The Decline of CDs and PCs – Trends Affect Us All More Than We Think

The Decline of CDs and PCs – Trends Affect Us All More Than We Think

Do you still have a pile of compact discs? If so, why? When was the last time you listened to one? Like almost everyone else, you probably stream your music today. If you are just outdated, you listen to music you bought from iTunes or GooglePlay and store on your mobile device. But it would be considered prehistoric to tell people you carry around CDs for listening in your car – because you surely don’t own a portable CD player.

As the chart shows, CD sales exploded from nothing in 1983 to nearly 1B units in 2000. Now sales are less than 1/10th that number, due to the market shift expanded bandwidth allowed.

demand for compact discs CDs, statista  sales of personal computers PCs, statista

 

 

 

 

 

Do you still carry a laptop? If so, you are a dying minority. As PCs became more portable they became indispensable. Nobody left the office, or attended a meeting, without their laptop. That trend exploded until 2011, when PC sales peaked at 365M units. As the chart shows, in the 6 years since, PC sales have dropped by over 100M units, a 30% decline. The advent of mobile devices (smartphones and tablets) coupled with expanded connectivity and growing cloud services allowed mobility to reach entirely new levels – and people stopped carrying their PCs. And just like CDs are disappearing, so will PCs.

These charts dramatically show how quickly a new technology, or package of technologies, can change the way we behave. Simultaneously, they change the competitive landscape. Sony dominated the music industry, as a producer and supplier of hardware, when CDs dominated. But, as I wrote in 2012, the shift to more portable music caused Sony to fall into a rapid decline, and the company suffered 6 consecutive years (24 quarters) of falling sales and losses. The one-time giant was crippled by a technology shift they did not adopt. And they weren’t alone, as big box retailers such as Best Buy and Circuit City also faltered when these sales disappeared.

Once, Microsoft was synonymous with personal technology. Nobody maximized the value in PC growth more than Microsoft. But changing technology altered the competitive landscape, with Apple, Google, Samsung and Amazon emerging as the leaders. Microsoft, as the almost unnoticed launch of Windows 10 demonstrated, is struggling to maintain relevancy.

Too often we discount trends. Like Sony and Microsoft we think historical growth will continue, unabated. We find ways to discount market shifts, saying the products are “niche” and denigrating their quality. We will express our view that the market has “hiccuped” and will return to growth again. By the time we admit the shift is permanent new competitors have overtaken the lead, and we risk becoming totally obsolete. Like Toys-R-Us, Radio Shack, Sears and Motorola.

Aircraft stalls when power is too low to climb

Aircraft stalls when not enough power to climb

The time for action is when the very first signs of shift happened. I’ve written a lot about “Growth Stalls” and they occur in just 2 quarters. 93% of the time a stalled company never again grows at a mere 2%/year. Look at how fast GE went from the best company in America to the worst. It is incredibly important that leadership react FAST when trends push customers toward new solutions, because it often takes very little time for the trend to make dying markets completely untenable.

Dell – Take the Money and Run! Innovation trumps execution.

Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private.  There are large investors threatening to sue, claiming the price isn't high enough.  While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.

In the 1990s everybody thought Dell was an incredible company.  With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology.  Dell jumped into the PC business as it was born.  Suppliers were making the important bits, and looking for "partners" to build boxes.  Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development.  All he had to do was put the pieces together. 

Dell was the rare example of a company that was built on nothing more than execution.  By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing.  Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model.  All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution.  Heck, everyone was going to make money building and selling PCs.  How much you made boiled down to how hard you worked.  It wasn't about strategy or innovation – just execution. 

Dell's business worked for one simple reason.  Everybody wanted PCs.  More than one.  And everybody wanted bigger, more powerful PCs as they came available.  Market demand exploded as the PC became part of everything companies, and people, do.  As long as demand was growing, Dell was growing.  And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.

But, the market shifted.  As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates.  Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services.  iPad sales now nearly match all of Dell's sales.  Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.

Which is why Dell's sales, and profits, began to fall several years ago.  And even though Michael Dell returned to run the company 6 years ago, the downward direction did not change.  At its "core" Dell has no ability to innovate, or create new products.  It is like HTC – merely a company that sells and assembles, with all of its "focus" on cost/price.  That's why Samsung became the leader in Android smartphones and tablets, and why Dell never launched a Chrome tablet.  Lacking any innovation capability, Dell relied on its suppliers to tell it what to build.  And its suppliers, notably Microsoft and Intel, entirely missed the shift to mobile.  Leaving Dell long on execution skills, but with nowhere to apply them.

Market watchers knew this. That's why  Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.

Now Dell has a trumped up story that it needs to go public in order to convert itself from a PC maker into an IT services company selling cloud and mobile capabilities to small and mid-sized businesses.  But Dell doesn't need to go private to do this, which alone makes the story ring hollow.  It's going private because doing so allows Michael Dell to recapitalize the company with mountains of debt, then use internal cash to buy out his stock before the company completely fails wiping out a big chunk of his remaining fortune.

If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers.  Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat.  Debt never fixes a failing company, and Dell knows that.  Dell has no answer to changing market demand away from PCs.

Now the buzzards are circlingHP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride.  Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation.  Now HP has a dismal future.  But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.

Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline.  Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets. 

Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell.  $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo?  A billion here, a billion there and pretty soon it adds up to a lot of money!  Not counting losses in its own entertainmnet and on-line divisions.  The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.

The lesson to learn is that management, and investors, take a big risk when they focus on execution.  Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions.  When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it.  It is not a question of if, but when.

Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.)  Being able to execute – even execute really, really well – is not a long-term viable strategy.  Eventually, innovation will create market shifts that will kill you.

Microsoft’s Crazy Windows 8 Bet – How you can invest smarter

This week people are having their first look at Windows 8 via the Barcelona, Spain Mobile World Congress.  This better be the most exciting Microsoft product since Windows was created, or Microsoft is going to fail. 

Why? Because Microsoft made the fatal mistake of "focusing on its core" and "investing in what it knew" – time worn "best practices" that are proving disastrous! 

Everyone knows that Microsoft has returned almost nothing to shareholders the last decade.  Simultaneously, all the "partner" companies that were in the "PC" (the Windows + Intel, or Wintel, platform) "ecosystem" have done poorly.  Look beyond Microsoft at returns to shareholders for Intel, Dell (which recently blew its earings) and Hewlett Packard (HP – which says it will need 5 years to turn around the company.)  All have been forced to trim headcount and undertake deep cost cutting as revenues have stagnated since 2000, at times falling, and margins have been decimated. 

This happened despite deep investments in their "core" PC business.  In 2009 Microsoft spent almost $9B on PC R&D; over 14% of revenues.  In the last few years Microsoft has launched Vista, Windows 7, Office 2009 and Office 2010 all in its effort to defend and extend PC sales.  Likewise all the PC manufacturers have spent considerably on new, smaller, more powerful and even cheaper PC laptop and desktop models.

Unfortunately, these investments in their core expertise and markets have not excited users, nor created much growth.

On the other hand, Apple spent all of the last decade investing in what it didn't know much about in 2000.  Rather than investing in its "core" Macintosh business, Apple invested in the trend toward mobility, being an early leader with 3 platforms – the iPod, iPhone and iPad.  All product categories far removed from its "core" and what it new well.  But, all targeted at the trend toward enhanced mobility.

Don't forget, Microsoft launched the Zune and the Windows CE phones in the last decade.  But, because these were not "core" products in "core" markets Microsoft, and its partners, did not invest much in these markets.  Microsoft even brought to market tablets, but leadership felt they were inferior to the PC, so investments were maintained in traditional PC products.  The Zune, Windows phone and early Windows tablets all died because Microsoft and its partner companies stuck to investing their most important, and best known, PC business.

Where are we now?  Sales of PC's are stagnating, and going to decline.  While sales of mobile devices are skyrocketing.

Tablet sales projections 2012-2015
Source: Business Insider 2/14/12

Today tablet sales are about 50% of the ~300M unit PC sales.  But they are growing so fast they will catch up by 2014, and be larger by 2015.  And, that depends on PC sales maintaining.  Look around your next meeting, commuter flight or coffee shop experience and see how many tablets are being used compared to laptops.  Think about that ratio a year ago, and then make your own assessment as to how many new PCs people will buy, versus tablets.  Can you imagine the PC market actually shrinking?  Like, say, the traditional cell phone business is doing?

By focusing on Windows, and specifically each generation leading to Windows 8, Microsoft took a crazy bet.  It bet it could improve windows to keep the PC relevant, in the face of the evident trend toward mobility and ease of use. Instead of investing in new technologies, new products and new markets – things it didn't know much about – Microsoft chose to invest in what it new, and hoped it could control the trend. 

People didn't want a PC to be mobile, they wanted mobility.  Apple invested in the trend, making the MP3 player a winner with its iPod ease of use and iTunes market.  Then it made smartphones, which were largely an email device, incredibly popular by innovating the app marketplace which gave people the mobility they really desired.  Recognizing that people didn't really want a PC, they wanted mobility, Apple pioneered the tablet marketplace with its iPad and large app market. The result was an explosion in revenue by investing outside its core, in technologies and markets about which it initially knew nothing.

Apple revenue by segment july 2011

Apple would not have grown had it focused its investment on its "core" Mac business.  In the last year alone Apple sold more iOS devices than it sold Macs in its entire 28 year history!

IOS devices vs Mac sales 2.12
Source: Business Insider 2/17/2012

Today, the iPhone business itself is bigger than all of Microsoft. The iPad business is bigger than the desktop PC business, and if included in the larger market for personal computing represents 17% of the PC market.  And, of course, Apple is now worth almost twice the value of Microsoft.

We hear, all the time, to invest in what we know.  But it turns out that is NOT the best strategy.  Trends develop, and markets shift.  By constantly investing in what we know we become farther and farther removed from trends.  In the end, like Microsoft, we make massive investments trying to defend and extend our past products when we would be much, much smarter to invest in new technologies and markets that are on the trend, even if we don't know much, if anything, about them.

The odds are now stacked against Microsoft.  Apple has a huge lead in product sales, market position and apps.  It's closest challenger is Google's Android, which is attracting many of the former Microsoft partners (such as LG's recent defection) as they strive to catch up. Company's such as Nokia are struggling as the technology leadership, and market position, has shifted away from Microsoft as mobility changed the market.

Microsoft's technology sales used to be based upon convincing IT departments to use its platform.  But today users largely buy mobile devices with their own money, and eschew the recommendations of the IT department. Just look at how users drove the demise of Research In Motion's Blackberry.  IT needs to provide users with tools they like, and use platforms which are easy and low-cost to leverage with big app bases.  That favors Apple and Android, not Microsoft with its far, far too late entry.

You can be smarter than Microsoft.  Don't take the crazy bet of always doubling down on what you know.  Put your focus on the marketplace, and identify shifts.  It's cheaper, and smarter, to bet early on trends than constantly trying to fight the trend by investing – usually at an ever higher amount – in what you know.

 

Looking for Winners – Dell

It's easy to recognize a company in the winner's circle.  Like Apple or Google.  Most of us want to know how to spot the winners early.  And that can be hard, because often the reported information will make an emerging winner sound horrible.  Like the expected demise of Apple in 2000.

Last week Dell reported sales and earnings, and valuation fell (Marketwatch.com "Dell Shares Fall as Company Net Slips").  The article notes that sales were "surprisingly strong," but claims that a dip in profits was bad news sending the stock price downward.  Of particular concern was a lack of growth in desktop PCs.  Many analysts are expecting (I should say hoping) that System 7 is going to spur additional desktop sales and are upset that Dell isn't getting "its fair share" versus Hewlett Packard.

This is entirely the wrong way to evaluate Dell's results.  Simultaneously, the Mobile unit had very strong performance.  As did Services, greatly aided by the Perot acquisition.  As I blogged months ago, Dell has started moving in a new direction.  Toward the growth markets of mobile devices and the need to build out applications using Cloud computing architectures.  These markets are certain to grow in the future.  Meanwhile, desktop PC sales are destined to decline.  There is no doubt about this.

Dell has been undertaking some Disruptions, and using White Space to develop and go to market with new products in these newer, growing markets.  Amidst this effort, it has put less money into the hotly contested and profit-margin-declining old fashioned PC business.  This is clearly the right move.  If Dell is the first and strongest to transition to new markets it has the best chance of regaining old growth rates.  For Dell, the best thing possible is to see it growing beyond anticipation in these markets. 

Some analysts complained that both mobile and services are too small as businesses at Dell, and therefore the company needs to put more resources (meaning price actions) into traditional PCs.  These same analysts will lambaste Dell when the market shift is completely pronounced and the traditionalist (which now appears to be HP) is left in decline.  Dell has used White Space to begin launching products.  If it uses these White Space efforts to learn the company can become smart, faster than other competitors, and "jump the curve" from its old business/market to the new one.  Isn't that what every business needs to do?

What we want to see now is ongoing investment in these growth markets,
with breakout products that can make a big revenue difference.
  White
Space is good, but it is critical that Dell invest fast and smart to
replace old revenues as quickly as possible.

I was encouraged by Dell's results.  The company is growing where it needs to, and de-emphasizing businesses that can become slaughterhouses.  For investors, employees and suppliers this is a good thing.  When companies are using White Space it is easy to beat them up and ask them to "refocus" on traditional markets.  It also can kill them.  Here's hoping Dell stays on track.

Implementing Market Shifts – Google, Android phone, eWallet

"The Google Phone, Unlocked" is a Seeking Alpha article detailing the early release of a Google phone planned for market introduction in 2010.  Will this be successful or not?  Legitimate question – given the success of Apple's iPhone.  And the answer to that really has nothing to do with cell phone technology.  It has everything to do with the downloadable applications.  The market for phones has shifted to where applications are rapidly becoming more important than the phones themselves. 

Which is why "Android to become eWallet" on MediaPost is an important article.  Mpayy is offering an app that supersedes both credit cars and debit cards.  It's Paypal on steroids.  This app allows users who want to buy something to use their phone to instantaneously pay for something.  Users can perform an eBay style transaction with immediate payment.  And they can do this buying products in the Burger King, or Starbucks, or Target

Two things are emerging that represent significant market shifts to which all businesses must react.  Firstly, mobile devices are much more than phones.  They are more than laptops.  They allow people to do a lot more things than they previously could, and these activities can be immediate.  From reading a CAT scan, to finding the closest pizzeria and downloading a coupon, to paying for a Pepsi at the convenience store.  This represents substantially different use of technology.  Those who remain Locked-in to old fashioned credit card/debit card technology – or internet transaction technology – will be left behind as users move quickly to mobile phone payment.

And, secondly, those who rapidly incorporate these opportunities will have advantages.  If you're making your business more internet friendly you are likely fighting the last war.  To be successful in 2012 it will be important you are able to offer real-time transactions buyers can access from their mobile devicePeople will want to find you, find your discounts, and pay you from the device in their hands.  They will want to complete their business seamlessly using their mobile device – without a call, without a browser transaction.  Those who make life easy for customers will increasingly win – and making life easy will mean access via the mobile device

It is increasingly ineffective to build future plans based upon completing projects started last year – or the previous year – or a few  years ago.  Customers don't care about your enterprise system implementation that is X years into implementation.  Customers are running fast – really fast – toward using new, low cost and easily usable technology.  This is a substantial market shift.  And your scenario plans must incorporate these shifts, expect them, and use them to move beyond Locked-in competitors by implementing these shifts fast and effectively.  That allows you to Create Marketplace Disruptions which create superior rates of return.