At the end of October, Microsoft (MSFT)'s Windows 8 operating system will hit the market – and in some ways, this has been a more fiercely fought battle than the presidential election. Everybody has an opinion on the functionality of the new OS, its potential uptake in the PC market, its potential impact on PC sales, etc. – and the debate goes on and on. I think I might be looking at this launch a bit different than some people and would like to run you through my thought process. To start, let's look at what Apple (AAPL) had to say in their most recently 10-K about PC sales:
“Mac net sales were $21.8 billion in 2011, representing an increase of $4.3 billion or 25% compared to 2010. Mac unit sales increased by 3.1 million or 22% in 2011 compared to 2010. The year-over-year growth in Mac net sales and unit sales was due primarily to higher demand in all of the company’s operating segments for MacBook Air and MacBook Pro, which were updated in July 2011 and February 2011, respectively. The year-over-year revenue growth for portables and desktops was 36% and 4%, respectively. Net sales of the company’s Macs accounted for 20% of the company’s total net sales for 2011.”
Some quick math shows that unit sales for 2011 of 17 million (roughly 5% of the global total of about 350 million) were preceded by 2010 unit sales of roughly 14.1 million; for the sake of comparison, let’s assume that every single Mac was sold in the back half of 2010, bringing the 18-month total to 31.1 million units. With that as our back drop, what would be considered a failure for Microsoft with the Windows 8 release? We don’t have to go too far back in history to find what many consider to be an unmitigated disaster by Microsoft: the hated Windows Vista. The OS was released in January 2007 and caught some backlash in a big way – in fact, CNET would end up rating it the “Worst Tech Product of 2007.” Fast forward 18 months, and we get an idea of what a disaster looks like: When the company reported their fiscal 2008 full-year results in July, Microsoft announced that more than 180 million licenses had been sold since the launch.
Thinking about these numbers is instructive – over a similar time period, Vista outsold Mac’s (which naturally come with OS X) at a pace of six-to-one. And remember, when Microsoft was dealing with Vista, they weren’t losing share (at least not in a huge way); they were simply maintaining their current hold on the marketplace among consumers (like myself) who decided to stick with XP. While Steve Ballmer rarely says anything worth quoting, here’s something that he noted in a recent interview worth considering:
“People talk about: ‘How healthy is the PC market?’ There's going to be close to 400 million PCs sold in the next year, which makes it a big market. And whether it's 405 (million) or 395 (million), it's a big market, and Windows 8 will propel that volume.”
I think this alone is the most overlooked point with this product launch: that vast majority of consumers will end up with a Windows 8 laptop, for the simple fact that most people don’t see the rationale in paying two-to-three times as much for a Mac when it has comparable utility.
On the other end of the spectrum in this battle, consider smartphones and tablets – Microsoft has failed to make a dent in those markets, but knows that being a player in these segments moving forward will be critical to their continued growth. Here’s some commentary from Mary Jo Foley of ZDNet, probably the most informed blogger out there on all things Microsoft, when management showed off an early version of Win8 in June 2011 (with bold added for emphasis):
“A day after Microsoft showed off an early version of its user interface for Windows 8 -- and I've actually had a chance to actually see it (via videos and photos) -- I've got mixed feelings.
For tablets, I like the tiled interface that looks like it has taken its cues from Windows Media Center and Windows Phone. I've used the tiled interface on Windows Phone and I think it will be a great way to navigate Windows 8 when installed on a touch-first/touch-centric device.
For PCs, I am not so sure -- especially for legacy PCs, like my two-year-old ASUS thin and light laptop. Why would I put Windows 8 on this non-touch-centric machine… why should the default interface, optimized for gestures and touch, be required on a machine that I never plan to put my grubby fingers on?”
I think the rationale is clear as day – for all intensive purposes, Microsoft doesn’t need to worry about the PC market: Windows 8 will sell on computers, and in a big way, regardless of its perception among techies (when I say big, I mean in comparison to any non-MSFT alternative). Microsoft is pushing this OS on consumers in the hope that the lure of familiarity (over time) and connectivity among devices will be enough to lure their faithful desktop base of more than 1 billion people into the world of smartphones and tablets (where the OS has received accolades) – and in my mind, this is all that matters.
Personally, I will be tracking Win8 tablet and smartphone adoption more than anything else, because I believe PC uptake is to some extent little more than noise – when people look to replace their computers, the vast majority will continue to turn to Microsoft (maybe to Windows 7, but still to Microsoft), and money will flow back to Redmond. Foley’s mixed feelings (which happened to be shared by many others) are just fine – as long as consumers and enterprises are attracted to the OS on phones and tablets, my belief is that Windows 8 will prove to be a success in sustaining Microsoft’s dominance over time, and the stock will respond in a big way as this plays out over the coming years.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with a handful of positions accounting for the majority of the total. From the perspective of a businessman, I believe this is sufficient diversification.