In the earlier part of the series we discussed the real numbers behind the skyrocketing sales of Netbooks and Microsoft’s financial loss due to Linux’s significant market share. Now we’re talking about something that’s often missed but actually accounting for a bigger hole in MSFT’s profit: the cannibalization of Vista sales by XP. Once again, we did the heavy work and dug up numbers from reputable sources.
$56 - Average revenue for each copy of Windows
Less than $20 - Estimated revenue for each copy of Windows XP (Endpoint Technology Associates)
For the first time in recent memory, Microsoft has a real operating system competitor for PCs. And Vista is not up to the challenge because MSFT wants to sell it for full price and it’s too resource intensive for low powered netbooks . So MSFT is relying on its two year outdated OS, Windows XP to take on Linux. Vista runs on a neglible 1.5% of Netbooks.
Lets run the math. Once again, software is a unique business model in that every incremental sale adds to the profit because development costs are fixed. Likewise, sales losses hit the bottom line.
10 million x $36 difference in cost = $360 million
Earlier we calculated that lost sales due to Linux marketshare was $75 million. Quite interestingly, MSFT is actually realizing a much bigger loss due to the price cut of XP. Getting in a price war with a free product is never going to be pretty.
Microsoft recently had to lay off 5,000 employees. It did not mention what percentage of that were R&D staff vs sales, marketing, finance, etc. But lets assume a developer has a total cost (salary and benefits) of $150,000.
($360 million+ $75 million) / $150,000 cost of developer = 2,900 developers.
These are the cold numbers. This nightmare cost Microsoft roughly $435 million last year. Developers are the lifeblood of a software company and 3,400 developers could have avoided the axe. This trend is set to accelerate in 2009 because of the skyrocketing sales of Netbooks.
The Existential Question
These numbers are demoralizing and Microsoft faces a tough question on how to exactly deal with this threat. But it faces an even more abstract quandary: what does an operating system company do when operating systems become a commodity?
The company previously did offer good value to its customers. Windows has always had more than its fair share of problems. At release the various versions are always buggy and full of security holes but overtime theses issues are fixed to a reasonable degree. Linux previously was not user friendly enough for mainstream users and more importantly could not run the vast majority of programs. The $50-60 for a copy of Windows was a small price to pay for consumers because it allowed them to use their computer.
But now Microsoft is facing several new trends in tech. “Cheap computing” has been predicted by experts for years but is finally a reality. And on a $250 netbook, an additional $50-60 for an OS is a significant amount of money. Linux has been sharpening its teeth over the years and is finally ready for the prime-time. And the internet has become the operating system. The advent of Firefox and Open Office allows users to do the vast majority of tasks they want to do with their computer.
Where does that leave Microsoft? There are plenty of companies that have to fight free alternatives by giving value to their customers. Bottled water companies give convenience and a perception of cleanliness. But what value can an OS give if its free rival can do everything it can?
In war strategy, controlling the high ground is often the key to winning the battle. In computing, the low end is the high ground. Decades ago companies like Digital and Wang Laboratories controlled the computer market with their mini-computer. Then Microsoft and the PC market emerged. Overtime, PC cannibalized the sales of mini-computers, and companies like Digital and Wang have been relegated to history books. The same effect is happening again. Netbooks are altering the playing field.
Investors are clearly panicking. MSFT plunged 44.4% in 2008. But even with the depressing numbers don’t count Microsoft out yet though. They’ve been written off numerous times before only to come back and win.
Great article!
Aside from the price - If I were to run windows on my netbook instead of Ubuntu, I wouldn’t get the same performance. It is such a lite weight OS and it uses only a fraction of the resources of even XP. I wouldn’t dream of trying to run Vista on it.
Well, i confess i don’t imagine Microsoft keep existing for too long, at least on the operating system area - they are still too 80’s minded, and too big, corporative and bureaucratic - i can’t imagine future for it - i think the less stupid option Microsoft would be on keep developing ms-Windows is to developing it as open-source - cleaning these sources from third party code (like Sun and SGI did on their Unixes), or abandoning it prior to ReactOS - but i think, even this way, the competition with Linux is becoming more impossible day by day… And we must understand ms-Windows is still being used from around 90% of their users just because it comes in the computer (OEM), not because people chooses it…
I wonder whether netbooks really are the “high ground” today that PCs were in the past. Could it be that netbooks, currently at least, are extra computers and not replacing regular laptop or desktop purchases? In that case, those extra computers would become extra sales of Xp and in fact, a windfall for MS, because, as you’ve pointed out, the costs for Xp are fixed and every sale is pure profit.
I guess the question is: Are netbook sales cutting into regular laptop and desktop sales?
While this will dent the MS juggernaut, I think they will recover to a degree from this specific situation. I know only what I have read about Windows 7 but I hear it runs on netbooks which says they have been thinking about this for a while so the largest block of time they will take these losses would be until this OS comes out. They know 2009 will suck for them in this market segment.
Where I think we will see some serious decline in marketshare is the next evolution onto new hardware platforms; the line between phone/pda/pc is blurring at a rate that is alarming to them I am sure since they have literally bet the farm on intel. As powerful as they are they don’t have the power to be in every market segment and linux has been playing this hardware game for years. MS will have to redesign from the ground up or give up a particular market segment. The irony would be if they constantly found themselves playing catch-up with an OS that they regularly disparage as “1960’s technology”
I have been predicting that Vista will cost Microsoft the farm, regardless of competition from Linux. Forcing people to buy something they don’t want and denying them the chance to buy something they do want (XP) is no way to treat the customer.
The steady increase in pricing for both the OS and the applications is very difficult to justify in a market where people know and understand the costs of replication.
It cost Borland their reputation, their market, and their company: I bought at least five generations of their pascal compiler, but they started to double the price with every version, and the added features and capabilities became less and less compelling. Where are they now?
This is the route Microsoft are on, trying to force people to re-purchase something that is already good enough for an ever increasing amount of money. Linux is not the main issue driving the crisis - Microsoft is.
Yes, Linux is a free competitor, which does sneaky things to the equations. But were it not there then there would be other paid-for OS options, like Mac, Solaris, something from IBM, Novell Netware 2008, or something from somewhere else. Phar Lap are still in business, after all. Linux has prevented commercial competition for windows just as much as it threatens microsoft. And regardless of what the competition actually is, it is the trading model of M$ that is the cause of its downfall.
In other words ‘You cannot fool all of the people all of the time’.
I’ve seen some good reviews of the newest MS filesharing application? / server service? coming in the next Windows.
The question will be what their place is when client server architecture is gone. Wang et al just didn’t have a fast ubiquitous network. Now, ATT, Google, etc. do.
How will they turn sharepoint server, Groove, Excel (love Excel), into server based internet applications like Google docs and at a profit?
The real question today is how to achieve a secure web, maybe you can’t have an anonymous web, then there are real (political/corporate) control issues to trade off.
Trust is really the one issue stopping full fledged, total migration to the “graphical mainframe”.
Don’t underestimate Microsoft - if they are allowed to illegally abuse their 90% monopoly of the desktop and office suite markets, then they will eliminate the competition as they have before.
Never in history has a company been allowed to abuse and maintain its monopoly in the US for so long and to such an extent with the anti-trust authorities turning a blind eye. The signs from the Obama regime are not promising, with Obama’s anti-trust honcho making a statement implying that Google and not Microsoft will be targeted by the DOJ. It looks like Microsoft may have managed to buy influence in the Obama camp to keep the DOJ from effecting effective anti-trust provisions as it did in previous US regimes.
They aren’t dead yet. Their problem this year is that they were caught flat footed by netbooks so they were forced to give away XP so that they could maintain market share. That could change next year assuming that Windows 7 runs decently on next year’s netbooks. The obvious strategy is for MS to give away Win7 Starter Edition which will allow the Win7 netbooks to have an apparent price that’s the same as a Linux netbook. Starter Edition is practically useless which most users will figure out pretty quickly. MS will provide a simple in place upgrade mechanism which will allow users to click on a button, and after providing a credit card #, they will be able to upgrade their netbook to a useful version of Win7. Say the user has invested $200 in the netbook, when they find out that it’s useless as configured they won’t have any choice but to fork over another $40 or so to buy Home Edition which would make the device minimally useful. Once they’ve done that many users will choose to repeat the process and upgrade to the next level. At the end of the day MS could end up making more money on a $200 netbook then they would on a full fledged machine because all of the upgrade purchases will be at a retail price rather than the OEM price they receive when the OS is bundled with a more expensive machine.
Tim,
There is reason to believe that netbook sales are eating into “traditional” computer sales. Sales of netbooks are skyrocketing while full-powered PCs and notebooks are falling:
http://www.netbookdigest.com/2009/02/12/the-cold-numbers-of-microsofts-netbooklinux-nightmare/
Alex
Netbooks are a nice fit with Linux. They are more utility than for full productivity. Linux compliments this class as described in the article. Microsoft is losing ground. It has learned pushing their weight no longer works.
More links for Tim. The flip side, those who bought netbooks would not have bought notebooks is not a 1 to 1 ratio. At a minimum, I would say 50% of netbook buyers would have bought a notebook had the choice not existed.
So you have 2 way cannibalization. Those who would have bought a laptop bought a netbook and those who bought a netbook and now, the future sale of a notebook won’t happen.
http://www.liliputing.com/2009/02/netbook-sales-are-up-are-they-saving-or-killing-the-computer-industry.html
http://www.digitimes.com/news/a20081219PD206.html
Low-end notebooks have faced declining market demand during the second half of this year largely due to the rise of the netbook market.
http://www.crunchgear.com/2009/01
http://www.liliputing.com/2009/01/gartner-pc-sales-revenue-is-down.html
One other point that doesn’t bode well for Microsoft in this segment, you will get a huge diversity of specific function netbooks coming soon. You will have the MEI (multimedia centric web focused segment). The Appliance type (Linpus, Xandros), the general tool (Ubuntu Remix), but I can see “Businessified” distro’s (turn key just for business people), Gaming type (as hardware power increases), etc. I can see HP offering the same base hardware (in a couple of years) and you pick your flavor of OS based on your specific needs. Windows offers the general tool only, and they don’t have the resources to customize it the same. Example, take a look at the sheer number of language packs for OO.
http://wiki.services.openoffice.org/wiki/Download_OpenOffice.org_LanguagePacks
TripleII
Microsoft was in deep trouble, the day Linus and before him Richard Stallman were born. Microsoft’s fate was already woven decades ago.
It just so happens, that MS was able to get a quick buck or two BEFORE the Open Source movement got enough steam and momentum.
Computer software is something that
a) has to be done right from the get go, else refactoring the code will cost too much
b) Software programs have to be able to throw out old habits, which Linux does well, but MS windows just can not throw away all their backwards compatibility.
Regarding part B… MS was recently SUED because Vista was not backwards compatible enough with XP, so corporations SUED Microsoft.
MS has EVERYTHING going AGAINST it. (bugs, viruses, bad core design, too corporate)
While Open Source and Linux has everything GOING for it. (Millions of minds building software, that was ALREADY good from the get go, immune to viruses, no corporate company to strangle hold decision making and stiffling innovation.)
Apple, well is somewhere inbetween. OS X is really UNIX BSD at the core, yet so expensive to buy it allowed Apple to invest into it even more. Also, Apple is smart by selling things (besides software) that people actually want.
The only thing I can see, that MS has produced that isnt 100% software is the XBOX. But, even the XBOX was flawed with the Over heating problem, costing MS all their profits by doing recalls and refurbishes.
Microsoft is NOT adapting to the situation very well. It can only COPY ideas, which by than is too late to make a difference. In other words MS is REACTING to the market, not trend setting as they used to be doing with NT and Windows 3.0-XP.
They could do what apple did, and use a UNIX BSD and put Areo on top, making it a secure OS again… but then that just ENDORSES Linux!
I feel bad for all the rich Microsoft employees and their millions in stocks… I mean, what will they all do now that their WINDOWED office is going away!
Hate to break this to you. Microsoft has enjoyed record revenues over the last few years. Desktop or Windows OS sales were were down 8%. Server and tools were up 18%.
http://www.microsoft.com/msft/earnings/FY08/earn_rel_q2_08.mspx
http://www.microsoft.com/msft/earnings/FY08/earn_rel_q4_08.mspx
Microsoft’s main revenue stream is Server products and Office. The Desktop OS is for running their other products.
I use Linux as my personal OS, but Linux stopped worrying Microsoft when the Desktop got hyped and everyone forgot about the Server roles. Same with OSX.
You can have the desktop. Just stay away from the business and Enterprise. MS won’t even bother to run targeted ad.
The FUD website, the threats of suing customers over IP infringement and buying interests in Linux vendors all stopped once the focus went to the desktop.
You aren’t going to see any antitrust actions. That was over in the 90’s. The only people who care about punishing Microsoft are Linux and Apple users, and Macheads not really interested because they think CEOs are going to force Apple into the enterprise.
A drop in replacement for Exchange, CRM and Sharepoint etc…will hurt them. They would like to dominate Netbooks, but it hasn’t really hurt them. Whatever they lost was more than made up for in Server products.
MS hasn’t done any good since Bill Gates stopped being captain.
Their core business is the desktop and that was already declining before Vista in a growing market.
Their server systems are not suitable for big business. Four 9s reliability and low energy footprints are better served by big iron hardware of the traditional UNIX variety, hardware that can be relatively easily migrated to Linux, especially in light of the latest kernel and file systems.
The trend in netbooks is towards low cost and solid state hardware including drives.
Traditional Windows and Linux filesystems tend to over stress SSDs with too many read/writes. The new Linux ext4 filesystem solves this problem and increases performance.
Whether Windows 7 has this capability is unknown, but added cost for an OS and software on high performance low cost netbooks in the $100 range may be not be what hardware are willing to install.
I think estimating the cost of developers at $150000 is probable slightly on the high side….
Microsoft does, however, have a huge problem in that it can’t compete with Linux on purchase cost, and most definitely can’t compete on ‘cost of ownership’.
Windows users generally spend huge amounts on virus checkers (which require a huge investment in increased disk speeds, and a separate CPU with the virus checker bound to it using a suitable CPU affinity mask. i have had to set up several machines at work like this, since our IT dept. insists on virus checkers - however, we charge them for an extra CPU + disk, since the virus checker is not going to run on hardware that our department has purchased, and we insist on RAID5 on any such systems to narrow the loss in disk performance! I suggest all departments supported by a Windows IT shop do the same). Windows also is plagued by a need for anti-spyware programs, and suffers general ‘odd’ problems. For example, I have seen numerous Vista systems rendered un-bootable after being automatically updated (including my own laptop). What did I do wrong? I left it switched on with automatic updates one night. Vista is bad. Windows 7 from early experiences is not any better.
Netbook type system will force Microsoft to ultimately lower the costs of Windows (and not just for some crippled version that completely sours users’ experience of Windows, by imposing some stupid arbitrary limit on the number of processes, etc.) Windows now accounts for a vast proportion of the cost of a computer, when it should, in-fact, only amount to a few tens of cents. If Microsoft does not change with the times, it will find itself slowly eclipsed, as it lethargically clings on to a sinking business model.
As for servers, and enterprise, I wouldn’t employ anyone who deploys any such products, of microsoft creation. All of our Windows servers are a nightmare, requiring frequent scheduled downtime for their stupid security update reboots. Totally unacceptable. Any other platform can patch WITHOUT rebooting. On some Linux versions, we can even replace a kernel without rebooting. Fix this now Microsoft, if you want to be taken seriously.
Boycott Novell » Links 23/02/2009: // Feb 23, 2009 at 6:08 am
[...] The Linux Netbook Nightmare:$435 million in vaporized MSFT 2008 profits (cont) For the first time in recent memory, Microsoft has a real operating system competitor for PCs. And Vista is not up to the challenge because MSFT wants to sell it for full price and it’s too resource intensive for low powered netbooks . So MSFT is relying on its two year outdated OS, Windows XP to take on Linux. Vista runs on a neglible 1.5% of Netbooks. [...]
Do not forget about ARM architecture for netbooks. Freescale. TI OMAP. NVidia. These processors will further push prices down and greatly extend battery life. Best of all, Windows cannot run on netbooks so equipped. It’s harder for Microsoft to pressure a manufacturer of a device that can’t even run Windows.
The Windows fanboy chorus will claim that Microsoft can port Windows to ARM (or other processors). But the value of Windows is in its ‘legacy’ applications, not the OS itself. Of the applications, how many CAN be ported to ARM? Of those, how many WILL be ported? Of those, how many vendors will see it as opportunity to price gouge? Even if not price gouging, when you get the $39 Photoshop Ultra Light Netbook edition (which would be a good price), and ten similarly priced apps, you just destroyed the economy of netbooks compared to Linux comming with dozens of preinstalled apps. Windows fanboys can’t just pirate their x86 copy of software they own or previously pirated. Oh, Boo Hoo! Plus Linux comes with something Windows does not: a real web browser.
Netbooks, and computers in general, are doing price-wise what happened to pocket calculators.
When a netbook is $99 or $49 in a blister pack on a peg at Walmart, the current Microsoft business model no longer works. If a netbook is, say, $99 retail, then the wholesale price must be about $40. The manufacture cost must be about $25. Where’s the room in that price for Microsoft’s cut?
Linux isnt going anywhere. As a “free” alternative and after a decade it can not get its act together to give the seamless presentation 95% of users want.
Add in costs for a commercial flavour and its a noddy shop poor imitation of windows at a price.
Microsoft owns the OS market, being a few % points down for a few months on a teeny segment doesnt make the slightest difference.
If anything it simply gives them some anti-trust brownie points.
When Google brands a linux netbook then perhaps……otherwise its just the same old Microsft bashers looking for salvation.
Netbooks Cost Microsoft Lost Profits | The VAR Guy // Feb 24, 2009 at 2:23 pm
[...] source industry. But along comes this blog post from Netbook Digest suggesting the software giant lost $435 million in profits because of the Netbook boom and low-cost competition from [...]
Ubuntu Runs On One Of Every Three Dell Netbooks Sold // Feb 24, 2009 at 4:43 pm
[...] Jay cited Linux’s ability for Dell to offer a very low price point as a key advantage. One of the largest computer manufacturers is basically saying that operating systems are a commodity. [...]
Microsoft Holding Back New Office Suite: OpenOffice to Blame? // Feb 24, 2009 at 9:24 pm
[...] Last year, in 2008, Microsoft cannonballed into the netbook market, and sales jumped to 15 million total netbooks sold. Conservative estimates put Linux sales at roughly 30% of those 15 million, 4.5 million. More in-depth numbers and analysis can be found in this post. [...]