Shira Ovide reports in Bloomberg:
Microsoft's business shift may be hurting PC sales. In a bid to expand the pool of people ripe for post-sale monetization, Microsoft last year made its latest version of Windows free for many people with older computers. People have been happy to update a laptop with fresh software that made their computers seem like new rather than pony up for a new PC. Free Windows 10 software offers were among reasons to "delay new system purchases in 2015."
Sales of personal computers dropped for the fourth consecutive year in 2015. By one firm's measure, the decline was the worst in the history of the PC business.
In our smartphone- and app-obsessed lives, it’s hardly surprising that personal computers aren’t a growth industry anymore. In many parts of the globe, the mobile phone is the sole computing device. In the developed world, people are happy to stick with old PCs and splurge instead on the latest smartphone or streaming video doodad. Cost-conscious companies don’t feel the need to buy new computers often.
No one can hold back these tides. But it’s not just the smartphone that is killing PCs. It's also diverging business interests among the biggest players in the PC world.
In the decades after Microsoft released Windows in 1985, the company and partners such as Intel, Hewlett-Packard and Dell worked in tandem to refine the modern PC and to sell people on the need for a computer on every desk and in every home. The PC partners didn't always agree, of course, but each wanted to do everything possible to sell more and more computers to increase their revenue. Those interests are less aligned then ever before. Microsoft is trying to change its business model so it can in theory make money even if no one ever buys a new PC again. Meanwhile, Intel and the PC makers still generate sales from each new PC sold and therefore want personal computers to fly off the shelves. And all of the PC companies are trying everything they can to get out of the PC business -- or at least become less dependent on selling computers.
For its part, Microsoft is turning the company inside out to move from making money once when a PC is sold with Windows and Office software to becoming a computing toll collector. Microsoft wants more companies to pay annual fees for the right to keep employees stocked with computers and document software, to handle back-end computing chores like accounting and data storage and to provide technical assistance.
For consumers, Microsoft wants to make money selling Office software subscriptions, Skype video-calling minutes, video games, app downloads and digital ads everywhere there are Windows PCs, Xbox video game systems or Windows smartphones. The company is happy to sell an Office subscription that can be used on iPhones and Android phones, too.
In a pinnacle of corporate speak, Microsoft CEO Satya Nadella has called this approach "post sale monetization." In theory, with this business model Microsoft makes money no matter whether people or businesses buy a Windows PC every year, every five years or never. This ambition is far from reality, but that's the vision he has sold to Wall Street.
Microsoft's business shift may actually be hurting PC sales, at least for now. In a bid to expand the pool of people ripe for post-sale monetization, Microsoft last year made its latest version of Windows free for many people with older computers. Surely some people have been happy to update a home laptop with fresh software that made their computers seem like new rather than pony up for a new PC. Research firm IDC said free Windows 10 software offers were among reasons to "delay new system purchases in 2015." That may be fine for Nadella but less so for his allies.
Executives at Intel and many PC makers have said their interests are aligned with Microsoft's. They, too, are trying to move beyond PCs. But don’t be fooled. Their fortunes, as well as Microsoft's, remain closely tied to PC sales.
Microsoft disclosed last year that it generated roughly $15 billion in annual revenue directly from Windows software, or about 15 percent of the company’s total. That figure undercounts Microsoft’s reliance on the PC because sales of the company’s lucrative Office software are tied closely to PC sales, too. By some estimates, about 80 percent of Microsoft profit comes from Windows, either directly or indirectly.
Intel has diversified into making chips for computer data centers, smart watches, Internet-connected cars and other computing brains that aren’t PCs, but more than half of its net revenue and operating profit still comes from its “client computing group,” which consists mainly of chips for PCs. The biggest PC hardware makers -- Lenovo, HP and Dell -- have broader ambitions to sell business software or corporate technology services, but the mission also leans on PCs as a hook to sell the additional technology.
There are lessons here for companies like Apple, Samsung and Google that have made hay from the smartphone boom. PCs were a great business until the world changed and once-successful companies had to scramble for new money-making ideas. Already some people are urging Apple to shift its business model to sell a collection of software, hardware and services, rather than trying to sell more and more iPhones every year. That is exactly what Microsoft is trying to do now with its Windows franchise. Let the present struggles in PCs be a guide to today's tech winners: No empire is invincible forever, and new business models are inevitable.
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