Category Archives: Microsoft

Apple, Microsoft, and the Future of Touch

October 27, 2016 Jan Dawson

Note: this blog is published by Jan Dawson, Founder and Chief Analyst at Jackdaw Research. Jackdaw Research provides research, analysis, and consulting on the consumer technology market, and works with some of the largest consumer technology companies in the world. We offer data sets on the US wireless and pay TV markets, analysis of major players in the industry, and custom consulting work ranging from hour-long phone calls to weeks-long projects. For more on Jackdaw Research and its services, please visit our website. If you want to contact me directly, you’ll find various ways to do so here.

This is one of those rare weeks when two of the tech industry’s major players have back to back events and in the process illustrate their different takes on an important product category, in this case the PC. I’ve already written quite a bit about all this this week:

My Techpinions Insiders piece on Monday was a scene setter for this week’s events
A media comment on Microsoft’s event
My weekly public Techpinions column gave a longer take on Microsoft’s event
A media comment on Apple’s event.

Now that it’s all done, though, I wanted to pull some of these themes and threads together. I attended today’s Apple event in person and so I’ve spent time with the new MacBooks, though not with Microsoft’s new hardware or software.

Differentiation: from hardware advantages to philosophical approaches

The biggest thing to come out of this week, which I previewed in my Techpinions piece on Monday, was a shift from hardware advantages to philosophical differences as the nexus of competition between Microsoft and Apple in PCs. MacBooks once enjoyed significant hardware advantages over all competing laptops in terms of battery life, portability, and features such as trackpads, but in recent years those advantages have all but disappeared. Instead, what we’re left with is increasingly stark philosophical differences in how these companies approach the market, and this week the focus was on touch.

Microsoft’s computing devices all run some flavor of Windows 10 and feature touch. Apple, on the other hand, continues to draw a distinction between two sets of products by both operating system and interactivity. On the one hand, you have iOS devices with touch interfaces, and on the other macOS devices with more indirect forms of interactivity. Today’s event saw Apple introduce an interesting new wrinkle to touch on the MacBook with the Touch Bar, but it’s clearer than ever that Apple refuses to put touch screens on the Mac and that won’t change soon.

Microsoft’s approach makes touch available everywhere, even when in many cases it doesn’t make sense. It’s optional, though, and Microsoft has pulled back from some of the earlier erroneous over-reliance on touch that characterized Windows 8. Apple, on the other hand, wants to largely preserve existing workflows based on mouse and keyboard interactivity while adding subtle new forms of interaction. It keeps all the interaction on the horizontal plane, while Microsoft has users switching back and forth between the tabletop and display planes. There isn’t necessarily a right and wrong here – both approaches are interesting and reflect each company’s different starting points and perspectives. But it’s differences like this that will characterize the next phase of competition between them.

In some ways, this new phase of competition is analogous to the competition between Apple and Google in the smartphone market. In both cases, there are now devices made by companies other than Apple which match Apple’s core hardware performance. That’s not to say that all devices now come up to Apple’s standards – it continues to compete only at the high end, while both Google and Microsoft’s ecosystems serve the full gamut of needs from cheap and cheerful to high-priced premium. But in smartphones as in PCs, the focus of competition at the high end is now moving to different approaches rather than hardware performance. It’s intriguing, then, that it’s during this era that both Google and Microsoft are finally getting serious about making their own hardware.

The Touch Bar itself is very clever. Apple made the decision to spend a lot of time in today’s event on demos, and I think that was a good use of the time (especially in an event with less ground to cover than most). The demos really showed the utility that the Touch Bar can provide in a variety of Apple and third party apps. What Apple has done here is in essence to take a slice of the screen and put it down within reach to allow you to interact with it. There will definitely be a learning curve involved here – I can see users forgetting that it’s there unless they make an effort to use it, but I can also see it prompting users to try to touch the screen (this happened to me in the demo area). “Touch here but not there” will be an interesting mental model to adapt to, but once users get the hang of it (and developers support it in their apps) I believe it will add real value.

Apple’s price coverage

Of course, MacBooks aren’t the only portable computers Apple makes, and it’s been increasingly making the case that the iPad Pro lineup should be considered computers too. These are Apple’s touch-screen computers, but in most consumers minds they don’t yet belong in the same category as Windows laptops. However, when you put the new MacBooks, older MacBooks, and iPad Pros together, you get an interesting picture in terms of price and performance coverage. The chart below shows base pricing for each of these products:

As you can see, there’s pretty good coverage from $599 all the way through $2399 with just the base prices. If you were to add storage and spec options (and Smart Keyboards in the case of the iPad Pros) the in between price points would be covered pretty well too. But Apple now offers a portable computer at almost any price point in this range, and that’s interesting. The newest MacBooks alone do a nice job of covering the spread from $1199 to $2399 with increasing power and capability, while the older MacBooks fill in some gaps. There’s no denying that these products are premium, but they extend down into price points that many people will be able to reach, while providing really top notch products for those that can afford or justify them. If you focus on those newer devices, I think this is the most coherent and logical MacBook portfolio Apple has had for years.

The next big question is what happens with desktops, because those are now from one to three years old, with no sign of an update. The one that’s had the most focus from Apple in recent years is the iMac, which is both the most mass market and the flashiest – it’s the only one that is highly visible, while both the Mac Pro and Mini could feasibly sit hidden under a desk. I don’t think Apple’s going to discontinue these anytime soon, but the timing of its lack of focus on these devices is providing an interesting window for Microsoft.

A few words on creativity

I won’t repeat everything I said in my earlier stuff on Microsoft’s event here, but suffice it to say that this creativity push is certainly interesting given that timing I just mentioned. However, it’s totally overblown to be talking about Microsoft somehow stealing away Apple’s creative customer base, for several reasons:

First, Apple has long since expanded beyond that base, especially if you look at the full set of devices including iPhones. Apple clearly isn’t selling hundreds of millions of iPhones solely to people that use Photoshop for a living. Even if you look at Mac buyers, they’re much broader than the cliche of ad agency creatives and video editors.
Secondly, all Microsoft has done so far is put a stake in the ground. The Surface Studio is a beautiful device and a well thought out machine for a subset of creative professionals. But workflows don’t change overnight just because a new computer comes along, especially if there’s an existing commitment to another ecosystem. The role of this device is to signal to creatives that Microsoft is serious about serving them, which is notable in its own right, but won’t sell millions of devices by itself.
Thirdly, Microsoft’s bigger creativity push is around software, with 400m plus Windows 10 users getting a bunch of new creativity software in the Creators Update in the spring. This will be much more meaningful in terms of spreading that creativity message far and wide than the new hardware.
Lastly, even with all this, Microsoft’s efforts to associate its brand with creativity and not just productivity will take years to take hold. Perceptions don’t change overnight either.

Apple’s event today was a nice reminder that it still takes these creative professionals very seriously – both the Adobe and DJ Pro demos were creativity-centric, and these new machines are clearly intended for creative professionals among others (the RAID arrays would be an obvious fit for people editing high-bandwidth video, for example). Apple isn’t going to cede this ground easily, but it will be very interesting to watch over the next few years how this aspect of the competition plays out.

Earnings, Microsoft, Q3 2016, Smartphones, Surface

Microsoft’s Evolving Hardware Business

October 21, 2016 Jan Dawson

Microsoft reported earnings yesterday, and the highlights were all about the cloud business (Alex Wilhelm has a good summary of some of the key numbers there in this post on Mattermark). Given that I cover the consumer business, however, I’m more focused on the parts of Microsoft that target end users, which are mostly found in its More Personal Computing segment (the one exception is Office Consumer, which sits in the Productivity & Business Processes segment).

The More Personal Computing segment is made up of:

Windows – licensing of all versions of Windows other than Windows server
Devices – including Surface, phones, and accessories
Gaming – including Xbox hardware, Xbox Live services, and game revenue
Search advertising – essentially Bing.

Microsoft doesn’t report revenues for these various components explicitly, but often provides enough data points in its various SEC filings to be able to draw reasonably good conclusions about the makeup of the business. As a starting point, Microsoft does report revenue from external customers by major product line as part of its annual 10-K filing – revenue from the major product lines in the More Personal Computing Group are shown below:

Windows declining for two reasons

It’s worth noting that it appears Windows revenue has fallen off a cliff during this period. However, a big chunk of the apparent decline is due to the deferral of Windows 10 revenue, which has to be recognized over a longer period of time than revenue from earlier versions of Windows, which carried less expectation of free future updates. At the same time, the fact that Windows 10 was a free upgrade for the first year also depressed revenues. As I’ve been saying for some time now, going forward it’s going to be much tougher for Microsoft to drive meaningful revenue from Windows in the consumer market in particular, in a world where every other vendor gives their OS away for free. That means Microsoft has to find new sources of revenue in consumer: enter hardware.

Phones – dwindling to nothing

First up, phones, which appear to be rapidly dwindling to nothing. It’s become harder to find Lumia smartphone sales in Microsoft’s reporting recently, and this quarter (as far as I can tell) the company finally stopped reporting phone sales entirely. That makes sense, given that Lumia sales were likely under a million in the quarter and Microsoft is about to offload the feature phone business. The chart below shows Lumia sales up to the previous quarter, and my estimate for phone revenues for the past two years, which hit around $300 million this quarter:

Surface grows year on year but heading for a dip

Surface has been one of the bright spots of Microsoft’s hardware business over the last two years. Indeed – this home-grown hardware line has compared very favorably to that acquired phones business we were just discussing:

As you can see, Surface has now outsold phones for four straight quarters, and that’s not going to change any time soon. Overall, Surface revenues are growing year on year, which is easier to see if you annualize them:

However, what you can also see from that first Surface chart is that revenues for this product line are starting to settle into a pattern: big Q4 sales, followed by a steady decline through the next three quarters. That’s fine as long as there is new hardware each year to restart the cycle, but from all the reporting I’ve seen it seems the Surface Pro and Surface Book will get only spec bumps and very minor cosmetic changes, which leaves open the possibility of a year on year decline. Indeed, this is exactly what Microsoft’s guidance says will happen:

We expect surface revenue to decline as we anniversary the product launch from a year ago.

I suspect the minor refresh on the existing hardware combined with the push into a new, somewhat marginal, product category (all-in-ones) won’t be enough to drive growth. The question is whether the revenue line recovers in the New Year or whether we’ll see a whole year of declines here – that, in turn, would depress overall hardware sales already shrinking from the phone collapse.

It’s also interesting to put Surface revenues in context – they’ve grown very strongly and are now a useful contributor to Microsoft’s overall business, but they pale in comparison to both iPad and Mac sales, neither of which have been growing much recently:

Ahead of next week’s Microsoft and Apple events, that context is worth remembering – for all the fanfare around Surface, Microsoft’s computing hardware business is still a fraction of the size of Apple’s.

Gaming – an oldie but kind of a goodie

Gaming, of course, is the oldest of Microsoft’s consumer hardware businesses, but its gaming revenue is actually about more than just selling consoles – it also includes Xbox Live service revenues and revenues from selling its own games (now including Minecraft) and royalties from third party games. However, it’s likely that console sales still dominate this segment. Below is my estimate for Gaming revenue:

In fact, Microsoft actually began reporting this revenue line this quarter, though unaccountably only for this quarter, and not for past quarters. Still, it’s obvious from my estimates that this, too, is an enormously cyclical business, with a big spike in Q4 driven by console sales and to a lesser extent game purchases, followed by a much smaller revenue number in Q1 and a steady build through Q3 before repeating. Microsoft no longer reports console sales either, sadly, likely because it was coming second to Sony much of the time before it stopped reporting. Still, gaming makes up almost a third of MPC segment revenues in Q4, and anything from 8-20% of the total in other quarters. In total, hardware likely now accounts for 30-50% of total revenue from the segment quarterly.

Search advertising – Microsoft’s quiet success story

With all the attention on cloud, and the hardware and Windows businesses going through a bit of a tough patch, it’d be easy to assume there were no other bright spots. And yet search advertising continues to be the undersold success story at Microsoft over the last couple of years. I’ve previously pointed out the very different trajectories of the display and search ad businesses at Microsoft, which ultimately resulted in the separation of the display business, but the upward trajectory of search advertising has accelerated since that decision was made.

Again, Microsoft doesn’t report this revenue line directly, but we can do a decent job of estimating it, as shown in the chart below:

There are actually two different revenue lines associated with search advertising – what I’ve shown here is total actual revenue including traffic acquisition costs, but Microsoft tends to focus at least some of its commentary on earnings calls on a different number – search revenue ex-TAC. As you can see, the total number has plateaued over the last three quarters according to my estimates, though the year on year growth numbers are still strong. However, the ex-TAC number is growing more slowly. In other words, this growth is coming at the expense of higher traffic acquisition costs, which seems to be the result of the deal Microsoft signed with Yahoo a few quarters ago and an associated change in revenue recognition. Still, it’s a useful business now in its own right, with advertising generating 7% of Microsoft’s revenues in the most recent fiscal year.

Adoption, Android, Apple, Google, iOS, iOS 8, iOS 9, Microsoft, Mixpanel, Operating Systems, Windows

Operating system user bases

October 7, 2015 Jan Dawson 4 Comments

Related: two previous posts on the patterns in Android adoption rates (December 2013, March 2014), a post contrasting iOS and Android adoption patterns, and a post from last month on iOS 9 adoption.

Both Apple and Google have just updated their mobile OS user stats, while Microsoft shared a new number for Windows 10 adoption at its event this week, giving us a rare opportunity to make some comparisons between these major operating systems at a single point in time. We now have the following stats straight from the sources:

The stats provided by both Apple and Google on their developer sites with regard to the user distribution across their mobile operating systems (Android and iOS)
The 110 million Windows 10 number provided by Microsoft this week
The 1.4 billion total active Android user base number provided by Google at its event last week
Total Windows users of around 1.5 billion, as reported by Microsoft several times at recent events.

In addition, there are various third party sources for additional data, including NetMarketShare and its estimate of the usage of other versions of Windows. Lastly, I have estimated that there are roughly 500 million iPhones in use now, and around 775 million iOS devices in use in total (including iPads and iPod Touches).

If we take all these data sets together, it’s possible to arrive at a reasonably good estimate for the actual global user bases of major operating system versions at the present time. The chart below shows the result of this analysis:There are several things worth noting here:

Each company has one entry in the top three, with Microsoft first, Google second, and Apple third.
However, only one of these entrants is the latest version of that company’s operating system (iOS 9), while the other two are the third most recent versions (Windows 7 and Android KitKat).
Google has three of the top six operating systems, none of which is its latest operating system (Marshmallow, released this past week). Even its second most recent version (Lollipop), now available for a year, is only the third most adopted version after KitKat and Jelly Bean.
Both iOS 9 and iOS 8 and the three most used versions of Android beat out every version of Windows but Windows 7.
The most recent versions of the three companies’ major operating systems are used by a little over 400 million (iOS 9), 110 million (Windows 10), and a negligible number (Android Marshmallow) respectively.
The second most recent versions are used by around 330 million (Android Lollipop), around 250 million (iOS 8), and around 200 million (Windows 8) respectively.

There are lots more data points to tease out here, but to my mind it’s a striking illustration of the differences in the size and adoption rates of these three major operating systems.

Two additional thoughts

Just for interest, I’m including a couple of additional thoughts below.

First off, here’s the same chart, but with iOS reduced to just the iPhone base. The order changes a fair amount, but iOS 8 and iOS 9 still make a good showing:

Lastly, I wanted to revisit my post from a couple of weeks ago about the initial adoption of iOS 9, especially as it relates to Mixpanel’s data. In that post, I showed how Mixpanel’s iOS adoption data tends to be pretty close to Apple’s own data except for the month or so after a new version of iOS ships, when it tends to skew way lower than Apple’s own data. Now that we’re a few weeks on from the initial launch, and Apple has released the second set of iOS adoption data since the launch, I wanted to revisit that pattern. Interestingly, the very same pattern is playing out again – despite the initial significant discrepancy, Mixpanel’s data is now once again very close to Apple’s own:

Laptops, Microsoft, Surface, Tablets, Windows Phone

Every device is a compromise, part 2

October 6, 2015 Jan Dawson 4 Comments

In May last year, when Microsoft unveiled the Surface Pro 3, I wrote a piece about the new device but also about the way it was unveiled, titled, “Surface Pro 3, like every other device, is a compromise.” In that piece, I wrote about Microsoft’s insistence that the Surface Pro 3 was a no-compromise device, when in fact all devices represent compromises of one sort or another. I went on to say:

The biggest change in Microsoft’s Surface strategy over the last several years has been the locus of the compromise it’s still inevitably making. The first Surfaces were intended to be good tablets first and good laptops second (and ended up being neither). But with the Surface Pro 3, Microsoft has created a competitive laptop first, and a compromised tablet second. But it’s still pretending that there’s no compromise, and that is why the Surface line will continue to perform poorly. At some point, Microsoft has to stop pretending that a single device can meet all needs and start optimizing for different use cases with different devices, just like every other manufacturer.

Fast-forward to today, and we got the next version of the Surface Pro, the Surface Pro 4. And we saw two of the same phrases from that first event repeated: “no compromise” and “the tablet that can replace your laptop. So far, so predictable.

But then, immediately after the SP4 was introduced, we were shown the Surface Book. Which is a laptop. And Panos Panay, the presenter, started out by talking about all the things a laptop does that the Surface Pro does poorly – a better typing experience, a bigger screen, and so on. This was one of the most bizarre juxtapositions I’ve ever seen at a tech event. After 30 minutes of talking about how the Surface Pro 4 could replace your laptop with no compromises, the very same presenter offered up a laptop which was clearly better, because it didn’t make certain of those compromises.

Taking a step back for a minute, both products look really promising. I’ll withhold final judgment until I get to use these devices (or at least until others I trust have done so and shared their opinions). But this “no compromise” nonsense continues to do a massive disservice to Microsoft and to its customers. As I said in that earlier piece, every device involves a compromise. That compromise might involve features, functionality, look and feel, size, weight, price, or any number of other elements. But every device does involve compromises. And instead of pretending that it doesn’t, Microsoft needs to embrace what’s distinctive and best about each of the devices it offers. However, when you look at the Surface Pro 4 and Surface Book side by side, you start to