Horsemen of the post-PC apocalypse? What signs of a waning PC industry really mean

microsoft surface tablet

Back in 2010, late Apple CEO Steve Jobs declared that the “post-PC” era had begun, while at the same time acknowledging that the transition away from traditional desktop PCs would be awkward and take quite a bit of time. The “post-PC” term has stirred up some controversy: Microsoft claims Apple has it wrong, and its own “PC Plus” vision is the more likely scenario. Either way, as consumers, schools, governments, and enterprises embrace a wealth of mobile technology including media players, smartphones, tablets, the computing landscape is definitely changing.

The first signs of that disruption may now be rippling out. Microsoft just filed its first ever quarterly loss as a public company. Intel’s ambitious Ultrabook initiative designed to bolster and invigorate PC sales appears to be going over like a lead balloon. A year ago HP was considering selling off its world-leading PC business. Chipmaker AMD says the future of PC sales looks dire. Former PC-making giant Dell is no longer better on PCs; instead it wants to be a software-and-hardware company more like Oracle or HP that sells servers and services, not desktops and notebooks.

Is the rising tide of a “post-PC” world about to put the titans of the traditional PC world underwater? Here’s at closer look at what each of these signs really means.

Microsoft’s first loss in 26 years

microsoft logo steve ballmer

Microsoft raised eyebrows with the financial results for its fourth quarter of fiscal 2012 this week. The headline (“reports record fourth-quarter revenue”) sounded rosy, but the company chalked up their first quarterly loss since becoming a publicly held company. That’s probably not an achievement Steve Ballmer wanted on his CEO record. Although Microsoft did rack up a record $18.06 billion in revenue for the quarter, when everything shook out the company still lost $492 million over the three-month period.

Is this a sign Microsoft’s Windows empire is crumbling under the onslaught of Apple, iOS, Google, Android, and social media kingpins like Google and Facebook? Not really — or perhaps the better answer is “not yet.”

Several factors led to Microsoft posting a quarterly loss. The most significant was Microsoft writing off a whopping $6.19 billion in goodwill resulting from its 2007 purchase of marketing firm aQuantive. Without that one-time writeoff, Microsoft would have turned in a quarterly profit of nearly $6 billion. That number would have represented growth from $5.9 billion over the same quarter a year ago, and $4.5 billion a year before that. Microsoft also deferred some $540 million in revenue related to the Windows 8 upgrade it announced in June — another one-time event that impacted this quarter’s revenue. Microsoft is launching Windows 8 next quarter; despite the upgrade offer, the imminent launch of a new operating system is going to depress sales of new PCs with Windows pre-installed, as well as sales of Windows 7 licenses.

Microsoft’s core revenue-generating businesses — the Business division (Office), Windows, and Servers & Tools all did well. The Business division posted 7 percent year-on-year growth with fourth-quarter revenue of $6.3 billion all by itself. Servers and Tools reported its ninth consecutive quarter of double-digit growth with quarterly sales of $5.1 billion. Commitments from enterprises and other volume licensees mean Microsoft also has a record unearned revenue balance of $20.1 billion — that’s money it hasn’t yet collected, but has every reason to expect is coming soon.

So Microsoft’s on-paper loss isn’t a reflection of the state of its core businesses, which are doing OK. The Windows empire contributed a bit to the loss by way of deferred revenue leading up to the launch of Windows 8, but Microsoft’s acquisition of aQuantive was the the biggest factor. Microsoft had hoped the agency would help it rev up its own online advertising empire to better compete with Google. But even at the time of acquisition, many industry watchers viewed it with some skepticism — just a tit-for-tat reaction to Google acquiring DoubleClick.

Microsoft’s online services division — which includes Bing as well as its online advertising business — is still the biggest drag on the company’s profits. However, the Online Services division is showing slow, incremental growth in both revenue and search market share.

AMD’s falling revenues

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Microsoft’ stumble could be painted as an on-paper, one-quarter glitch, but not every PC company has such a convenient excuse. One example would be chipmaker AMD: It reported second quarter revenue of $1.41 billion, operating income of $77 million, and net income of $37 million. That might not seem too bad for a company that’s seriously investing in R&D to better compete with chipmaking giant Intel and trying to make a serious play in mobile. But it’s all relative. That $1.41 billion represents an 11 percent decline in revenue from the previous quarter and a 10 percent year-on-year decrease.

The same factors that are depressing Windows 7 sales during the quarter (like the upcoming launch of Windows 8) mean fewer PCs with AMD processors are being sold. In a conference call about the earnings, AMD CEO Rory Read didn’t have much positive to say about the PC industry, noting that PC shipments have declined for three quarters running for the first time since 2001, and have been below average for the last seven quarters running. Read concluded that AMD believes the PC industry is settling towards a new normal, where base PC sales will continue to be lower than historical figures. It’s worth noting that AMD’s chip sales are more sensitive to fluctuations in consumer demand for computers than Intel.

PC makers looking for an exit door

Does anyone want to make PCs anymore? Before bringing Meg Whitman in as CEO, computing giant HP famously considered selling off its entire PC business — and it’s the largest PC maker on the planet. If a company the size of HP can capture the largest share of the PC market and doesn’t find the PC business worth its time, what does that say about the business overall? Of course, shortly after taking over as CEO Whitman reversed course, but doubts about the PC business remain.

Dell used to be the top PC maker in both the United States and worldwide markets. It’s still number two in the U.S. market behind HP, although Apple has slipped into the number three position behind it. (Apple is in a distant third place: Apple’s PC sales are just over half of Dell’s.) Worldwide, Dell was in third (IDC) or fourth place (Gartner) behind HP, Lenovo, and (maybe) Acer.

Gartner worldwide PC sales July 2012

Worldwide PC sales figures show a 0.1 percent decline in shipments compared to a year ago: a small enough decline that it might be considered an aberration. However, both HP and Dell showed double-digit market share losses during the second quarter of 2012. That’s more than an aberration.

There were some winners. Asus and Lenovo both showed strong growrth, with Acer also able to expand its footprint. The former two have been aggressively cutting prices to spur sales. That strategy seems to be working: In its most recent quarter, Lenovo reported $7.5 billion in sales, translating to $806 million in gross profit and a margin of 10.8 percent. Asus seems to be fueling its sales jump with entry-level and mainstream notebook sales. And although it’s not reflected in PC sales figures, it’s also the manufacturer behind Google’s Nexus 7 tablet.

It’s easy to argue that HP and Dell are both tired of the PC business — and so are having their lunch eaten by leaner and hungrier players like Asus and Lenovo. HP, of course, is in a wide range of businesses, but increasingly sees itself as a provider of enterprise and data-center services. Dell is moving into the same area, looking to become a provider of cloud solutions and enterprise services (as well as the hardware that drives them). The president of Dell’s software division recently said he envisions the company’s software business eventually accounting for $5 billion in annual sales at some point down the line. Right now, Dell sells about $1.5 billion in software a year. Just to put a bow on it, this week Dell CEO Michael Dell claimed the “new Dell” isn’t really in the PC business anymore. (He claims it’s in four: PCs, sure, but also enterprise hardware, services, and networking.)

Bottom line: Two of the world’s largest PC makers — HP and Dell — are starting to behave less like serious competitors and more like companies operating a business on maintenance mode while they focus their attention elsewhere. For both companies, that looks to be enterprise computing rather than hardware consumers will hold in their hands.

Intel’s Ultrabook stagnation

Lenovo IdeaPad U310 Review ultrabook lid open blue white shell

At the heart of the PC industry is chipmaking giant Intel, which saw its second-quarter revenues slump from $3 billion a year ago to $2.8 billion in its most recent quarter. Those results were actually better than the market expected, but at the same time the company cut its forecast for the third quarter, citing slower than expected growth due to the “challenging macroeconomic environment.” Nonetheless, Intel actually saw its PC revenue grow: PC client volume was up seven percent for the quarter, although that gain was offset a bit by a two percent drop in prices. Overall, the PC unit pulled in revenue of $8.68 billion and turned $3.42 billion of that into profit.

Intel is still betting heavily that Ultrabooks will pay off handsomely in the second half of 2012, most likely after the introduction of Windows 8. It also hopes it first foray into smartphones (including an Android partnership with Google) will gain industry momentum. But Intel’s footprint in the smartphone and tablet market remains to be seen. The company has been trying for years and so far as absolutely no traction — and Ultrabooks still appear to be a dud — for now, anyway. Nonetheless, while Intel didn’t have a great quarter the company didn’t do badly. And Intel truly is a global company, so economic conditions around the world matter. During the second quarter, 58 percent of Intel’s revenue came from the Asia Pacific region, compared to 21 percent in the Americas and 12 percent in Europe. Intel also still says it expects the second half of 2012 to be more lucrative than the first half.

Are we there yet?

Apple iPad iPhone MacBook Air

There’s no doubt that consumers are increasingly deferring or even foregoing purchases of new PCs in favor of smartphones, tablets, and even dedicated consumer electronics devices like Roku boxes and Apple TVs. (Remember when home-theater PCs were all the rage? Not so much anymore.) There’s also no doubt the bastions of the PC business have found it necessary to diversify their businesses in order to keep investors happy. PCs can still generate cash for someone, but price competition is intense and there are higher-margin businesses open to PC makers. Nearly all the major players in the PC business — including Microsoft and Intel, as well as companies like HP and Dell — are all seeing increasing portions of their revenues come from businesses that are not directly related to PCs.

But none of these financial results indicate the end of the PC era — or the official start of a post-PC era. Despite a one-time blip, Microsoft’s core revenue situation issolid. Despite the failure-to-date of Ultrabooks in the consumer marketplace, Intel is still managing just fine. The PC will not be going away anytime soon.

But Steve Jobs’ description of a post-PC era may have still been accurate, especially likening the emergence of smartphones and tablets to the emergence of passenger cars. In 2010, Jobs noted “As vehicles started to be used in the urban centers, cars got more popular. […] PCs are going to be like trucks. They’re still going to be around, they’re still going to have a lot of value, but they’re going to be used by one out of X people.”

It’s interesting to note that, in historical terms, we don’t generally think of the distinction between cars and trucks as being tremendously significant in transportation development. Instead, we tend to think of internal combustion engine as the development that put cars and trucks on the roads instead of horses and buggies. Nobody spoke of a “post-truck” or “truck plus” era. In the end, the market for electronics might just start to look like the diverse market for vehicles we know today. SUV, sedan, compact…desktop, tablet, smartphone?

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