Yesterday IDC released their quarterly report on tablet shipments, and the report underscores the urgent need for adjustments in business strategy by both Apple (AAPL) and Microsoft (MSFT). First let's look at Apple.
Apple: iPad Market Share Declines
IDC's data showed that Apple was still number one in unit shipments, as the report simply reproduced the iPad shipments data of 19.48 million Apple had reported in its Q1 2013 earnings report, so no surprises. With healthy year over year growth of 65% for the quarter, what's to worry about? Apple's problem is the decline in market share from 58.1% in Q1 2012 to 39.6% in Q1 2013, the first time that iPad hasn't commanded a majority of the market. Android OS tablet shipments exploded by 247.5% year over year, to command 56.7% market share in 2013.
Judging by the comments I received on my previous post, I realize that there are many Apple devotees who, passionate in their admiration for Apple and its products, are entirely unconcerned about Apple's market share. As an Apple investor and technology business analyst, I feel it's incumbent upon me to take a more dispassionate view about Apple's future. The trend here is perfectly obvious, and it's not good for Apple or its investors. The tablet market overall grew by 142.4%, according to IDC. If you're not at least keeping up with the market, you're falling behind, and Apple is falling behind.
Does market share even matter? I'm sure there are Apple supporters who couldn't care less about market share. Those of us who remember that Apple was almost forced out of business by being overwhelmed by commodity Windows PCs in the mid-90s are necessarily less sanguine. This was one of the first examples of a tech business ecosystem collapse, as the larger Windows ecosystem drained off users, software developers, hardware developers, and institutional interest and support. The process becomes a vicious circle, where, as the ecosystem shrinks, it becomes less attractive to new users, thereby accelerating the collapse.
The mobile device wars have been called by Stephen Elop, CEO of Nokia (NOK) and ex-Microsoft (MSFT) exec, a "war of ecosystems," and he's absolutely right. The operant term here is "war," because it's not just about making money, it's about survival for the respective ecosystems. The three major ecosystems are led by the providers of the mobile operating systems: Apple, Google (GOOG), and Microsoft. Each of these companies has created kieretsu of associated hardware and software suppliers, accessory makers, and app developers who depend on the success of their respective ecosystems.
One of the things I've realized as a writer about the technology industry is how little communication there is between the Microsoft and Apple ecosystems. So it may come as a surprise to those Apple supporters that it's virtually assumed in the Windows world that Apple will inevitably be overwhelmed again by commodity mobile devices.
I consider this perception of inevitability to be a myth, however, one that I was attempting to debunk in my article "What Tim Cook Must do to Turn Apple Around". This myth rests on a flawed assumption that Apple is fundamentally cost disadvantaged relative to its commodity rivals. As I showed in my article, that isn't the case. As a result of outsourcing, and the pioneering work Tim Cook did in supply chain management, which will serve as a textbook example for years to come, Apple is quite cost-competitive with Samsung (GM:SSNLF) while enjoying the advantages of its distinctive brand and reputation for quality.
While I don't regard the collapse of the iOS ecosystem as inevitable, I do accept that it's entirely possible, if Apple's market shares in smart phones and tablets continue to erode. Reversal of market share loss is the key aspect of the turnaround that Tim Cook still needs to accomplish. If Cook doesn't achieve this by the end of the year, I believe his successor will, which is why I'm taking a very long view of Apple. But it could take until the end of the year to see progress on the market share front, which is why I expect Apple shares not to move significantly upward until the fall. Cook promised some new products by the fall in the Q1 conference call, and Apple investors will find encouragement there.
Microsoft: Progress and Setbacks
Microsoft has taken a two-pronged approach to creating a mobile device ecosystem to rival iOS. On the one hand, MS has created variants of Windows 8 for ARM processor based devices, Windows RT and Windows Phone 8, analogous to what Apple did in creating iOS based on Mac OS for the ARM-based iPhone and iPad. Microsoft has gone a step further in converting its main Intel OS into the mobile capable Windows 8, spawning a new category of Intel touch screen devices and tablets. IDC's data shows that Windows RT is faltering, having sold only 200,000 tablets in the quarter, down from 900,000 in Q4.
I've been predicting that Windows 8 tablets, especially the Surface Pro, would cannibalize Windows RT tablets, and IDC's data substantiates this. Windows 8 tablets outsold RT by a factor of 8 at 1.6 million units, despite being pricier and heavier. The reason is that the value proposition for Windows users is simply more compelling for a Windows 8 tablet. Windows 8 affords users the ability to run Windows 7 software, so it taps into the ready made Windows 7 ecosystem, whereas Windows RT has little to offer in terms of apps compared to the larger more developed iOS and Android ecosystems.
In my article "Is Windows 8 a Success?", I called Windows RT a misstep for Microsoft, and I think the IDC data confirms that RT is withering away. Microsoft supporters and investors should not overly mourn its passing. The arrival of "Haswell" fourth generation Intel Core processors are expected to make Intel tablets such as the Surface Pro about as light and power efficient as the Surface RT. Meanwhile, Intel is also set to unleash "Bay Trail" Atom processors built on Intel's most advanced 22 nm process, and these should enable ultra-light, thin tablets comparable to iPad.
One has the feeling that the whole Windows on ARM initiative that Microsoft announced with much fanfare at CES in 2011 is simply being overtaken by events. The raison d'etre for Windows on ARM is simply going away as Intel fields competitive mobile processors. I doubt that Windows RT will survive the year.
With the demise of Windows RT, this leaves MS with the problem of what to do with Windows Phone. Windows Phone market share is growing in the U.S., according to a Kantar WorldPanel study, and now stands at 5.6% for Q1. Microsoft can't afford to ditch Windows Phone, but there's much to be said for ditching ARM for Intel. Using an Intel processor would provide a truly unified processing platform that would make developing for Windows 8 more attractive to developers.
My main concern about MS from an investor's standpoint is how long it will take MS management to make course corrections on its Windows on ARM initiatives, both tablet and phone. There's some negative blowback to pulling the plug on ARM for tablets and phones, since it would tend to leave consumers of current Windows RT and Windows 8 Phone devices out in the cold with dead-end platforms. My expectation is that MS will pull the plug on RT by the end of the year, but soldier on with Windows Phone on ARM through the holiday season, then take stock of the situation in early 2014.
As I stated in "Is Windows 8 a Success?", I expect MS shares to trade roughly flat through the summer, but not be overly impacted by the demise of RT in the fall, as MS investors take heart in growing sales of Windows 8 Haswell tablets in Q4. In Q4, I expect MS' share price to ramp up 5-10%.