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 If you are just outdated, you listen to music you bought from iTunes or GooglePlay and store on your mobile device.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.

PC Sales drop >10% Q1 2016. Surprised? Do You Care?

PC Sales drop >10% Q1 2016. Surprised? Do You Care?

Leading tech tracking companies IDC and Gartner both announced Q1, 2016 PC sales results, and they were horrible.  Sales were down 9.5%-11.5% depending on which tracker you asked.  And that’s after a horrible Q4, 2015 when sales were off more than 10%.  PC sales have now declined for 6 straight quarters, and sales are roughly where they were in 2007, 9 years ago.

Oh yeah, that was when the iPhone launched – June, 2007.  And just a couple of years before the iPad launched.  Correlation, or causation?

Amazingly, when Q4 ended the forecasters were still optimistic of a stabilization and turnaround in PC sales.  Typical analyst verbage was like this from IDC, “Commercial adoption of Windows 10 is expected to accelerate, and consumer buying should also stabilize by the second half of the year.  Most PC users have delayed an upgrade, but can only maintain this for so long before facing security and performance issues.”  And just to prove that hope springs eternal from the analyst breast, here is IDC’s forecast for 2016 after the horrible Q1, “In the short term, the PC market must still grapple with limited consumer interest and competition from other infrastructure upgrades in the commercial market. Nevertheless….things should start picking up in terms of Windows 10 pilots turning into actual PC purchases.”

Fascinating.  Once again, the upturn is just around the corner.  People have always looked forward to upgrading their PCs, there has always been a “PC upgrade cycle” and one will again emerge.  Someday.  At least, the analysts hope so.  Maybe?

Microsoft investors must hope so.  The company is selling at a price/earnings multiple of 40 on hopes that Windows 10 sales will soon boom, and re-energize PC growth. Surely. Hopefully. Maybe?

death-of-the-pcThe world has shifted, and far too many people don’t like to recognize the shift.  When Windows 8 launched it was clear that interest in PC software was diminishing.  What was once a major front page event, a Windows upgrade, was unimportant.  By the time Windows 10 came along there was so little interest that its launch barely made any news at all.  This market, these products, are really no longer relevant to the growth of personal technology.

Back when I predicted that Windows 8 would be a flop I was inundated with hate mail.  It was clear that Ballmer was a terrible CEO, and would soon be replaced by the board.  Same when I predicted that Surface tablets would not sell well, and that all Windows devices would not achieve significant share. People called me “an Apple Fanboy” or a “Microsoft hater.”  Actually, neither was true.  It was just clear that a major market shift was happening in computing.  The world was rapidly going mobile, and cloud-based, and the PC just wasn’t going to be relevant.  As the PC lost relevancy, so too would Microsoft because it completely missed the market, and its entries were far too tied to old ways of thinking about personal and corporate computing – not to mention the big lead competitors had in devices, apps and cloud services.

I’ve never said that modern PCs are bad products.  I have a son half way through a PhD in Neurobiological Engineering.  He builds all kinds of brain models and 3 dimensional brain images and cell structure plots — and he does all kinds of very exotic math.  His world is built on incredibly powerful, fast PCs.  He loves Windows 10, and he loves PCs — and he really “doesn’t get” tablets.  And I truly understand why.  His work requires local computational power and storage, and he loves Windows 10 over all other platforms.

But he is not a trend.  His deep understanding of the benefits of Windows 10, and some of the PC manufacturers as well as those who sell upgrade componentry, is very much a niche.  While he depends heavily on Microsoft and Wintel manufacturers to do his work, he is a niche user.  (BTW he uses a Nexus phone and absolutely loves it, as well. And he can wax eloquently about the advantages he achieves by using an Android device.)

Today, I doubt I will receive hardly any comments to this column.  Because to most people, the PC is nearly irrelevant. People don’t actually care about PC sales results, or forecasts.  Not nearly as much as, say, care about whether or not the iPhone 6se advances the mobile phone market in a meaningful way.

Most people do their work, almost if not all their work, on a mobile device.  They depend on cloud and SaaS (software-as-a-service) providers and get a lot done on apps.  What they can’t do on a phone, they do on a tablet, by and large.  They may, or may not, use a PC of some kind (Mac included in that reference) but it is not terribly important to them.  PCs are now truly generic, like a refrigerator, and if they need one they don’t much care who made it or anything else – they just want it to do whatever task they have yet to migrate to their mobile world.

The amazing thing is not that PC sales have fallen for 6 quarters.  That was easy to predict back in 2013.  The amazing thing is that some people still don’t want to accept that this trend will never reverse.  And many people, even though they haven’t carried around a laptop for months (years?) and don’t use a Windows mobile device, still think Microsoft is a market leader, and has a great future.  PCs, and for the most part Microsoft, are simply no more relevant than Sears, Blackberry, or the Encyclopedia Britannica.   Yet it is somewhat startling that some people have failed to think about the impact this has on their company, companies that make PC software and hardware – and the impact this will have on their lives – and likely their portfolios.

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices.  This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device.  Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.

Only it is probably too late to make much difference.  PC sales continue falling – quickly. Q3 PC sales were down over 10% versus a year ago. Q2 saw an 11% decline vs year ago. The PC market has been steadily shrinking since 2012In Q2 there were 68M PCs sold, and 66M iPhones.  Hope springs eternal for a PC turnaround – but that would seem increasingly unrealistic.

BallmerThe big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry.  By 2010 when the iPad launched, the shift was in full swing.  And that’s when Microsoft’s current problems really began.  Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010.  But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.

By January, 2013 sales results were showing the abysmal failure of Windows 8 to slow the wholesale shift into mobile devices.  Ballmer had played “bet the company” on Windows 8 and the returns were not good.  It was the failure of Windows 8, and the ill-fated Surface tablet which became a notorious billion dollar write-off, that set the stage for the rapid demise of PCs.

And that demise is clear in the ecosystem.  Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales.  But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy.  And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.

Windows deadAnd, worse, the entire OEM market is collapsing.  For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%!  With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.

Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs.  But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth.  Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.

Today Apple and Google have both built very large, profitable developer networks.  Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC.  Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.

Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows.  But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs.  Today the situation is only exacerbated.

By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft.  Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh.  Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.

In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S.  But, largely, nobody cared.  Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices.  But it is so incredibly late to market that there is little interest.

Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs.  And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.

AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world.  But when Xerox taught people how to “one click” print on a copier, the market for presses began to die.  Many people thought the installed base would keep these press companies profitable forever.  And it took 30 years for those machines to eventually disappear.  But by 2000 both companies went bankrupt and the market disappeared.

Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits.  But, it probably doesn’t matter.  When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products.  And Windows 10 is not much more relevant than Blackberry.

Focus is Only Confusion at Failing HP

Focus is Only Confusion at Failing HP

Hewlett Packard yesterday announced second quarter results.  And they were undoubtedly terrible.  Revenue compared to a year ago is down 7%, net income is down 21% as the growth stall at HP continues.

Yet, CEO Meg Whitman remains upbeat.  She is pleased with “the continued success of our turnaround.”  Which is good, because nobody else is.  Rather than making new products and offering new solutions, HP has become a company that does little more than constantly restructure!

This latest effort, led by CEO Whitman, has been a split of the company into two corporations.  For “strategic” (red flag) reasons, HP is dividing into a software company and a hardware company so that each can “focus” (second red flag) on its “core market” (third red flag.)  But there seems to be absolutely no benefit to this other than creating confusion.

This latest restructuring is incredibly expensive. $1.8billion in restructuring charges, $1billion in incremental taxes, $400million annually in duplicated overhead services, then another $3billion in separation charges across the two new companies.  That’s over $5B – which is more than HP’s net income in 2014 and 2013.  There is no way this is a win for investors.

Additionally, HP has eliminated 48,000 jobs this this latest restructuring began in 2012.  And the total will reach 55,000.  So this is clearly not a win for employees.

The old HP will now be a hardware company, focused on PCs and printers.  Both of which are declining markets as the world goes mobile.  This is like the newspaper part of a media company during a split.  An old business in serious decline with no clear path to sustainable sales and profits – much less growth.  And in HP’s case it will be in a dog-eat-dog competitive battle to try and keep customers against Dell, Acer and Lenovo.  Prices will keep dropping, and profits eroding as the world goes mobile.  But despite spending $1.2billion to buy Palm (written off,) without any R&D, hard to see how this company returns profits to shareholders, generates new jobs, or launches new products for distributors and customers.

The new HP will be a software company.  But it comes to market with almost no share against monster market leader Amazon, and competitors Microsoft and Cisco who are fighting to remain relevant.  Even though HP spent $10B to buy ERP company Autonomy (written off) everyone has newer products, more innovation, more customers and more resources than HP.

Together there was faint hope for HP.  The company could offer complete solutions.  It could work with its distributors and value added resellers to develop unique vertical market solutions.  By tweaking the various parts, hardware and software, HP had the possibility of building solutions that could justify premium prices and possibly create growth.  But separated, these are now 2 “focused” companies that lack any new innovations, sell commodity products and lack enough share to matter in markets where share leads to winning developers and enterprise customers.

HP-10C-MThis may be the last stop for investors, and employees, to escape HP before things get a lot worse.

HP was the company that founded silicon valley.  It was the tech place to work in the 1960s, 1970s and early 1980s.  It was the Google, Facebook or Apple of that earlier time.  When Carly Fiorina took over the dynamic and highly new product driven company in July, 1999 it was worth $45/share.  She bought Compaq and flung HP into the commodity PC business, cutting new products and R&D.  By the time the Board threw her out in 2005 the company was worth $35/share.

Mark Hurd took the CEO job, and he slashed and burned everything in sight.  R&D was almost eliminated, as was new product development.  If it could be outsourced, it was.  And he whacked thousands of jobs.  By killing any hope of growing the company, he improved the bottom line and got the stock back to $45.

Which is where it was 5 years ago today.  But now HP is worth $35/share, once again.  For investors, it’s been 25 years of up, down and sideways.  The last 5 years the DJIA went up 80%; HP down 24%.

Companies cannot add value unless they develop new products, new solutions, new markets and grow.  Restructuring after restructuring adds no value – as HP has demonstrated.  For long-term investors, this is a painful lesson to learn.  Let’s hope folks are getting the message loud and clear now.

Surface 3 and Apple Watch – Red Oceans v Blue Oceans

Surface 3 and Apple Watch – Red Oceans v Blue Oceans

Microsoft launched its new Surface 3 this week, and it has been gathering rave reviews.  Many analysts think its combination of a full Windows OS (not the slimmed down RT version on previous Surface tablets,) thinness and ability to operate as both a tablet and a PC make it a great product for business.  And at $499 it is cheaper than any tablet from market pioneer Apple.

Surface 3

Meanwhile Apple keeps promoting the new Apple Watch, which was debuted last month and is scheduled to release April 24.  It is a new product in a market segment (wearables) which has had very little development, and very few competitive products.  While there is a lot of hoopla, there are also a lot of skeptics who wonder why anyone would buy an Apple Watch.  And these skeptics worry Apple’s Watch risks diverting the company’s focus away from profitable tablet sales as competitors hone their offerings.

Apple Watch

Looking at these launches gives a lot of insight into how these two companies think, and the way they compete.  One clearly lives in red oceans, the other focuses on blue oceans.

Blue Ocean Strategy (Chan Kim and Renee Mauborgne) was released in 2005 by Harvard Business School Press.  It became a huge best-seller, and remains popular today.  The thesis is that most companies focus on competing against rivals for share in existing markets.  Competition intensifies, features blossom, prices decline and the marketplace loses margin as competitors rush to sell cheaper products in order to maintain share.  In this competitively intense ocean segments are niched and products are commoditized turning the water red (either the red ink of losses, or the blood of flailing competitors, choose your preferred metaphor.)

On the other hand, companies can choose to avoid this margin-eroding competitive intensity by choosing to put less energy into red oceans, and instead pioneer blue oceans – markets largely untapped by competition.  By focusing beyond existing market demands companies can identify unmet needs (needs beyond lower price or incremental product improvements) and then innovate new solutions which create far more profitable uncontested markets – blue oceans.

Obviously, the authors are not big fans of operational excellence and a focus on execution, but instead see more value for shareholders and employees from innovation and new market development.

If we look at the new Surface 3 we see what looks to be a very good product.  Certainly a product which is competitive.  The Surface 3 has great specifications, a lot of adaptability and meets many user needs – and it is available at what appears to be a favorable price when compared with iPads.

But …. it is being launched into a very, very red ocean.

The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks.  Low cost, scaled back yet very useful Microsoft-based PCs which can be purchased at prices that are less than half the cost of a Surface 3. And although Surface 3 can be used as a tablet, the number of apps is a fraction of competitive iOS and Android products – and the developer community has not yet embraced creating new apps for Windows tablets. So Surface 3 is more than a netbook, but also a lot more expensive.

Additionally, the market has Chromebooks which are low-cost devices using Google Chrome which give most of the capability users need, plus extensive internet/cloud application access at prices less than a third that of Surface 3.  In fact, amidst the Microsoft and Apple announcements Google announced it was releasing a new ChromeBit stick which could be plugged into any monitor, then work with any Bluetooth enabled keyboard and mouse, to turn your TV into a computer.  And this is expected to sell for as little as $100 – or maybe less!

ChromeBit

This is classic red ocean behavior.  The market is being fragmented into things that work as PCs, things that work as tablets (meaning run apps instead of applications,) things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both.  And prices are plummeting.  Intense competition, multiple suppliers and eroding margins.

Ouch.  The “winners” in this market will undoubtedly generate sales.  But, will they make decent profits?  At low initial prices, and software that is either deeply discounted or free (Google’s cloud-based MSOffice competitive products are free, and buyers of Surface 3 receive 1 year free of MS365 Office in the cloud, as well as free upgrade to Windows 10,) it is far from obvious how profitable these products will be.

Amidst this intense competition for sales of tablets and other low-end devices, Apple seems to be completely focused on selling a product that not many people seem to want.  At least not yet.  In one of the quirkier product launch messages that’s been used, Apple is saying it developed the Apple Watch because its other innovative product line – the iPhone – “is ruining your life.

Apple is saying that its leaders have looked into the future, and they think today’s technology is going to move onto our bodies.  Become far more personal.  More interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption.  They see a future where we don’t need a keyboard, mouse or other artificial interface to connect to technology that improves our productivity.

Right.  That is easy to discount.  Apple’s leaders are betting on a vision.  Not a market.  They could be right.  Or they could be wrong.  They want us to trust them.  Meanwhile, if tablet sales falter…..  if Surface 3 and ChromeBit do steal the “low end” – or some other segment – of the tablet market…..if smartphone sales slip….. if other “forward looking” products like ApplePay and iBeacon don’t catch on……

This week we see two companies fundamentally different methods of competing.  Microsoft thinks in relation to its historical core markets, and engaging in bloody battles to win share.  Microsoft looks at existing markets – in this case tablets – and thinks about what it has to do to win sales/share at all cost.  Microsoft is a red ocean competitor.

Apple, on the other hand, pioneers new markets.  Nobody needed an iPod… folks were  happy enough with Sony Walkman and Discman.  Everybody loved their Razr phones and Blackberries… until Apple gave them an iPhone and an armload of apps.  Netbook sales were skyrocketing until iPads came along providing greater mobility and a different way of getting the job done.

Apple’s success has not been built upon defending historical markets.  Rather, it has pioneered new markets that made existing markets obsolete.  Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched.  Questionable.  And it has cannibalized its own products as it brought out new ones (remember when iPods were so new there was the iPod mini, iPod nano and iPod Touch? After 5 years of declining iPod sale Apple has stopped reporting them.)  Apple avoids red oceans, and prefers to develop blue ones.

Which company will be more successful in 2020?  Time will tell.  But, since 2000 Apple has gone from nearly bankrupt to the most valuable publicly traded company in the USA.  Since 1/1/2001 Microsoft has gone up 32% in valueApple has risen 8,000%.  While most of us prefer the competition in red oceans, so far Apple has demonstrated what Blue Ocean Strategy authors claimed, that it is more profitable to find blue oceans.  And they’ve shown us they can do it.

Alligators Gal