms. They determine the direction and reasoning of why a company even exists. If you have bad specs, it never matters whether the algorithm is efficient and you have all the data: you are building the wrong thing.

Acquiring Priorities is also fundamental in that they are usually exclusive. A company typically only has room for one set. If there are conflicting priorities, they need to be sorted out else the company can end up in a state of internal conflict and dysfunction. So if you're acquiring a set of Priorities, it's likely that you'll have to discard your own. It makes most sense when a company which might otherwise be prosperous needs to change direction.

So, in a way, an acquisition of Priorities is almost a reverse acquisition. The acquired is actually "buying" the acquirer. The acquired company's Priorities (and hence Processes and Resources) become the guiding principles in the acquirer. It's what happened when Apple bought NeXT and may have happened when Disney bought Pixar.

Some companies are "Resource-heavy", some are "Process-heavy" and some are "Priority-heavy". Great companies tend to have great sense of priority. They may also have greatness in the other asset classes but it's rare to find a great company without a great sense of purpose.

So the question for the Microsoft Nokia deal is what is Microsoft buying?

Resources? Sure, there is IP and a team. But the chances are that not all the team members will be kept on. See what happened to Motorola after it was acquired by Google.

Processes? Absolutely. Microsoft needs device development processes desperately.  They may seem a commodity but it turns out that running great hardware businesses is hard, very hard.

Priorities? Here we have to pause. To acquire Nokia's priorities means acquiring its business model; its belief system. Perhaps they will be discarded and they're not valued. Perhaps, as is often the case, the acquirer becomes allergic to the new priorities.

But Microsoft has made it clear that they are now a "Devices and Services" company. As much as Apple changed its name to exclude "Computer," Microsoft is almost changing its name to exclude "software". It will still make software, to be sure, but for it to get paid it needs to integrate that software into hardware and services.

My first thought on this is that Nokia's priorities are not sufficient for the company that Microsoft wants and needs to become, but there are some priorities which are necessary and which it values.

It may be too much to say that with respect to Priorities, Nokia acquired Microsoft, but insofar as Microsoft is having to transform its business model, what Nokia devices brings is an integral component of the new.

 

The most common, almost universally accepted reason for company failure is "the stupid manager theory". It's the corollary to "the smart manager theory" which is used to describe almost all company successes. The only problem with this theory is that it is usually the same managers who run the company while it's successful as when it's not. Therefore for the theory to be valid then the smart manager must have turned stupid at a specific moment in time, and as most companies in an industry fail in unison, then the stupidity bit must have been flipped in more than one individual at the same time in some massive conspiracy to fail simultaneously.

So the failures of Microsoft to move beyond the rapidly evaporating Windows business model are attributed to the personal failings of its CEO. The calls for his head have been getting loud and rancorous for years. Taking this theory further, now that he's leaving, the prosperity of the company depends entirely on the choice of a new (smarter) CEO.

It's all nonsense of course.

Microsoft is composed of people, processes and priorities. And nothing else. The CEO is but one person, admittedly one with a high degree of authority. However, that authority is not unlimited. A change of leadership in a company may have some impact on a larger set of people, at least in the short term, but the bulk of existing resources, institutionalized processes, and priorities set by customers and cash flows limit what any one person can do.

What really causes a company to fail is disruption. The business model around which all products, customers and priorities are built; the culture, the skills and "DNA" of the company; is vulnerable. This vulnerability is why companies have considerably shorter lifespans than the people who work there. They are one of the most fragile of organisms: high infant mortality, with short, unpredictable lives.

Microsoft ascended because it disrupted an incumbent (or two) and is descending because it's being disrupted by an entrant (or two). The Innovator's Dilemma is very clear on the causes of failure: To succeed with a new business model, Microsoft would have had to destroy (by competition) its core business. Doing that would, of course, have gotten Ballmer fired even faster.

Steve Ballmer's only failing was delivering sustaining growth (from $20 to over $70 billion in sales.) He did exactly what all managers are incentivized to do and avoided all the wasteful cannibalization for which they are punished.

If anything, Steve Ballmer avoided The Innovator's Curse. Being successful with new market innovations would probably have led to an even shorter tenure. Destroying prematurely the pipeline of Windows in favor for a profit-free mobile future would have been a fireable offense. Where established large companies are concerned, markets punish disruptors and reward sustainers.

Steve Ballmer will not be remembered as favorably as the man who created Microsoft. But at least he won't be remembered as the fool who killed it. That epitaph is reserved for his successor.

Bill, I think the smartphone market has always been competitive. [Only] the names have been changed.

Tim Cook responding to Bill Shope's question on the competitive landscape, April, 2013.

Indeed, over the years, the companies considered Apple's primary competitor have been many.

In years gone by in the phone market there were RIM and Nokia and Palm and HTC. In the iPod era there was Creative and Sony and innumerable others long forgotten (not to mention the tyranny of DRM).

Even today we struggle to decide whether Apple competes with Google first or Samsung. Or perhaps with the iPad it's with Amazon or  Microsoft. Or maybe iTunes is threatened by Netflix or Spotify. The Mac surely competes with HP and Dell and Toshiba. What about iCloud? Clearly it's Dropbox or Google Drive. iWork? Both Office and Google Docs.

Doing a competitive analysis for Apple is then mostly a struggle of whom to compare it to. So forgive me that I only track the few challengers shown below.

Note also that these companies all may compete with Apple to some degree but they may not compete with each other. Competition, it seems, is not transitive.

There isn't much that I can observe in the data that hasn't already been observed. Google shows steady but not spectacular growth in revenues with decreasing margins. Microsoft shows even more modest growth in revenues with flat earnings. Apple growth is moderating from near vertical while earnings pause. Samsung has great growth but there is a similar set of doubts about its sustainability and finally, Amazon continues to grow the top line by 20% and  has nothing to show for it.

Operating margins have mostly fallen with the exception of Samsung whose increasing reliance on smartphones has led to a modest increase, though not nearly to the level of the others. (Amazon, lacking in profits, cannot be compared.)

 

In summary there is little change to report.

Except that it's been reported that in the last quarter Samsung managed to "dethrone" Apple from the phone operating profit crown. This is a matter of estimates and for that we need to understand clearly the assumptions.

I estimate that this is not the case. That indeed Apple remains most profitable phone maker by a wide margin.

To estimate operating margins you need to estimate gross margin and the allocation of operating expenses (SG&A and R&D) to a particular "division" or product line. The problem is that Apple does not operate as a divisional organization so its marketing and R&D budgets (i.e. people) are not assigned permanently. You have to move them around based on whatever is being worked on at any given time.

What's more, we need to account for the huge SG&A costs associated with iTunes and Retail. They both consume vast resources which cannot be allocated directly to any product. There are 41,000 people working in retail.  Also, some of the expenses for iTunes are overhead and cannot be considered cost of sales. That's also SG&A. Then there's corp research and design (Mansfield and Ive), which are not allocated to any particular product. When you slice out these costs, there is very little to apply to iPhone, etc.

So if (and it's a big, sanctimonious if) you want to cast iPhone out as a separate business unit, it would be wildly profitable. There is a huge gross margin of 46% (this assumes a cost per unit of $316) and only another 5% of sales spent on engineering and marketing leaves a 41% operating margin or $7.4 billion. (Why only 5%? Because there's only 10.8% to allocate and after taking out iTunes, Retail you're really only left with 4.49% for SG&A and 3.3% for R&D or 7.79% so 5% is about two thirds of the operating budget).

If you take all of Samsung's IM division which is PCs, Tablets and phones their operating profit was only $5.6 billion.

You can see the difference in the grey areas of operating profit in the first graph above.

Bear in mind that this is still an artificial comparison. The split of profit between product groups is not only an estimate by the analyst, it would be an estimate for Apple itself since it has only one P/L.

Nokia's Windows (Smart)Phone performance was drowned out last week by Microsoft's big announcement of the Surface inventory write-off. They are pieces of the same puzzle however.

First, a look at Nokia.

There were 7.4 million Lumia phones sold in Q2 with 0.5 million sold in the US. Although Windows Phones grew sequentially from 5.6 million the previous quarter, and up from 4.0 million in the same quarter last year, total smartphones are down y/y and nearly flat over the last four quarters. This is of course because Symbian phones have finally disappeared from volume shipments. The following graph shows the history of Nokia's smartphone shipments.

Although it's tempting to compare Lumia to iPhone (given the premium positioning in the US) the average price of €157 or $206 shows that Lumia is more adequately compared to Android. This is about a third of what Apple gets for its iPhones.

That's not necessarily a bad thing. Nokia's always had a knack for mass-market phones and certainly that was one reason Microsoft was attracted to them. Presumably, the promise of the relationship was to insert Windows Phone into the Nokia development and distribution pipeline, squeezing out costs and filling up channels.

The problem for the brand has been that although priced at Android levels, volumes are nowhere near and the gap is widening. At current activation rates, Android is selling 16.5x faster than Windows Phone (assuming 90% of Windows Phones are Lumia).

So Nokia's problems become Microsoft's problems. As bad as Nokia seems to be doing with Lumia, it's doing a lot better than Microsoft with hardware. Here the story of the great Surface write-off should give pause. Microsoft announced that it would write off $900 million of Surface.  In terms of write-offs this is pretty significant. Compare it with the debacle of the PlayBook write-off when BlackBerry (then known as RIM) wrote off $485 million for tablets it could not sell. Or with Microsoft's own write-off for the Kin which took $240 million out of its shareholder's pockets. The only charge for hardware that I found higher was Microsoft's own Xbox 360 which cost it $1 billion for the "red ring of death".

But this is not an unusual situation at Microsoft. Besides Xbox, Kin and Surface, Microsoft also declared victory in (read: shut down) SPOT watches, the Smart Display, Tablet PCs and the Zune. This is why when I heard about the Surface I asked who would be Microsoft's Tim Cook.

By the way, $900 million write-off could amount to over 3 million devices, more if Microsoft is assuming some residual value in the inventory. Misjudging demand to such a degree that more units are disposed of than sold implies a basic failure of understanding of hardware businesses.

Which brings up the question of what Microsoft will do. They are likely to double down on hardware (also signaled by their re-org) simply because in a device world (read: post-PC) the economics of licensing Windows and Office are evaporating. The price points of EULAs simply don't hold and there are good enough alternatives in use by the hundreds of millions of iOS and Android devices out there already. By withholding Office from iOS and Android, Microsoft has shown a billion people that they can live without it and they already knew they could live without Windows.

So rather than fight, Microsoft chose to switch. Switching from software to hardware, however, is proving very hard. I'm sure quite a bit harder than management  thought.

Excluding Motorola, Google's gross margins have dropped for six out of the last nine quarters. They peaked at 65.8% in early 2011 but have now dropped to 60.4%. Including the drag from Motorola they are down to 57%.

Gross margins include the effect of price, volume and direct costs of sales. Although sales have grown (see graph below), the pricing Google has been able to obtain (CPC) has fallen. The cause is unknown but there is a strong correlation between the growth in their mobile channel. For their part, management cites mobile as having an effect in reducing CPC though they caution that it's one of many factors.

 

The elephant in the room is indeed the effect of 900 million activated Android devices (with 1.5 million added each day.) These nominal billion devices are a new channel that could be said to have doubled Google's addressable market in only the last three years. The effect of this doubling is perhaps partly underlying the top line growth shown above.

How can we test this?

I placed Google's performance alongside Microsoft's for a reason. Since Microsoft has had precisely zero benefit from any new mobile channels, and since its software is broadly tied to business spending (as is Google's), we can consider Microsoft as a control in what baseline non-mobile growth could be. From Q2 2010 to the present (the Android epoch), Microsoft's consolidated revenues grew by 24% (31% if we exclude Windows).  In contrast, Google's advertising revenues (excluding Motorola and licensing) have increased by a more robust 83%.

So it's possible that mobile contributed to top line growth. The effect could be 50% over three years. The downside is of course that this comes from a doubling of the channel. The new channel is therefore half as engaging. In terms for bottom line, the effect would be seen as more subdued growth. Overall, income increased 32% for a nominal doubling of usage.

Not that there's anything wrong with that.

Expansion of user base usually comes with lower engagement and margins. I demonstrated the same effect with the vast expansion of iTunes customers.

The only difference seems to be that markets reward Google's margin dilution but punish Apple's.

Put another way, hypothetically, as she spends slightly less, the market value for an Apple user is disappearing while as he spends a lot less, the value placed on a Google user is increasing.

Horace talks about Microsofts reorganization from Divisional to Functional, and the implications on their Windows and Mobile OS roadmaps. In doing so, he and Moisés touch briefly on the subject of last episode, Scott Forstalls ouster from Apple.

via 5by5 | The Critical Path #92: Microsofts Critical Path.

Last week Frank X. Shaw, VP of corporate communications at Microsoft stated:

 ... most of the people around me were using their iPads exactly as they would a laptop – physical keyboard attached, typing away, connected to a network of some kind, creating a document or tweet or blog or article. In that context, it’s hard to distinguish between a tablet and a notebook or laptop. The form factors are different, but let’s be clear, each is a PC.

Actually this "admission" that iPads are PCs is not something new. Steve Ballmer made the same assertion in 2010 pre-iPad (though calling them slates). Arguably, the notion that tablets are PCs has been dogma at Microsoft for over a decade and Windows running on all form factors has been a strategic guiding principle.

Which is why I've always added the tablet data to the PC data to create a picture of the "personal computing" market. And this is what that picture looks like today:

Note how the share of various platforms has evolved over this brief time span:

Seen this way, Windows has now reached 60% market share and it's likely to dip below 50% during this year. What happens beyond then is harder to imagine. If Windows tablets start growing as fast as the tablet market overall then Windows could stabilize in share. But if Android and iOS tablets follow their phone brethren in growth then it will be far harder for Microsoft to maintain share. But is that cause for concern?

Not necessarily.

The total computing market[1] is likely to expand to over 4 billion users with 1.5 devices per user in the next five years. That expansion implies that 20% share equals more than one billion devices, making such an ecosystem "good enough" for the average developer. It certainly has been good enough for Windows developers to date and they have kept hiring it throughout the new mobile app revolution.

So even if Windows dips to only 20% of the world's computing market it will still be perfectly "viable" for some time to come.

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1. I define the computing market as the total number of devices which have (a) a CPU (b) a broadband connection (c) a native application execution environment which is open to third party apps. This definition implies the presence of an "ecosystem" which is bound specifically to a platform.