Windows

The Mac grew at the extremely low rate of 1.8% over last year's second quarter. Although it grew faster than the Windows PC market, the gap has narrowed quite a bit. The following graph shows the growth of the two members of the computing Ancien Régime.

We have to wait a few more quarters before we can decide whether the Mac will enter a new phase of diminished expectations. Although it's not immune from the impact of the iPad, the effect can take a long time to be evident and in either case, growth can come from conversion of Windows users which vastly outnumber loyal Mac users who might upgrade.

If we see the computing market as the superset of keyboard+mouse input and touch-based input then new computing consumption becomes easier to spot:

Seen this way, rather than there being a crisis in personal computing, we have a renaissance. And as in the actual Renaissance, it's a volatile and unsettling period.

Nowhere more so than in the changing of bases of power. Consider the following data:

A change in perspective leads one to conclude that Apple is the new leader in selling personal computers. Maybe this charting is putting too fine a point on it, but the data is beginning to make evident that which has been perceived subjectively by only a few.

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.

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.

As previously noted, Apple has overtaken Microsoft (and Google) in operating margin percentage. This is an astonishing statistic as Apple is still largely perceived to be a "hardware company" while Microsoft is a "software company" and Google is a "services company."

To suggest that "hardware" could be more operationally profitable than either software or services is akin to heresy in technology analysis. This reversal is newsworthy indeed. However, even the most casual observer would note that Apple does not derive its market power from hardware alone. It is, in fact, an integrated hardware, software and services company (with a few more roles besides.)

So the emergent successful business architecture in this technologically transitional period is of integration and completeness of solutions.

This shift explains at least at a conceptual level Microsoft's tectonic Surface shift.

But what about another point of view? What does integration mean for Microsoft's income, cost and profit structure? Is integration self-disruptive to Microsoft?

Here's a reminder of Microsoft's revenues and operating income by division:

The challenge of devices for Microsoft is that the licensing of software for devices is very difficult to sell.

In 2011 Microsoft received about $18.7 billion in Windows revenues and $23 billion in Office revenues. The chart shows that this is a fairly steady growth business. According to Gartner, in 2011 there were about 336 million Windows PCs sold and that this too is a fairly stable and mature business.

If we simply divide revenues by PCs sold we get about $55 Windows revenues per PC and $68 of Office revenues per PC sold [1]. The total income for Microsoft per PC sold is therefore about $123. If we divide operating income by PCs as well we get $35 per Windows license and $43 per Office license. That's a total of $78 of operating profit per PC.

Now let's think about a post-PC future exemplified by the iPad. Apple sells the iPad with a nearly 33% margin but at a higher average price than Microsoft's software bundle. Apple gives away the software (and apps are very cheap) but it still gains $195 in operating profit per iPad sold.

Fine, you say, but Microsoft make up for it in volume. Well, that's a problem. The tablet volumes are expanding very quickly and are on track to overtake traditional PCs while traditional PCs are likely to be disrupted and decline.

So Microsoft faces a dilemma. Their business model of expensive software on cheap hardware is not sustainable. The future is nearly free software integrated into moderately priced hardware.

For Microsoft to maintain their profitability, they have to find a way of obtaining $80 of profit per device. Under the current structure, device makers will not pay $55 per Windows license per device and users will not spend $68 per Office bundle per tablet. Price competition with Android tablets which have no software licensing costs and with iPad which has very cheap software means that a $300 tablet with a $68 software bill will not be competitive or profitable.

However, if Microsoft can sell a $400 (on average) device bundled with its software, and is able to get 20% margins then Microsoft is back to its $80 profit per device sold. This, I believe, is a large part of the practical motivation behind the Surface product.

The challenge for Microsoft therefore becomes to build hundreds of millions of these devices. Every year. Sounds like they need a Tim Cook to run it.

---

Notes:

1. Microsoft accounts for revenues using deferrals due to Software Assurance pre-payment models for many corporate customers so this figure is not a precise value for each license sold.

 

The history of personal computing has come to be defined as the history of Microsoft. At least since 1981 Microsoft's operating systems have been the consistent market share leaders, and by a very large margin. That is about to change. This year Android will be on more devices sold than Windows. iOS is also set to also overtake Windows next year. The following chart illustrates the wave of mobile platforms that has emerged, and in spite of some notable failures, is overtaking traditional computing.

Of course we should remember that PC themselves overtook entrenched predecessors like minicomputers and mainframes which themselves overtook business computing systems based on adding machines, typewriters and slide rules. This is the cycle of disruption and there is nothing new about it.

However, it always seems to take people by surprise. This is because it happens in unforeseen ways and at unpredictable rates. And so it is that we are surprised by Microsoft's seeming abandonment of a business model that has sustained it for three decades.

Yesterday's reveal of Surface, Microsoft's first personal computer, was a watershed event in the evolution of value chains around computing. In a famous slide Clay Christensen illustrated (in 2004) the value chain evolution in computing from the 1960s to 2000.

As computing moved from the desktop to the pocket the industry re-integrated. First, Apple moved from Product Design into Sales & Distribution with its stores. Then it moved into service with Genius bar. Then it moved into component design with the A series chips and unique batteries. Then it moved into materials with exclusive licensing of LiquidMetal. It also began to own the equipment used in its manufacturing. This in addition owning the operating system.

Now we see Microsoft following in the same footsteps. First applications came early then stores, then service, and now product design. Google is also tracking closely behind as well with its acquisition of Motorola, the results of which have yet to be revealed.

And so we can see value chains evolving in real time before our very eyes. They have always evolved but in technology industries they evolve far more rapidly and will continue to accelerate.

Whether Microsoft or Google will be successful in their integration efforts remains to be seen. The challenges are immense as the value of the existing chains are enormous and the bonds that tie the company to them very strong. Breaking these ties will seem like value destruction and corporate antibodies will be set loose to kill the transitions. HP, RIM, Nokia and Dell are vivid examples of what happens when the response mechanisms have their way.

My thanks to Bruno Ferrari of Exame magazine Brazil for asking the following questions. My answers were written two weeks ago on April 2nd.

Based on financial data of the first fiscal quarter, it is possible to confirm that 2012 will be the best year in Apple's history?

Actually, it's possible to confirm without looking at first quarter data. Every business line Apple has except the iPod is growing and is likely to keep growing during this year. That means that sales will increase over 2011, which was Apple's biggest year. You can see historic sales growth data here:

 What are your predictions for the second fiscal quarter?

I published my predictions here.

The iPhone number seems to be higher than consensus. It's aggressive but I'm basing my opinion on the launch of the iPhone 4S in China and the Chinese New Year and new carrier agreement there. Also the iPad will do quite well.

Do you think Apple will hold the iPhone 5 launch to September in order to open 2013 with an extraordinary result?

The next iPhone will launch between June and September. It might be earlier due to the 4S being the "wide end of the egg". Think of the iPhone as an egg rolling down the hill. There is a sharp end and a wide end and the speed of rolling depends on which end is down.

Besides the iPhone 5, which products that Apple could announce in 2012 you think may help them to maintain this extraordinary growth?

I think the iPhone is becoming more predictable. What I'm more curious about is what they will do with the iPod. Apple takes its brands seriously. I am watching the iMac, MacBook and iPod for clues of a re-fresh or replacement as they have aged.

Do you think we will see the “iTv”? Do you think it could be “the next iPad” of technology market?

Apple TV is in waiting mode. It's like an airplane circling, waiting to land. Something will happen but not sure when. Fundamentally, the opportunities are still there but the entertainment industry is very complex. The more complicated it is the more necessary for an entrant is to create a parallel version of it. That takes time.

The building blocks are all there however. See additional thoughts here.

If we analyze the growth of Apple in recent years, it is supported by the launch of new products, especially the iPhone and the iPad. Do you think Apple can lower your rate of growth in coming years since we don’t see in its roadmap new innovative products like a new smartphone or a new iPad?

New products created new growth but iterations of those products also created and will continue to create growth. Of all of Apple's products only one product is not growing today, the iPod. And that is after 10 years in the market and with a "dominant" market share. In addition, Apple has a lot of room to expand internationally and into enterprise and professional sectors.

I do agree that 100% growth is hard to maintain without new products. I believe there might be a few products still waiting for launch. TV is one area (along with game-based entertainment). New user interfaces might be enabling new categories of products. Intelligent assistance and companionship are open problems that software can solve but which have not been productized.

When do you think we’ll stop to see Job’s legacy in Apple new products. And what then?

Jobs' legacy is not in specific products but in how products are built. He also taught the importance of putting products first and markets second (this is, at its base, an artistic principle, not a commercial one). I think that legacy can last forever, if managed properly.

How do you analyze the dividends pay and the buyback made this month?

I wrote some thoughts about it here. I believe the impact will be mostly psychological for investors.

And finally, I was reading at Asymco some analysis of Apple’s share price. Do you think $600 is enough? Do you think in a 1 trillion dollars company in 2014 as some analysts are saying?

The share price depends on the psychology of people. I like to say that Apple is the same exact company today as the one that was priced at $78/share three years ago. When I look out the window of my office I see the same view year-to-year. When I look on my computer screen at Apple's financials I also see the same view year-to-year. I don't know how people can see Apple differently one year to the next. To me it's like looking out the window and seeing mountains instead of the sea.

But this is how markets behave. I can't say what the price will be. It may be $1000 or it may be zero. But the company will not change in either case. It won't change because it does not need to change.

The following charts show Google and Microsoft revenues and operating income:

Both companies showed healthy growth. Revenues: Microsoft 6%, Google 24%. Operating Income: Microsoft 12%, Google 48%. Google had a particularly weak margin Q1 2011 so its income growth appears very strong.

The surprise in Microsoft's performance was the 4.8% increase in Windows revenue at a time when PC sales were expected to be declining or flat. Final PC numbers are not yet out so we'll have to check back on this figure to see whether Microsoft has been able to get higher pricing for Windows or whether the market did expand. (Average revenues per PC sold have been quite steady for years). Overall, Microsoft's business shows consistency. Of course, that should not be cause for comfort. Nokia had remarkable consistency until it jumped from a burning platform and RIM grew more rapidly until its platform imploded.

As Google still obtains 96% of its income from advertising, it's quite remarkable that it is now at 61% of Microsoft's revenues. Google is also growing more rapidly than Microsoft so the possibility exists that the top ad service will overtake the top software company in revenue, establishing a new benchmark for how software can be monetized.

The curious thing about both of these companies' financial performance is that mobility does not appear to have had any impact on either top or bottom lines[1].  There is no business division or income statement line that can be attached to mobile revenues. Microsoft placed Windows Phone under Entertainment and Devices but that division is dominated by Xbox and accessories. Google bundles everything under Advertising and has never broken out mobile, much less Android-derived income.

The surge in valuation for mobile-focused startups seems to leave investors in both these companies unaffected. The damnation for both companies lies in mobility being non-core businesses whose strategies center on reaction and defense.

---

Notes:

1. Google does not answer specific questions about the impact of mobile on their business but they do acknowledge that there are traffic acquisition costs (TAC) associated with OEMs and Carriers who deploy Android. This means that there are costs of mobile sales (i.e. Search) but not to any measure of specific value.

In terms of platforms, IDC expects a relatively dramatic shift between 2011 and 2016, with the once-dominant Windows on x86 platform, consisting of PCs running the Windows operating system on any x86-compatible CPU, slipping from a leading 35.9% share in 2011 down to 25.1% in 2016. The number of Android-based devices running on ARM CPUs, on the other hand, will grow modestly from 29.4% share in 2011 to a market-leading 31.1% share in 2016. Meanwhile, iOS-based devices will grow from 14.6% share in 2011 to 17.3% in 2016.

Via: IDC - Press Release - prUS23398412

The company provides a stacked bar chart (follow link above) to illustrate their view of the market. I took the data they included and measured the implied growth rates for the product categories:

IDC is implying that in four years the tablet market will be growing at 10%, the Smartphone market will grow at 11% and the PC category will grow at 11%. In other words, five years from now the PC market is expected to grow faster than the tablet market and just as fast as the smartphone market!

What's more remarkable is that this situation is not going to happen in four years. The slowdown in growth is actually expected much sooner. The growth rates two years from now are expected to be: Tablets 17%, Smartphones 15% and PC 10%. IDC is unequivocal: by 2014 the good times will come to an end to the post-PC challengers. These growth rates would be catastrophic for share prices and the value propositions of the new platforms to developers, partners and consumers.

What's more, these growth rates are striking not only because they predict a collapse in the value of most market challengers but that they also predict a strongly resilient PC market. How can we test this forecast?

I tried to reconcile this doomsday scenario with what is known about the components making up the data. I.e. what "bottom-up" data is IDC using? In the quote above, IDC offers some insight into this market participant data. Based on the category and share data they published it's possible to infer the following:

Bearing in mind that neither iOS nor Android existed five years ago, we can observe they are bigger together than the PC market. And yet, IDC predicts a compounded average yearly growth rate of 16.7% in Android, 19.4% in iOS and 7.5% in Windows between today and 2016.

In aggregate, IDC forecasts that in the next five years Android will not manage to double and that iOS will only increase by a factor of 2.4. Is this believable?

I try to stay away from long term forecasts, but I do maintain a short term forecast based on recent growth data. My forecasts for this year and next year are shown below.

I super-imposed my short-term forecast (outline bars) on IDC's long term forecast (solid bars) and a several differences become apparent.

First, my 2013 forecast is nearly the same as IDC's 2016 forecast. To see why we need to look at each platform separately.

Perhaps we might (with difficulty) agree on Microsoft's potential. I believe Windows 8 will have a catalyzing effect and that Microsoft will begin to see its platform grow again. However, my expectations are modest. To increase Windows sales rate by 100 million units/yr between 2013 and 2016 is possible but ambitious.

The real problem is that our Android and iOS forecasts are outside any zone of possible agreement. Maybe there is a difference in what we measure. For a hint, we seem to disagree on the number of Android devices shipped in 2011. I used Google's own reports of activations to work out the yearly shipment estimates. Perhaps IDC is including versions of Android that are not Google sanctioned.

We also disagree on the 2011 iOS figures. I obtained 156 from Apple's own reports. Again, perhaps the difference is the inclusion of the iPod in my case.

Nevertheless, the difference in the long term cannot be accounted for only through these categorization differences. I would put the cause of the difference down to the methods used in forecasting. As can be seen from the first chart above, IDC's growth rate reductions are extraordinarily steep. Perhaps the approach used by IDC was to forecast the overall market growth and then assignment of shares to participants. This can be called the "top-down" approach. In contrast, my approach is to forecast growth rates based on recent growth rates and moderating these rates gradually. This can be called the "bottom-up" approach.

My experience and all the data I've ever collected about historic disruptions tell me that the entrants tend to win these types of paradigm shifts. They win through a vast expansion of consumption and the recruitment of non-consumers. Markets tend to experience vast shifts in composition. If we believe this to be true then the bottom-up approach focused on entrants is likely to be more effective vis-a-vis the top-down approach of projecting steady state markets and the implicit assumption of incumbent share preservation.

I truly believe, and many others in the company believe, that there will come a day that the tablet market in units is larger than the PC market.

Tim Cook Discusses Q1 2012 Results - Earnings Call Transcript - Seeking Alpha

Question is when?

I began by projecting growth rates of various market participants including the leading Windows PC makers (HP, Acer, Dell, Lenovo and Asus), the combined "others" and the Mac. I also added the iPad, Samsung's tablets, other Google sanctioned Android tablets and Amazon. I also projected a split between traditional and tablet Windows shipments.

The underlying assumptions are:

1. Mac growth continues at 25% as it has on average for a few years
2. Windows grows slightly in 2012 with the introduction of Windows 8 late in the year. However I anticipate Windows 8, including tablet versions, to mostly be upgrades with slow enterprise take-up within this time frame.
3. The tablet versions of Windows begin shipping in Q4 2012 with 7% of total Windows shipped. The ratio reaches 20% by end of 2013.
4. iPad growth will flatten for '12 and '13 at 100%, similar to iPhone's historic performance.
5. Android tablet growth will be significant in the current year and follow iPad growth pattern though settling at 80% during '13.
6. Amazon growth will be approximately 80%.

Building the platforms combined growth bottom-up gives the following forecast for the next two years (and historic growth shown for perspective.)

[FF = form factor]

Given these assumptions, the day when the tablet market (by units) will exceed that of traditional PCs will come sometime in the fall of 2013.

As yesterday's post noted, the tablet market will be additive. This can be seen in the vendor shipments forecast that accompanies the model:

In January I noted that there were more iPads sold by Apple than PCs from HP, the largest PC vendor in the fourth quarter. Including all tablets, this is the distribution of market shares by units shipped.

Note the different color palettes for Windows and non-Windows.

By the metric of tablets+PC's Apple appears to be the leading vendor. However, if we consider only the Mac, Apple is still well behind. The historic unit volumes of the two is shown below:

Although Apple has nearly doubled its shipment volumes since 2008, it's still only one third that of HP. In addition to comparing volumes, we can also measure profitability. In this case HP's PSG (Personal Systems Group) reports operating profits and we can estimate the same from Apple based on a gross margin estimate and an operating expense estimate (as percent of sales).

The comparison looks like this:

The operating profit for Apple is 2.7 times higher from a third the units. This gap is a result of a vast difference in profitability. HP's operating margin for PCs is 5% while Apple's is 21%.

A few days ago I highlighted that Apple's iPhone yields disproportionate profits because of the way it performs the jobs its hired to do by consumers and operators.

With the Mac the story is that Apple's OS X is primarily responsible for delivering quadruple hardware margins vis-a-vis the most successful PC vendor.

Both iPhones and Macs are sold as hardware products and the entire econometric analysis of Apple depends on hardware cost structures. This is because hardware lends itself to easy measurement. However, a casual observer would be stumped by a comparison with competitors which cannot come near the profitability Apple enjoys. How can the same bundle of components (admittedly mostly off-the-shelf) be sold at triple the margins?

It comes down to software. Apple has a monopoly on iOS and OS X and charges for it through its hardware. That's a very valuable monopoly. It's worth at least $1 billion per quarter.