A few weeks back I wrote a column headlined "Microsoft Looking Like An End-Stage Company," in which I made the audacious suggestion that Microsoft as we know it may not exist in five years. I said Redmond's failure to perceive the grave threat to its core franchises posed by new computing form factors like tablets and smartphones could result in a vastly downsized company struggling for relevance in tech's most important markets.
Responses included a good number of hoots and guffaws from readers inside and outside the industry who said I was nuts to believe a company with $62 billion in revenue and a 90% share of the PC operating system market could be faced with an existential crisis in just the next half decade. One wag suggested my thinking was "madness."
He was right. In light of new information, it seems I was off the mark. So let me correct myself with the following: Microsoft as we know it might not exist in two years.
I'm revising my thesis based on research published Sunday by Goldman Sachs that is, in a word, stunning. Goldman's analysts dropped a pair of notes in which they predict the PC industry will grow next year not by the mid-teens number most in the industry expect, but by just 8%.
At the same time, Goldman thinks tablet shipments will increase by more than 500%! And the real game changer, according to the investment bank's world-class equity research team, is that all those tablet shipments will cannibalize PC sales at a rate of 35% in the next year alone. In other words, one in three PC sales will be lost to tablets in 2011, if Goldman Sachs is right.
Unless something changes real soon, almost none of those tablets will be running Windows software. "A tablet response is still not forthcoming," Goldman's Sarah Friar said of Microsoft, in her note. How much revenue is at risk? If tablets knock down Windows sales by a third, that adds up to about a $5.5 billion haircut to Microsoft's top line. But it's more complicated than that.
With so much platform competition, Microsoft will be forced to lower the licensing fees it charges to OEMs. "With a multitude of operating environments popping up on tablets, Microsoft may not be able to capture a dominant share in this segment of the market. For PC vendors, this may mean that they finally have a powerful negotiating tool for OS pricing," says Goldman Sachs hardware analyst Bill Shope, in his note.