earnings – Tech.pinions

Microsoft Is (Sorta) Doomed

On October 27th, 2014, Techpinion’s very own, Brian S. Hall, wrote an article entitled “Microsoft Is Doomed. Doomed!”

Brian was, of course, being facetious. Far from predicting doom for Microsoft, he was mocking the Microsoft doomsayers. Let’s take a look at a few of his article’s choicer bits:

I have to believe Microsoft’s latest earnings has finally obliterated all the silly “Microsoft is doomed!” discussion that’s been so bien pensant across the blogosphere these many years. This is a company that generated $23 billion in revenues and is clearly poised for growth.

Repeatedly, the analysts trotted out “jobs to be done” and “the innovators dilemma” and “the smartphone is the computer” to explain why Microsoft was so obviously doomed. How could they all have been so utterly wrong?

Microsoft is welcome to serve up a bowl of tasty claim chowder.

That sound you hear now? That’s Satya Nadella, laughing from his CEO chair in Redmond.

Hmm. With all due respect to Brian, Microsoft is not poised for growth, the critics aren’t wrong yet, there’s no claim chowder to be had here, and I very much doubt that Satya Nadella is laughing about the challenges facing Microsoft.

Truth springs from argument amongst friends. ~ David Hume

The difference between Brian’s view and mine reminds me of a joke:

“I see millions of stars, Holmes,” says Watson.

“And what do you conclude from that, Watson?”

Watson thinks for a moment. “Well,” he says, “astronomically, it tells me that “there are millions of galaxies and potentially billions of planets. Astrologically, I observe that Saturn is in Leo. Horologically, I deduce that the time is approximately a quarter past three. Meteorologically, I suspect that we will have a beautiful day tomorrow. Theologically, I see that God is all-powerful, and we are small and insignificant. Uh, what does it tell you, Holmes?”

“Watson, you idiot! Someone has stolen our tent!”

Brian, like Watson, is very observant but he’s overlooking the problems that are closest at hand. Just because Microsoft made lots and lots of money last quarter does not mean that all is well. Profits are great, profits are swell, but they do not, the future foretell. For example, Nokia outsold the iPhone for four years after the iPhone’s launch…and we all know how that story ended.

The Microsoft that just brought in record quarterly income, is the same Microsoft that faces severe challenges going forward. First, Mobile is the fastest growing segment in tech and Microsoft has no prospects there. Second, Microsoft’s business model is dependent upon licensing its Windows Operating System to manufacturers and that business model has been disrupted and is no longer viable. Third, approximately seventy percent of Microsoft’s income is generated by its Windows Operating System and its Office productivity suite but all of that income is coming from PCs (notebook and desktop personal computers) and PC sales are flat or declining.

Let’s examine each those issues in one by one.

Mobile

In 2006, Microsoft Windows ran on about 95% of all personal computing devices in existence.

Today, that number is well south of twenty-five percent and Microsoft itself estimates that number to be around fourteen percent. ((MS COO Turner: We have 14% share of all devices (including our 90% PC share).”~ @maryjofoley) 7/14/14))

In 2010, Microsoft saw that it was nowhere in Mobile and they tried to turn things around with the introduction of Windows 8 and Windows RT. Microsoft was going to use its Windows Operating System as leverage to drive sales of Windows 8 tablets and it was going to use its Office productivity suite as leverage to drive sales of Windows RT.

Four years later, Windows tablet sales are nonexistent, Windows RT is gone, and both Windows and Office are being given away to mobile users for free.

We’re seeing the consumer valuation for those [Offce] start to approach zero,” said Wes Miller, an analyst at Directions on Microsoft, a research firm that tracks the company.

“Lots of consumers don’t need a PC,” said Rick Sherlund, an analyst at Nomura Securities. “They just need an Internet connection. They don’t need Office as much.”

In other words, free Windows and Office on Mobile devices are now being used by Microsoft to 1) mollify their existing user base; and 2) as a freemium product designed to entice mobile users to try, and then potentially buy, the full product. Mollifying Microsoft’s existing base is, in my opinion, a good move. Microsoft needs to milk Windows and Office for all they are worth, for as long as they’re worth something.

However, using freemium to attract new users has proven to be a losing proposition.

Microsoft launched Office for iPad in March and says it’s seen 40 million downloads of the three apps since then. But the full functionality of the apps has only been available to Office 365 subscribers, and it’s added less than three million Home and Personal subscribers since then, at roughly the same pace as it added subscribers earlier. People have been very interested in the apps, but most haven’t been willing to pay for the full functionality (or already had access to it through existing Home or Business subscriptions). ~ Jan Dawson

[pullquote]Neither Windows nor Office have any significant value on mobile devices[/pullquote]

This is the reality facing Microsoft today: Neither Windows nor Office have any significant value on mobile devices.

The problem with MS Office isn’t the price. Jordan Cooper (@blenderhd)

Exactly right.

User behavior isn’t the same on phones as it is on PCs. ~ Jared Newman

[pullquote]User behavior isn’t the same on Mobile as it is on PCs[/pullquote]

Let me repeat that, because this is the part the many people are still not getting. User behavior isn’t the same on phones (and tablets) as it is on PCs. In other words, operating systems like Windows and productivity suites like Office, have great value on PCs but have little or no value on phones and tablets. Accept that as a fact and your entire understanding of what is happening to Microsoft dramatically changes.

One’s destination is never a place, but a new way of seeing things. ~ Henry Miller

Microsoft is GIVING AWAY both Office and Windows for free…and the move is being met, not with applause but, with apathy:

Was poised to download MS Word, Excel for mobile. Then thought: what do I need them for again exactly? Charles Arthur (@charlesarthur) 11/7/14

Notice how long the web cared about free Microsoft Office for iOS. Times have indeed changed. Sammy the Walrus IV (@SammyWalrusIV) 11/7/14

Mobile is where it is at and Microsoft is nowhere in Mobile.

The high-growth parts of the tech industry, smartphones and tablets, are not built on Microsoft software. Microsoft applications have very little presence on those devices. Meanwhile, on the Internet it continues to be an also-ran to giants like Google and Facebook. ~ Ben Thompson, Stretechery

But perhaps you think that Microsoft is going to make their money in Mobile by selling hardware.

Please.

Estimated share of Q3 handset industry profits: Microsoft: -4%, Motorola: -2%, HTC, BB: 0%, LG: 2%, Samsung: 18%, Apple: 86%. ~ Kontra (@counternotions) 11/4/14

Microsoft’s hardware has done nothing but bleed red ink. For an excellent discussion of Microsoft’s hardware woes, check out the Mark Rogowsky’s article entitled: “Amazon, Microsoft And The Quixotic Quest To Sell Mobile Devices“.

CAPTION: Microsoft is never going to make any money off of any of these mobile devices.

If you think Microsoft’s short-term earnings makes their long-term problems in Mobile go away, then you’ve got another think coming.

Business Model

Business models are the best crystal ball technology ever invented. ~ @andreascon

Microsoft makes its money from Windows by licensing the operating system to manufacturers and consumers. Google killed that business model by giving their operating system away for free. Apple piled on by bundling their operating system for free with the purchase of their hardware.

Incumbents are rarely disrupted by new technologies they can’t catch up to, but instead by new business models they can’t match. ~ Aaron Levie (@levie)

Operating systems are losing all of their value. Their price is rapidly moving to zero. Yet Microsoft still makes approximately thirty percent of its income from this dying business model.

Moving from one technology to another is difficult. Moving from one business model to another is one of the hardest transitions there is. But that’s exactly what Microsoft now has to do.

If you think Microsoft’s short-term earnings makes their long-term problems in licensing Windows go away, then you’ve got another think coming.

PCs (Notebook and Desktop Computers)

This is what Windows sales looked like in 1995:

We’ve come a long way since then and yet, in some ways, it would be apt to say that Microsoft is still partying like it’s 1995.

Approximately seventy percent of Microsoft’s income comes from Windows and Office.
Almost all of that Windows and Office income is generated from sales to PC manufacturers and owners.

This presents Microsoft with two problems.

First, PC sales are flat or diminishing. Second, Microsoft’s portion of that diminishing market share is also rapidly diminishing.

PCs ARE FLAT OR DIMINISHING

The challenge staring Microsoft in the face is the 1.5 billion copies of Windows being used is not increasing and is, in fact, decreasing. … Desktops and notebooks are not growing in sales and not attracting first time buyers in any meaningful numbers. ~ Ben Bajarin

GOOGLE CHROMEBOOKS

Here are four recent headlines regarding Google Chromebooks.

Chromebook sales increase 67%, Acer holds the market lead

Chromebooks may grab 5% of PC market

Chromebook sales set to nearly triple by 2017, Gartner says

Microsoft’s next big headache: The Google Chromebook

Chromebooks are eating away at Microsoft’s PC sales from the low-end. And Macs are eating away at Microsoft’s PC sales from the high-end.

APPLE MACS

Apple’s Mac hits record market share in U.S., says latest IDC research. ~ Walt Mossberg (@waltmossberg) 11/6/14

Apple Grabs Record US PC Market Share On Strong Mac Sales in Q3 2014 ~ AppleTree

26.8% of the PCs sold in the U.S. between July 4th and September 1st were Macs. ~ Horace Dediu (@asymco) 9/24/14

Mac reached the highest PC market share since Windows 95 launched. ~ Horace Dediu (@asymco) 10/20/14

The Apple Mac, by itself, easily generates more revenue than does Microsoft’s Windows.

Mac ~$6bn/quarter, Windows ~$4bn. ~ Jan Dawson (@jandawson) 10/24/14

MICROSOFT IS LOSING EDUCATION

In the third quarter of 2014, Macs took in more than 25% of the back-to-school sales. And at Harvard University, an astonishing 71% of new students owned a Mac computer.

Further, the trend in education is towards tablets and away from laptops.

This is bad news for Microsoft since their presence in tablets is practically non-existent. Meanwhile, the iPad is capturing 90 percent tablet share in U.S education.

The back-to-school season voted and the Mac won… ~ Tim Cook

MICROSOFT IS LOSING THE ENTERPRISE

Good Technology released the latest iteration of its Mobility Index Report, in which it found iOS holds 69 per cent of the enterprise market — that’s nearly seventy times larger than the 1 percent share held by Microsoft. ~ Jonny Evans

Windows Phone activations remain consistent with the six previous quarters: flat at 1 percent. ~ Venturebeat

The iPad took 89 percent of activations during the third quarter, while Android tablets claimed the remaining 11 percent. Windows tablets are yet to make a dent. ~ Jonny Evans

(O)verall, the trends in the enterprise remain unchanged. Businesses prefer iOS, sometimes choose Android, and essentially ignore Windows Phone. ~ Venturebeat

Custom business apps showed a 107 percent quarter-over-quarter growth and 731 percent growth over the same time period last year. And Windows developers are getting virtually none of that business.

If you think Microsoft’s short-term earnings makes their long-term dependency on an ever shrinking PC base go away, then you’ve got another think coming.

Transition

(Wall Street) focuses on the waves and not of the currents. ~ Consuelo Mack

Microsoft’s most recent earnings statement was a wave and an impressive wave at that. But if we want to foresee Microsoft’s future, we need to focus on the currents, not the waves, and the tech currents are flowing against, not with, Microsoft.

Wisdom consists of the anticipation of consequences. ~ Norman Cousins

Windows will continue to make money for some time to come, but it is not a growth sector.

Windows has taken Microsoft as far as it could. ~ Ben Bajarin (@BenBajarin) 10/31/14

And Windows is not Microsoft’s future.

Microsoft has many very interesting things going for them and none of them have to do with Windows. ~ Ben Bajarin (@BenBajarin) 10/30/14

Office is transitioning from a monopoly software suite, running on a monopoly platform, to a cloud service, that is just one of many competing cloud services.

Seventy percent of Microsoft’s income is in flux and is either going to go away or is going to transition to something entirely new. And these sorts of things happen “gradually, then suddenly.” ((“How did you go bankrupt?” Two ways. Gradually, then suddenly.” ~ Ernest Hemingway, The Sun Also Rises))

So no, Microsoft is not “Doomed.” But neither is its future assured.

Realizing Windows is not a hegemony will unleash market forces nobody can predict. ~ Jean-Louis Gassée (@gassee)

Ridiculous to say Microsoft is doomed. But entirely sensible to wonder whether (and how much) it will shrink in the next few years. ~ Jan Dawson (@jandawson) 10/23/14

In fact, the one thing we know for certain is that the Microsoft of tomorrow is going to be radically different from the Microsoft of today. So, in a way, the monopoly Windows and Office supported Microsoft that we know is — sorta — doomed as it makes way to the unknown Microsoft of tomorrow.

The Promised Land always lies on the other side of a Wilderness. ~ Havelock Ellis

And if you think the magnificent earnings of a single quarter are going to change the fact that today’s Microsoft is a Microsoft in transition — not just from one or product to another, but from one business model to another — then you’ve got another think coming.

Apple In Perspective

Apple has been taking a real beating on Wall Street and in the press lately. But are we losing our long-term perspective by focusing so intently on quarterly results?

Stock Market

The Stock Market is a predictor of future growth, but it is hardly infallible. Seven months ago the market was predicting spectacular growth for Apple. Today it’s predicting almost no growth at all, worse than Dell and HP. Was the market wrong seven months ago or is it wrong today? Or both?

Growing Markets

Take a broader look at the computing markets. We are transitioning from notebook and desktop computers to mobile phones and tablets. No one is in a better position to benefit from this changeover than Apple. They were first-movers in both phones and tablets and they continue to devour the bulk of those sector’s profits. Apple’s path is not unimpeded, but they still have the inside track.

iPhone & iPad Sales

Last quarter, Apple sold 37.4 million iPhones for 7% growth and 19.5 million iPads for 65% growth.

Remember all that talk about suppliers cutting orders and how it meant that Apple wasn’t selling as many phones and tablets as before? Yeah, not so very much.

China

“iPad experienced very strong year-over-year growth in every operating segment, particularly in Greater China and Japan where sales more than doubled year over year.”

The highlights for the quarter in China were that iPads grew 138% year-on-year, and we set new records for sell-through both for iPhone and iPad during the quarter.” ~ Peter Oppenheimer

Remember all that talk about Apple not doing well in China? Yeah, not so very much.

Business

“…the Good Technology’s data that says that iOS accounted for 77% of all their activations by their corporate customers. Now that would not include BlackBerry, but it would include all the other guys. and so we seem to be doing really well and honestly, I don’t see the recent announcements changing that at all. I’ve seen more and more people developing more and more custom apps for their businesses on iOS to be used on iPad and we’re very, very bullish on it. As a matter of fact, just to quote you some numbers, iPad now is being used in 95% of the Fortune 500 and what’s even more impressive probably is on the global 500 companies, we’re now in 89%.” ~ Peter Oppenheimer

Remember all that talk about Apple’s iPhone and iPad not doing well in business? Yeah, not so very much.

Unique Advantages

Critics dismiss Apple as un-innovative, passé and niche. But Apple retains distinctive differences that give it unique advantages in the the newly emerging mobile markets:

— App Stores in 155 countries

— iTunes in 119 countries

“Today, our iTunes store offer the broadest combination of geographic reach in content depth in the industry, and they surpassed quarterly billings of $4 billion for the first time ever in the March quarter, that’s a $16 billion annual run rate making our digital content stores the largest in the world. The quarter’s iTunes billings translated to record quarterly iTunes revenue of $2.4 billion, up 28% from the year ago March quarter with new quarterly revenue records for music, movies, and apps. ~ Peter Oppenheimer

— 300 million iCloud users

— Highest loyalty and customers satisfaction rates in the business

“A recent study by Kantar measured 95% loyalty rate among iPhone owners, substantially higher than the competition, and iPhone remains top in customer experience. Last month, we were very pleased to receive the number one ranking in smartphone customer satisfaction from J.D. Power and Associates for the ninth consecutive time.” ~ Peter Oppenheimer

“The most recent survey published by ChangeWave indicated a 96% satisfaction rate among iPad customers.” ~ Peter Oppenheimer

— Developers

…(W)ith App Stores in 155 countries that encompass almost 90% of the world’s population, our developers have created more than 850,000 iOS apps, including 350,000 apps made for iPad.”

“Cumulative app downloads have surpassed 45 billion and app developers have made over $9 billion for their sales through the App Store, including $4.5 billion in the most recent four quarters alone. Canalys estimate the sales from our App Store accounted for 74% of all app sales worldwide in the March quarter.”

“…(W)e are now paying very happily our developers more than $1 billion every quarter.” ~ Peter Oppenheimer

Revenues, Profits And Margins

Apple had $43.6 billion in revenue. What other company had comparable revenues?

Apple had $9.5 billion in profits. What other company had comparable profits?

Apple had 37.5% margins which is astonishing for a hardware company and compares quite favorably to the margins of both Google and Microsoft, which are primarily software shops.

Courtesy of Asymco

It seems that Apple compares favorably to every other company in the world other than the Apple of 12 months ago.

iPhone 4

“Now, that said, we see an enormous number of first time smartphone buyers coming to market, particularly, in certain countries around the world. And so what we’ve done with that is and we started last quarter is we’ve made the iPhone 4 even more affordable and which has made it more attractive to first time buyers and we caught up on the – our supply – demand towards the late in the quarter last quarter and we are continuing to do that in other markets. And we believe that the phone or the price point that we are offering is an incredible value for people, that allows them to get into the ecosystem with a really, really, phenomenal product.”

One thing that hasn’t been getting enough attention, or rather hasn’t been getting the right kind of attention, is the continued sales of the iPhone 4. The iPhone 4 is now over two and a half years old but it continues to sell well in developed markets like the United States and Europe and in developing markets like China, India and Brazil. How can this be? Is there any other phone manufacturer who could successfully sell a phone that is two generations and two years out of vogue?

The iPhone 4 is proof that buyers are buying Apple’s ecosystem, not just their hardware. So long as Apple maintains a lead in integrating hardware, software and services, they will maintain an edge in mobile computing.

And as an added bonus, while the iPhone 4 may be bring the iPhone’s average sale price down, the sale of this older technology should be bringing the iPhone’s margins up.

Apple’s Long-Term Outlook

“We are managing the business for the long-term and are willing to trade off short-term profit where we see long-term potential. The iPod is a great example of this. When we launched it in 2001, its margins were significantly below the margins of Apple at that time.

Four years later, the iPod and the iTunes Music Store comprised half of Apple’s revenues and inspired us to build the iPhone. The iPad mini is another great example. We have priced it aggressively and its margins are significantly below the corporate average. However, we believe deeply in the long-term potential of the tablet market and think that we’ve made a great strategic decision. We’ll only make great products and this precludes us from making cheap products that don’t deliver a great experience.”

If you look at Apple’s numbers for this quarter and the next, you might think you see a company in decline. But if you look at Apple’s numbers over the fiscal or annual year, you see anything but decline. Let’s put this in perspective: Would you rather have Apple’s profits or those of Google, Amazon, Microsoft or Samsung? Once you put it that way, the answer as to how Apple is doing becomes clear.

Apple dominates the most dominant tech sectors of our times. And unless I’m gravely mistaken, that’s a good thing. A very good thing.

Miscellaneous Musings On Apple’s Earnings And The Future Of Personal Computing

Yesterday Apple released their earnings for the fourth quarter of 2012. It is important to note that Apple had 14 weeks, as compared to the normal 13 weeks, in their year ago fourth quarter. In order to equalize results, all comparisons will be done on a week to week, rather than on a quarter to quarter basis.

(All quotes are from the Apple earnings call.)

(Chart via Ars Technica)

Mac

Apple sold 4.1 million Macs compared to 5.2 million in the year ago quarter. That’s a decline of 16% on a week to week basis. My initial reaction to this news was that Macs were suffering from the same malaise that is plaguing all notebook and desktop computers. I’m sure that this is somewhat true, but Apple laid the blame squarely on supply constraints. In other words, they couldn’t make their Macs fast enough to meet demand.

…we were significantly constrained with respect to the new iMacs and we’re only able to ship them for the final month of the December quarter. We believe our Mac sales would have been much higher absent those constraints. ~ Peter Oppenheimer

Further, it does not appear that Apple is confident that they will be able to make enough Macs for the upcoming quarter either.

On iMac we’re confident that we’re going to significantly increase the supply, but the demand tier is very strong and we’re not certain that we will achieve a supply/demand balance during the quarter. Peter Oppenheimer

iPad

Apple sold 22.9 iPads compared to 15.4 million in the year ago quarter. That is an increase of 60% on a week to week basis.

Clearly the iPad Mini was a big seller, although Apple didn’t break out the specific numbers. Again, Apple couldn’t make enough iPad Mini’s to satisfy demand and they’re still struggling to make enough, even now.

…the iPad mini was very constrained.

We believe that we can achieve supply-demand balance on iPad mini later this quarter.

One interesting note is that the popularity of the lower priced iPad Mini brought the average sales price (ASP) of all iPads down by $101 on a year-over-year basis.

iPhone

Apple sold 47.8 million iPhones compared to 37 million in the year ago quarter. That’s an increase of 39% on a week to week basis.

Again, for much of the quarter, Apple simply couldn’t make enough iPhone 5’s to satisfy demand. More surprisingly, Apple was unable to make enough iPhone 4’s to satisfy demand and they are still struggling to do so.

If you look at the iPhone sales across the quarter, we were very constrained for much of the quarter on iPhone 5.

iPhone 4 was actually in constraint for the entire quarter…

…supply of iPhone 5 was short to demand until late in the quarter and iPhone 4 was short for the entire quarter.

We believe that we can achieve supply/demand balance … on iPhone 4 during this quarter.

This information, along with reports from Verizon, would seem to suggest iPhone 4 sales were growing in caparison with the iPhone 5. However, we have two statements in the earnings call that seem to counter this conclusion.

…the ASP for iPhone was essentially the same year-over-year in the quarter that we just finished.

If the mix of iPhones was drifting towards the older models, one would expect the average sales price to go down, not remain the same.

…if you looked at the mix of iPhone 5 to total iPhone and then in the previous year you look at 4S to total iPhones towards the top iPhone those mixes are similar.

That’s about as plain as it gets (although I still wish it were plainer).

iOS

All told, Apple sold over 75 million new iOS devices this quarter bringing their total to over half a billion. Kantar estimates that Apple gained 6.3% market share in the U.S. and maintained market share in Europe with growth of only 0.2%

Revenue, Income & Cash

Apple’s revenue for the quarter was 54.5 billion compared to 46.3 billion in the year ago quarter. That’s an increase on a week to week basis of 27%. To put that into perspective:

— Apple generated more revenue in one quarter than Google did in all of 2012.
— Apple is getting close to generating as much revenue in one quarter as Microsoft does in one year.

Apple’s net income (profit) was 13.1 billion. That’s an increase on a week to week basis of 8%. To put that into perspective:

— Apple made over a billion dollars in profit a week.
— Apple made more in profit (13.1 billion) than Google made in revenue (11.34 billion). Further, Apple generated as much profit in three weeks as Google did in three months ($2.89 billion).
— Apple’s 13.1 billion in earnings this quarter was the fourth largest of all time.

Apple’s cash totaled $137 billion compared to $121 billion at the end of the September quarter. That’s a sequential increase of almost $16 billion.

The Future Of Computing In Two Parts

I have a pet theory that mobile computing is breaking into a premium iOS operating system and a commodity Android operating system. Please pardon the following very long quotes from Apple’s earning call, but it appears that Apple is thinking along the same lines:

While other mobile devices and operating systems faced increasing security risks and fragmented inconsistent user experiences iPhone and iOS continue to deliver an exceptional experience that people love. They also provide a secure and trusted ecosystem that IT departments require. iPhone continues to be embraced by government agencies and businesses across the globe.

Many U.S. government agencies are issuing iPhones by the thousands as part of their new mobile strategies. Some examples include NASA and National Oceanic Atmospheric Association, Immigration and Customs Enforcement, and the Transportation Security Administration.

We’re also seeing continued growth iPhone growth in business across the board from companies replacing existing smartphone deployments to businesses adding first-time smartphone users. Companies around the world like Neiman Marcus, Skanska and Volvo are issuing iPhone to their employees to improve interactions with customers and give workers access to essential corporate data.

In addition to the tremendous response from consumers, iPad continues to be the tablet of choice for businesses and government agencies, transforming the way their employees work. Financial institutions like Barclays, Nomura Securities, and Bank of Beijing are deploying iPad to enable employees to better service customers and work securely with financial portfolios and products. In particular, Barclays’ rollout of over 8,000 iPads has generated tremendous employee engagement and feedback, making it the most successful IT deployment in Barclays’ history.

State and local governments in the United States are also rapidly adopting iPad. Court systems, accounting inspectors, and law enforcement agencies use iPad to streamline processes and replace huge amounts of paper. And state legislatures in Virginia, Texas, and West Virginia are all using the iPad to give lawmakers instant access to government documents and information.

Outside the U.S., 10,000 iPads are being deployed as part of broad adoption of the local government workflow solution in Sweden and over 5,000 iPads have been purchased by the government in the Netherlands for the Dutch tax authority and the Dutch court system.

Note the adoption of iOS devices in business, government and education. These were areas where Microsoft ruled supreme but now their dominance seems to be waning. And these are areas where Android is struggling despite its massive mobile market share.

Conclusion

Apple is engaged in a battle for control over the future of personal computing. Microsoft and Intel won the last battle but, in terms of unit sales and potential profits, that battle seems almost trivial. While Microsoft and Intel controlled the desktop and notebook markets, it appears that the combination of the smartphones and tablets is going to eclipse the PC’s numbers and profits by far.

There are many companies vying to become the king of personal computing. Each company has its strengths and each has its weaknesses. Apple has the hardware and software in place, but the future of computing is the cloud acting as the digital hub for all of that hardware and software and Apple has not yet proven its competency in that realm. Google has the most popular mobile operating system in the world but they haven’t figured out how to monetize it…yet. Microsoft is the king of the notebook and the desktop but that market is diminishing and Microsoft can’t seem to get any traction in mobile (smartphones and tablets). Samsung is making money – though not as much money as Apple – but they are not in control of their operating system or their ecosystem. Amazon? Geez, how does one evaluate Amazon? The less profit they make the more successful people think they become.

Tech is involved in its own personal game of thrones. And there are many new contestants waiting for their chance to steal the crown. It’s difficult to predict the future of personal computing but it’s easy to see that it’s going to be fascinating to watch.

Game on!

Where Have All The Profits Gone? Gone to Apple, Every One

A few years ago, folks in tech used to worry that all the profits in the PC industry were being scarfed up by Microsoft and Intel and that the crumbs left to PC makers would be insufficient to fund any innovation. For companies not named Apple, those were the good old days.

Apple’s blowout December quarter was stunning enough viewed in isolation. But it is even more striking in comparison to the rest of the industry. Apple’s revenues of $46.2 billion blew past Hewlett-Packard’s $32.3 billion to make it the industry leader by sales. But the real story is profits. Apple’s net of $13.1 billion was just a hair less than the earnings of Microsoft, Intel, HP, and Dell combined.

For a little historical perspective, in 2006, Apple earned just under $2 billion on sales of $19 billion for the entire year. Microsoft and Intel combines for sales of $80 billion and profits of $18 billion. (M.G. Siegler at TechCrunch has a host of other Apple-industry comparisons.)

Apple’s growth and stunning profitability is obviously wonderful news for the company and its shareholders. And there are no signs that its remarkable run is over. The growth rate of the December quarter is unsustainable, but that is a reflection of the strength of one three-month period, not an indication of any weakness.

But the concentration of the tech industry’s profitability in one company is a potential problem for the industry as a whole. Apple is a wonderfully innovative company that has, year after year, come out with the most interesting products in tech. And the iPhone and iPad have spawned a whole ecosystem of successful third-party products.

Innovation, especially in hardware, requires talent, imagination–and money. Apple’s cash hoard–by now over $100 billion–allows it to do things that competitors cannot even think about.

It’s not a healthy situation to have all the innovation coming from one company, no matter how brilliant. But the razor-thin margins of Apple’s competitors make risk taking difficult. Consider the sad case of HP and the TouchPad. Executives of HP’s Personal Systems Group saw webOS and the TouchPad as a way to both challenge Apple and to free the company from the domination of Microsoft. PSG chief Todd Bradley saw this as a fight of “years, not months.” But looking at startup costs in the billions and a lack of instant success, HP’s top management got cold feet and killed the project before it had a chance. A lot of this had to do with HP’s tumultuous internal politics, but the fact that the company earns eight cents on every dollar of revenue while Apple nets 29 cents has to have been an important factor in its skittishness. The problem is the vicious cycle, in which a financial squeeze cripples innovation which damages the prospects for growth.

It’s hard to see how this situation changes anytime soon. Perhaps Google, which has margins even better than Apple’s though it is a much smaller company, can use some of its profits to turn stodgy Motorola Mobility into an innovation engine, assuming that it completes its planned purchase. Maybe the partnership of Nokia and Microsoft will produce something wonderful. But for the foreseeable future, expect Apple to expand its dominance.

Even With a Huge Quarter, Apple is just getting Started

– Apple’s $13 billion quarterly profit is second-biggest in U.S. history. Only topped by Exxon’s $14.8 billion in 2008

– 97.6 billion in cash that AAPL has is higher than the market value of 476 of the companies in the S&P 500

– Apple sold more iPads than HP sold PCs. – HP PC sales 15.123m, iPad 15.43m

– 315M iOS > 250M Android

Quotes from Tim Cook:

“I believe there will come a day when tablet market by unit is larger than the PC market”

“Apple TV is not just a product but a strategy for the next decade. ”

“There is cannibalization of the Mac by the iPad”, but Apple thinks the cannibalization is much worse on the Windows PC side.

I think it’s remarkable that we’ve sold 55m iPads and we’ve only been in the business since April 2010.

After Apple’s blow out quarter, setting records in nearly every category, there is going to be talk and speculation that Apple is peaking. But really, how can Apple beat this quarter they just had? Especially with such fierce competition right? Wrong, Apple is just getting started.

Think about this last year and quarter for Apple. Apple had a record blowout quarter on incremental product upgrades. What if Apple release all new Macs, iPhone, and iPads in 2012? Tim Cook answered the question of how Apple can keep this up. The answer–innovate.

There are still industries for Apple to disrupt. | Four Industries Apple Can Still Disrupt | There are still new products to be made for new types of customers. We are only half way through this 50+ year journey of bringing technology to the masses.

Not to mention new markets. Apple is just scratching the surface in Asia and the Apple brand is one of the most desirable in all of Asia. Consumers in Asia, and China in particular, have an insatiable appetite for Apple products. One could make quite a compelling argument that China consumer may even have more demand for Apple products than the US.

What is my biggest take away from this call? Lots of OEMs better get their tablet strategies in order.

Three Numbers from Apple’s Earnings That Should Scare Competitors

By now you have probably heard that Apple had the best quarter of their existence in the previous earnings period. Ben has given the basic details in his post but I wanted to share with you three other numbers that came from the call with their COO, Tim Cook, after the earnings were released-numbers that should keep Apple’s competitors up at night.

The first is their cash horde. It now sits as $76.2 billion. In my PC Mag column this week I wrote in detail how Apple uses this cash to its advantage and I suggest you read it and see how Apple “invents” products of the future with this cash reserve, making it very hard for competitors to keep up with them. A reader pointed out that if you subtract current liabilities from this cash position, they actually have about $60 billion in free cash to work with. This is still a pretty big reserve to work with.

See: How Apple Uses its Cash Hoard to its Advantage

The second scary number is that Cook said that 86% of the Fortune 500 in the US are testing iPads and looking at deploying them within their enterprise solutions. We already know that SalesForce.com has bought iPads for their entire work force and are seeing major benefits from its use. And Cook also said that it is being tested in many US government organizations as well. If Apple gains a lot of traction with major US enterprises it could make it hard for any other tablet makers to make any serious inroads given Apple’s huge head start with the iPad.

But the third number should really cause the major PC companies with WW reach to be concerned. Tim Cook said that 49% of the Global 500 are testing iPads for use in global enterprise solutions. I am aware of at least two Global 500 companies that are in the final stages of their tests and could buy thousands of iPads for WW deployment by early next year. This kind of interest from Global IT bodes well for Apple and means that their large head start over competitors could serve the very well in this WW market for enterprise-based tablets.

Although the main audience that is driving iPad sales is clearly coming from consumer’s, this interest in iPads within corporate America and WW IT could possibly increase demand more for iPads by a third of what it already is today from consumers. While the big tablet vendors are also eyeing IT markets for their tablets, they better get a serious offering into their IT customers hands soon or they risk the possibility that Apple could “iPod” them in this market the same way Apple innovated around the iPod and pretty much wiped out any competitive threats along the way.

If I was an Apple competitor, I would be amazed at the monster earning numbers. But the three numbers I listed above should have me shaking in my boots.

Why Apple’s Earnings Reports Matter

Today Apple released their earnings report for the third quarter of 2011. As was expected there was much anticipation regarding the earnings, not only from Wall St but also from media outlets. Apple did not disappoint having their best non-holiday quarter ever as well as selling more iPads and iPhones than any other quarter. Outside of continually delivering reports that shock people there is a more significant point about Apple and their earnings progress that i’d like to highlight.

Namely that Apple’s earnings are one of the biggest indicators that not only show the healthy life of the technology economy but they should also give other companies hope. That hope is that if a company truly delivers value to the market place it will be rewarded. They should find hope that consumers aren’t just after the cheapest thing on the market but that consumers truly desire products that add value to their lives and they are willing to pay for it.

It’s not a race to the bottom its a race to provide value. Apple’s earnings continually re-enforce this point.

Below are the key points from the earnings.

Apple® today announced financial results for its fiscal 2011 third quarter ended June 25, 2011. The Company posted record quarterly revenue of $28.57 billion and record quarterly net profit of $7.31 billion, or $7.79 per diluted share. These results compare to revenue of $15.70 billion and net quarterly profit of $3.25 billion, or $3.51 per diluted share, in the year-ago quarter. Gross margin was 41.7 percent compared to 39.1 percent in the year-ago quarter. International sales accounted for 62 percent of the quarter’s revenue.

– The Company sold 20.34 million iPhones in the quarter, representing 142 percent unit growth over the year-ago quarter.
– Apple sold 9.25 million iPads during the quarter, a 183 percent unit increase over the year-ago quarter.
– The Company sold 3.95 million Macs during the quarter, a 14 percent unit increase over the year-ago quarter.
– Apple sold 7.54 million iPods, a 20 percent unit decline from the year-ago quarter.

Overall:
– Apple reported quarterly revenue of $28.57 billion, and profit of $7.31 billion, representing year-over-year growth of 82% and 125%, respectively
– We’ve now sold 222 million iOS devices to date
– International sales made up 62% of the quarter’s revenue, compared with 59% in FYQ2
– Gross margin was 41.7%, above our guidance for the quarter
– Apple closed the quarter with $76.2 billion in cash, compared with $65.8 billion at the end of the previous quarter
Mac:
– 3.95 million Macs were sold, a record for the June quarter
– Mac sales grew 14% year-over-year, four times the global PC market growth, according to IDC
– The Mac has outgrown the PC market for 21 straight quarters – more than five years
– International Mac sales continue to be strong, growing 57% year-over-year in Asia Pacific
– Peter Oppenheimer shared that Lion, the new version of OS X, will be available tomorrow
iPhone:
– Apple sold an all-time record of 20.3 million iPhones during the quarter, compared with 8.4 million in the year-ago quarter, 2X IDC’s growth estimate for the smartphone market
– iPhone is being deployed or piloted by more than 95% of Fortune 500 companies, and by 57% of the Global 500
– iPhone is now available in 105 countries through 228 carriers, and year-over-year sales quadrupled in Asia Pacific
iPad:
– Apple sold 9.2 million iPads in the quarter, up from 3.3 million in the year-ago quarter
– Supply improved and we’re still selling every iPad we can make – iPad is now available in 64 countries
– iPad is now being deployed or piloted in 86% of Fortune 500 companies and 47% of the Global 500
– There are more than 100,000 apps designed for iPad in the App Store
Music:
– Apple sold 7.54 million iPods, with iPod touch continuing to make-up over half of the iPods sold
– iPod maintained over 70% marketshare in the US, according to NPD, and is the top-selling MP3 player in most countries for which we have data
– iTunes Store revenue was up 36% year-over-year, reaching $1.4 billion
– We have paid over $2.5 billion out to developers, as the 425,000+ apps in the App Store have been downloaded more than 15 billion times
Retail:
– Apple plans to open 30 new stores this quarter, for a total of 40 new stores this fiscal year
– Mac sales in our retail stores totaled 768,000, up 13% from the year ago quarter, and 50% were to people new to the Mac
– Apple’s retail stores brought in $3.5 billion in the quarter, up from $2.6 billion in the year ago quarter