Microsoft’s marketshare problem

Paul Thurott throws a stone through Philip Elmer DeWitt’s chart comparing iPad and netbooks sales growth. Thurott rightfully points out that netbook sales growth may be declining but may have nothing to do with the iPad – higher priced notebooks with Windows 7 has been selling well and may have contributed to the decline in netbook sales as well. Here’s a larger point about this: it doesn’t matter. Microsoft’s entire revenue strategy is built around the marketshare moat that it has created around Windows and having to frequently refill the water in the moat.

The marketshare problem is so bad that every counter argument from Redmond to the threat poised by Google or Apple has been. Witness Ballmer relentlessly deriding Apple’s market share when the topic comes up.

Joe Wilcox: Ballmer dismissed Mac shipments of “10 million” units a year as being meaningless. He described Mac market share gains as “a rounding error.” Ballmer emphasized: “Apple’s share globally cost us nothing.”

TMO: “The truth of the matter is we do quite well, even among college students. Do we have an opportunity for improvement? We do. Some of that is marketing, some of that is phase of life. Ninety-six times out of 100, people choose a PC with Windows,” Mr. Ballmer responded. “Mac has picked up a couple of tenths of a percent of market share last year. But every tenths of a percent matters.”

ZDNET: Ballmer: Would I trade 96% of the market for 4% of the market? (Laughter.) I want to have products that appeal to everybody. Now we’ll get a chance to go through this again in phones and music players. There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.

9To5Mac: Ballmer: The most successful [IE competitor] by far is Firefox. Chrome is a rounding error to date. Safari is a rounding error to date. But Firefox is not. The fact that there’s a lot of competitors probably is to our advantage. Yeah, we’re right now about 74 percent overall with the browser market, roughly speaking. But we’re having to compete like heck with IE 8, with great new features.

The biggest part of this that Microsoft gets its marketshare for free (almost). It forces its partners to push pricepoints while keeping its own margins high, take HP as an example. Despite having had a history of unique offerings (HP-UX, Apollo), they are completely dependent on Microsoft and even worse, thanks to Microsoft, have been pushed into competing on price to preserve their own market share. It’s cushy for Microsoft that everyone works on their behalf but not everyone enjoys the margins – despite falling PC prices, Microsoft has raised its licensing cost. The average netbook price is $300 – and Microsoft’s license cost is 12-15%!

Jon Gruber made a point about why Microsoft’s licensing scheme as become a burden:

It’s not just that Apple is different among computer makers. It’s that Apple is the only one that even can be different, because it’s the only one that has its own OS. Part of the industry-wide herd mentality is an assumption that no one else can make a computer OS — that anyone can make a computer but only Microsoft can make an OS. It should be embarrassing to companies like Dell and Sony, with deep pockets and strong brand names, that they’re stuck selling computers with the same copy of Windows installed as the no-name brands.

Things are afoot – HP seems to have realized this and apparently going down a different route (even though rumors of a webOS tablet in Q3 are wildly optimistic). Dell seems to be doing the same. Microsoft has completely lost the ability to rope in new users or new products to replace aging castles. As of today, Microsoft’s mobile strategy is a mess. For all their bluster, they are still heavily dependent on client software (though that doesn’t stop Ballmer for making fun of Google’s single source of revenue). And while that franchise is stable it’s not growing because it can’t: Thurott can crow all night long about 100 million Windows 7 copies sold but how many of the 100 million Windows 7 users are new? And how is Microsoft going to overcome 25% OS piracy in Russia? 63% in India or is it 68%? 80% in China. Is the base increasing or just sticking around?

In contrast, Apple is not only deepening their penetration with their existing base but it is ripping a Texas to Canada 12 lane highway sized hole into new markets: 51 million iPhones and 1 million iPads worth (so far). And there’s nothing Microsoft can do except throw the same marketshare argument. Apple can afford to lose  market share because they don’t have much of it anyway (at least in the global market), but Microsoft cannot afford to lose even half of one percent without taking a substantial financial hit.

Here’s a final thought: in recent visits to Apple stores, I noticed that the iPad display tables were dominated by kids. Families, irrespective of whether they own Windows or Macs, are going to get these machines for home use. In twenty years, you are going to five times the number of people running around saying that they were inspired by the iPad to get into technology or science or business as there are folks today who claim that they were excited about computer science because their parents brought home an Apple II or a Mac. And that’s worth a lot more than just market share.