For Microsoft, Apple Is the Elephant in the OS Room

by: Larry Dignan April 25, 2008 | about stocks: AAPL / MSFT    

Larry Dignan

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Are all of those Apple OS X vs. Vista commercials making an impact? Microsoft’s (MSFT) client revenue–Vista and XP came in below expectations–and the company cited three primary reasons: A tough comparison from year ago levels, OEM inventory build and piracy. But the elephant on the conference call may have been Apple (AAPL) and its Mac.

Microsoft’s three reasons for the client malaise are all legitimate. What’s curious is that piracy–always a big deal for Microsoft–was mentioned 12 times on the conference call by CFO Christopher Liddell and analysts, who were following the software giant’s lead. The takeaway: Microsoft is facing tough growth comparisons and any blip in piracy levels can be the difference between Vista and XP hitting Wall Street targets. If Microsoft didn’t need that extra percent of growth or two it’s unlikely we’d get a conference call where piracy chatter was dominant.

But let’s dig deeper: Could it be that the real elephant in the room was Apple? Let’s be real: Apple isn’t taking over operating system dominance, but it is growing fast enough to take away a few incremental dollars from Microsoft.

Pacific Crest analyst Brendan Barnicle connects a few dots in a research report:

Microsoft provided three explanations for the shortfall in Client revenue. First, that the OEM channel had built inventory ahead of the Vista launch last year, which drove 20% unit growth last year and made for a difficult comparison; second, that inventories at OEMs were higher than normal after fiscal Q2 (Dec.), which resulted in less OEM demand in the current quarter; and third, that it experienced higher piracy rates in Asia in the quarter.

While we cannot confirm the piracy rates, we have looked into inventory levels at the OEMs, and the Pacific Crest hardware analysts do not believe that the OEMs built inventories a year ago or in the last quarter. Microsoft’s first two explanations are not consistent with our hardware analysis.

Microsoft’s Client revenue results are also inconsistent with results from Intel and elsewhere in the PC supply chain. Apple, however, could provide an explanation for the shortfall, if it is taking market share. Microsoft certainly did not admit to losing share to Apple, but the most recent NPD data, which is provided below, suggest that there could be some share shift from Microsoft to Apple.

Anecdotally, Barnicle is on to something.

Consider the monthly NPD stats for the first quarter.

Now contrast that with what Apple CFO Peter Oppenheimer had to say about Mac growth. Apple shipped 2.29 million Macs in its March quarter, a tally that was well ahead of expectations.

Oppenheimer noted:

We are extremely pleased to have shipped 2.29 million Macs, just shy of the record number of Macs we sold this past holiday quarter and representing 51% growth over the prior March quarter’s results.

This is a 3.5 times the overall PC market rate of growth for the March quarter based on the latest forecast published by IDC, up from the 2 to 3 times market growth rate we have been reporting almost every quarter for the last three years.

Sales of desktops grew 37%, driven by strong demand for the iMac, as well as increased sales of Mac Pro, which we updated in January.

Sales of portables grew 61%, driven by continued strong demand for Macbook and Macbook Pros, both of which were refreshed during the quarter, as well as the successful launch of the Macbook Air. Macbook Air represents a new portable category for Apple and customers have responded very well to its breakthrough design and ultra portability.

Every one of those Macs were most likely sold at the expense of a new Windows machine.

Barnicle goes out another limb and argues that Apple is even taking away a little enterprise share. He writes:

In our Pacific Crest Mosaic surveys, we have seen increasing evidence of Apple taking share in the enterprise market. While Apple is not the only reason for the Microsoft Client shortfall, it seems plausible that it could be a larger factor than acknowledged by Microsoft. As a result, we are somewhat skeptical of Microsoft’s assumption that its Client revenue will snap back next quarter.

Barnicle’s take has some merit. Oppenheimer noted that a third of the Fortune 500 was signed up for the iPhone enterprise beta program. If these folks are interested in the iPhone chances are good that they aren’t averse to bring Macs into their IT shops.

Meanwhile, Apple activity has been picking up on our sister site TechRepublic, a community of IT professionals. Consider the following:

  • Between 2000 and 2005, TR members made 97 forum posts that contained “Apple”.
  • In 2006 that number skyrocketed to 62-a 220 percent to increase over a 19.4-post average for the period between 2000-2005.
  • In 2007, there were 108 posts TR-a 74 percent jump.
  • In 2008, that 2007 figure is likely to be eclipsed.

TR’s audience is comprised of the folks that actually implement stuff. It’s not the fanboy crowd. One sample response from an IT exec:

I started out as a Windows/Novell man, but now I advocate for Mac purchases and make them as much as I can. Two main reasons I do this: 1) on the whole, they require less time to support, much less time, actually, because the OS runs better and there are fewer malware concerns; 2) I practice the philosophy of keeping it simple. Mac software is easy to use and, more importantly, easy to teach to my IT employees. Macs and their server software are quite sophisticated, really, but I think back how many times did I actually try to make some kind of circus-like trust-object-hulahoop-like security rights in Novell? Maybe once or twice in 10 years.

Rest assured that the Apple quote was buffeted by a bunch of Windows supporters, as is often the case on ZDNet. But those pro-Mac comments are becoming increasingly common among IT types. It remains to be seen whether Apple can be a real enterprise player, but it doesn’t have to do much to be a thorn in Microsoft’s side. All Apple has to do is nibble and it will be harder for Microsoft to hit its client revenue growth targets–especially against tough comparisons.

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This article has 21 comments:

  •  
    Apr 25 10:36 AM
    Odd that linux wasn't even mentioned once...
    Reply | Link to Comment
  •  
    Apr 25 10:38 AM
    In the short term, MSFT gets a "cushion"; many Mac users in business may choose to dual-boot copies of Vista or XP, to run those old COBOL or DOS-based vertical market relics your accounting dept. might insist on.
    Reply | Link to Comment
  •  
    Apr 25 11:13 AM
    Apple has finally learned how much of a premium (not much) their stuff can really command plus they really have something with the MacBook Air. I have used NT based OS's since the Beta program for Windows NT 3.0. Vista is such a travesty that my next purchase will almost certainly be a Mac of some sort. Worse, my latest HP machine will only run Vista, so they are losing my business as well. Windows machines made sense (even with all the warts) when they were half the price of a marginally better Mac. Now with better (technically and compatibility) and relatively less expensive Mac's, Microsoft only has its inertia going for it.
    Reply | Link to Comment
  •  
    Apr 25 11:55 AM
    How could the reason be any other? Isn't it a no-brainer that each first time Mac buyer (50% of sales according to Apple) would have had an existing PC? What is it thought these folks new to the Apple brand previously had in their dens - Commodore's?
    Reply | Link to Comment
  •  
    Apr 25 12:00 PM
    Mac definitely made inroads lately. Will it stick? In the home computer world, definitely. I know several people who switched to Mac lately, they are not going back. But Linux is a factor too. Why else MS would specifically allow XP for Asus Eee? Because Eee is a huge success and it sold with Linux. Same goes for OLPC. Vista might be a killer of Microsoft. Well, all empires on Earth died of self-inflicted wounds...
    Reply | Link to Comment
  •  
    Apr 25 12:06 PM
    When do we get to see MSFT start rolling out enterprise software for OSX? What's the tipping point in terms of AAPL penetration of the enterprise market?

    My smallish (60 employees) company is wed to Wintel because of the software apps. Several senior managers and half the sales force are using Macs and emulating XP only to communicate with the server or to run some data analysis/graphing software. Office is run in the native OSX environment. The office staff all use Dell products.

    Also, given the mobile nature of our sales force -- roughly half the employees -- the iPhone would be a natural fit. We already run a mobile platform to access our inventory and provide real-time order entry. Blackberries are the preferred device at this point, but we spent some time brainstorming ideas to exploit the iPhone's ability to run new applications. The biggest hiccup seems to be linking into our SQL database because we use Dynamics on the front end.

    We may be forced to use Vista at some point in the future, just like we were forced to abandon Server 2000 when it was perfectly functional, but we're hoping there will be enough corporate pressure to continue support for XP past the June cut-off. Upgrading to Vista would be a large enough expense to warrant a full evaluation of our IT needs. Also, we do not have a dedicated IT person in-house. KISS... please.
    Reply | Link to Comment
  •  
    Apr 25 12:17 PM
    The key factor for MSFT is that companies don't want to upgrade to Vista because of all the bad press, as well as the incredible additional costs (as usual) required for training and supporting ALL employees when implementing it. MSFTs claim of increased pirating as an issue is a total smokescreen. The largest PC base in Asia is China. Up until Bill went crying to senior Chinese govt. officials in the last year or so (and hosted the Chinese president for dinner at his house), something like less than 10% of computers in China shipped with an OS leaving a huge opportunity for pirated software. Bill convinced China to implement new rules that all PCs sold had to now ship with an OS and in exchange started investing in Chinese companies and opened additional MSFT facilities there. On my trips to China XP was running about 12 yuan or $1.50 US. At the time I maintained that Asia was the only place in the world that people were actually paying what an MSFT OS was worth.
    Reply | Link to Comment
  •  
    Apr 25 12:30 PM
    Sporkman - not odd at all: Linux has what? Maybe 1% marketshare? AAPL has about 15% now, and growing? It's pretty clear Linux remains for the technorati...but AAPL has succeeded at using BSD as the base of OS-X and making it usable, secure, and commercially viable.
    Reply | Link to Comment
  •  
    Apr 25 12:38 PM
    Not just the technorati, but also servers, and increasingly enterprise desktops and low-cost laptops. And according to this guy, the share will only grow:

    seekingalpha.com/artic...

    To not even get mentioned in an article analyzing operating system market trends is a bit myopic.
    Reply | Link to Comment
  •  
    Apr 25 01:20 PM
    "On my trips to China XP was running about 12 yuan or $1.50 US. At the time I maintained that Asia was the only place in the world that people were actually paying what an MSFT OS was worth."

    This is the future of MSFT: eroding margins. They also have to offer big bribes to keep third world countries from going Open Source / LINUX. And the erosion won't stop in the third world.
    Reply | Link to Comment
  •  
    Apr 25 01:39 PM
    I never understand this argument. I have been a Mac user since day one. I have also used MS at my government job since day one. Especially with OS X the inter phase with the user is just plain out more simple. The amount of money paid to our IT department is incredible because no normal office worker understands how to do any MS system manipulation. I have used Macs from 84 and I have never needed an IT fix it guy to do anything. Just in dollars and cents (and sense) MAC is the right move.
    Reply | Link to Comment
  •  
    Apr 25 05:15 PM
    @FreeRange

    Corporate IT departments don't care about what the uninformed masses think(many commentors here for instance). They don't understand computers and exist in a user mentality.

    Companies don't want to upgrade because hardware requirements are too high for all but the best PCs. Why would I spend a ton of money to do a massive refresh in my enterprise when even the latest smaller laptops would run like slugs(SP1 included)?

    We need Active Directory integration and all the bells and whistles around this and the back end server ecosystem, MS has done a fabulous job creating(The server group and client group are not the same)

    We will wait with Windows XP that runs just great(everyone likes to compare Vista to OSX but no one does an XP vs OSX test) and do nothing till a decent replacement OS is offered. Either Windows 7 is that OS or the Mac is integrated into the AD properly(good luck).

    We are not going back to the win 95 no management days, I don't care how badly you want your Leopard at work.
    Reply | Link to Comment
  •  
    Apr 26 05:52 AM
    Salesforce.com is giving Macs to all employees. Yup, all 4000 of us; we are going to be one of the largest enterprise software Mac shops around. As the leases come up for the Dells, IT is replacing with Macs.

    And why, you ask, Security! The resources it takes to defend against all the stuff the baddies throw at a PC, it’s just cheaper/easier to pay a few bucks more for a Mac and not have any of those issues.

    With the Google Apps integration, and moving to the Mac, we will be free of the clutches of the Redmond Beast!

    You really couldn’t ask for a much better endorsement of your value to the forward-looking enterprise than being officially adopted by Salesforce.com, could you now?

    Reply | Link to Comment
  •  
    Apr 26 08:51 AM
    haha! beautiful masterstroke raman and thank you for sharing that...
    Reply | Link to Comment
  •  
    Apr 26 11:42 AM
    @raman - replacing MS Office with the least viable alternative - Google Apps - too funny! I did the numbers and it would actually cost more to beef up our Internet to handle it than pay the licensing - forget the fact that when the Internet would be down so would our company.

    Love the security argument by the way - being someone who actually works in IT, I spend almost no time on that(viruses and spyware are far lower than most of the last 15 years I've been doing this) - most of my time is being proactive on software/hardware replacements.

    Good luck with that though. Should be fun to see how they do managing 4000 Macs with no Active Directory.
    Reply | Link to Comment
  •  
    Apr 26 02:05 PM
    Good one, BlahBlah. I mean, everyone knows the ONLY way to manage large networks is with MS's Active Directory, right?

    Right?
    Reply | Link to Comment
  •  
    Apr 26 07:19 PM
    The fact that Vista is poor and that Apple relative priceing is much improved vis-a-vis Windows PCs is probably enough to accelerate the shift to Apple. Years ago Apple was expensive relative to Windows. MSFT practically gave Office away until they drove competition out of the market. After many years of unrelenting price increases the difference is now minor. I know hundreds of people that would have purchased a Macintosh if price was not a factor. From a creative perspective MSFT is highly overrated. MS DOS was a copy of an early DEC Operating System. NT, 2000, and XP are copies of VAX VMS. Prior to NT Windows were ugly giant cludges requiring gangs of techies to keep things going. Vista is bad and will only get worse. Windows will likely stop supporting XP and soon as they can--Directx10 is already not available of XP. With only Vista as an alternative many more people will turn to Apple. With nothing left to copy, and a total lack of true cultural creativity and with a ton of hubris, MSFT is inevitably faced with a slow but steady decline. Their shark like market strategies will become less and less effective as alternatives grow and prosper. Once everyone realizes that they are no longer a growth stock they will lose access to the best talent. As far as Linux is concerned the 1% arguement does not hold for the long haul. We at DEC used to say that about PCs.
    Reply | Link to Comment
  •  
    Apr 26 09:38 PM
    @deasys - it's the best way out there chosen by the majority of Enterprises. It does a very good job - any deficiencies not addressed in Server 2008 that you can think of?
    Reply | Link to Comment
  •  
    Apr 27 12:48 AM
    A level playing field is required - where is the Microsoft Laptop with the optimized OS that only supports a small set of drivers as AAPL does?
    Reply | Link to Comment
  •  
    Apr 30 12:10 AM
    @BlahBlah

    Your screen name could not be more apt. What a moron. All PC hardware is essentially the same. It's generic. It doesn't matter if you have a Dell or HP or any white box PC.

    You all WHINE about poor, disadvantaged, beleagured Microsoft. Boo Hoo, so sorry for you.

    OS X runs on ANY PC. It's just NOT SUPPORTED. Apple supports virtually ANY device. Any USB, almost any graphics card (flash the ROM it will work), any monitor, etc...

    The difference is Apple has set the standard higher.

    Wait for MSFT to TANK EVEN FURTHER. Billions of dollars will flee before the end of the year, perhaps the end of the summer at this rate.

    THEN, and ONLY THEN, will Apple find the time is RIPE to sell to all. HP and DELL are on record as BEGGING to buy OS X. Apple is waiting for the right time.

    That shoe is going to drop, but Apple doesn't want their rightful market STOLEN again.
    Reply | Link to Comment
  •  
    Apr 30 10:03 AM
    "THEN, and ONLY THEN, will Apple find the time is RIPE to sell to all. HP and DELL are on record as BEGGING to buy OS X. Apple is waiting for the right time.

    That shoe is going to drop, but Apple doesn't want their rightful market STOLEN again."

    So Apple will be the next Microsoft, eh? Big, proprietary behemoth with closed source & closed standards, that locks down its markets.
    Reply | Link to Comment
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