Operating Systems as Commodities

Back in 1995, when M$ was figuring out how to control the ecosystem Paul Otellini (Intel) wrote,
“Microsoft doesn’t want Intel to be in the system software business for the very same reason – we don’t want the operating system to be a commodity.”

Commodity – “2. That which affords convenience, advantage, or profit, especially in commerce, including everything movable that is bought and sold (except animals), — goods, wares, merchandise, produce of land and manufactures, etc.
[1913 Webster]“

Well, here we are in 2012 and operating systems are a commodity and Intel is in the operating system business. In the mobile space a half dozen different operating systems are common. In the non-mobile space there are a few operating system in wide usage.
MSFT shows no growth

Growth Est MSFT Industry Sector S&P 500

Current Qtr.

-4.90% 12.10% N/A 17.00%

Next Qtr.

-5.80% 34.60% 1,130.80% 15.20%

This Year

0.00% 19.40% 12.50% 11.00%

Next Year

11.90% 26.40% 46.50% 13.50%

Past 5 Years (p.a.)

13.96%

Next 5 Years (p.a.)

7.96% 20.28% 17.82% 10.56%

P/E

12.21 15.06 15.48 15.06

PEG Ratio

1.53 0.89 0.10 4.42

That table includes the entire revenue of M$, not just the client OS segment. The client division is the cause of most of that drag because all the forces of the market are to lower its price. The problem for M$ is that if they lower the price the bottom line will take a larger hit and if they don’t lower the price they will lose unit-share of operating systems and the other segments will follow the client division into the toilet.

The reason M$ feels pricing pressure is that MacOS sells for a tiny price compared to that other OS and */Linux sells for $0. The market is shifting 90million PCs per quarter and 100million smart thingies per quarter but only 50million PCs are getting M$’s OS. The revenue is not plunging but the installed base, that requires goods and services from those other divisions, is shrinking rapidly. NetApplications shows ~1 percentage point per annum (non-mobile) but that is biased to business usage. A more general sample from Wikimedia.org shows ~8.16 percentage points of all page views (mobile and non-mobile) (81.96% a year ago – 73.80% today). 93% of their hits come from non-mobile OS. M$’s non-mobile share has fallen from 87.9% to 85.16%, 2.74 percentage points per annum, 3.11% of share.

Normally, this would be a tiny dent in a business’ performance but when it comes form the flagship product, with nothing but “8” on the horizon and present users don’t like it, and ISVs don’t like it, there is no upside. The slide will continue, and as the loss of traction affects other segments, will accelerate. “7” is still available but “8” is looking like the next Vista, which did nothing for M$. The market for personal computing is exploding and M$ is no longer part of the growth.

Meanwhile, most OEMs are shipping more and more GNU/Linux systems and folks who weren’t into personal computers at all are shipping many millions of ARMed machines. This year, those ARMed machines will penetrate M$’s traditional markets in the form of compact desktop, notebook and thin client computers with no need at all for a copy of M$’s OS. Business, M$’s bread and butter, is busy writing web applications that will be accessible from any browser and can run on any server with no need at all for a copy of M$’s OS at either end. Then there is the cloud where M$ is taking only a small share. Apple shipped more mobile personal computing devices than HP, Dell, and Acer, combined. Android/Linux was activating on new devices 850000 times per day. The OS is a commodity and M$’s offering is over-priced. Where there is choice, people are choosing the competition.

About Robert Pogson

I am a retired teacher in Canada. I taught in the subject areas where I have worked for almost forty years: maths, physics, chemistry and computers. I love hunting, fishing, picking berries and mushrooms, too.
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23 Responses to Operating Systems as Commodities

  1. Clarence Moon says:

    I think I’m getting too old to worry about such things, but that is a cute twist. Imagine the US becoming so poor in terms of valuation of its riches that we are the low price producer of things, even Mr. Pogson’s elusive small, cheap computer!

    On the one hand we are told that China is becoming rich and powerful. On the other, that wealth seems to be due to having hundreds of millions of China’s citizens employed by mega-manufacturing firms that keep their employees on campus, housed and fed, so that they can be worked to death on 12 hour or longer shifts. Who, in China, is the beneficiary of the new wealth there?

    If there are a bunch of really wealthy Bill Gates types getting all the money while the workers only hope for a successful suicide to get them off the job, I don’t think that their society will endure very long. On the other hand, if all that wealth flows to the general population, your scenario where they can easily afford to buy more and more Microsoft Windows licenses seems likely.

  2. aardvark says:

    Rampant inflation: an interesting question, Robert.

    Let’s divide an (arbitrary) $300 PC into (an arbitrary) $250 hardware and (arbitrary) $50 Microsoft costs. Possibly not exact, but good enough for this comparison.

    Now let’s assume rampant inflation in the US, such that it outstrips China.

    All other things being equal, the Renmimbi will appreciate against the dollar (of course, things aren’t quite that simple).

    Since the hardware cost to the Chinese is still, effectively, $250 (readjusted for American inflation), your Chinese consumer is looking at payment to Microsoft of something less than $50. If inflation is rampant enough, maybe $25. Maybe even $10.

    If you’re correct about rampant US inflation, the logic is that the Chinese are going to be buying Windows licenses in their hundreds of millions.

  3. I was writing about the same box + licensing fees. I don’t see M$ adding any value to a PC.

  4. oldman says:

    “Who in their right mind would buy those boxes for $600 when they could buy them for $250 with GNU/Linux?”

    How about someone who wants to have a real computer as opposed to the cheap piece of crap that you seem to think we all should be running.

    Not everyone is as cheap as you apparently are Robert Pogson!

  5. Clarence Moon admits the US economy and M$’s empire are a house of cards barely holding things together, “As long as there is enough ink to run the printing presses at the Federal Bureau of Engraving, the money will be there to pay those debts.”

    Does anyone believe M$’s monopoly would survive rampant inflation? M$ is clinging to life in the client division at $50-$100 per licence for the OS on a $300 box. Who in their right mind would buy those boxes for $600 when they could buy them for $250 with GNU/Linux?

  6. Clarence Moon says:

    In 2000, M$ was not providing me and my students any reliable service. Lose ’95 was failing daily

    Which was possibly why the real world had switched to Win98 a couple of years previous. Did you not get the news?

    …glass houses…

    They say it takes real money to play in the bigger games, Mr. Pogson, but don’t you worry, we’ll protect you.:-)

    The deficit and resultant debt is something that a lot of tea party folk fuss and fume about, Mr. Pogson, but nothing ever seems to change. For one thing, it is unsecured debt entirely and China and other countries that have invested in those loans are not really able to collect on them unless we pay willingly. That has caused a slight dip in the credit rating down here, but it remains as the most favored investment vehicle for the world.

    As long as there is enough ink to run the printing presses at the Federal Bureau of Engraving, the money will be there to pay those debts.

  7. Clarence Moon mentioned, “the stereotype of Inspector Closeau and the notion that the French, in general, are inept administrators”.

    Hmmm. US deficit 8.5% of GDP. Fr deficit 5.8% of GDP.
    US wastes 4.6% of GDP on the military. Fr wastes 2.6%
    US has 24 maternal deaths per 100K births, Fr has 8…
    US spends 16% of GDP on health, Fr spends 3.5%…

    Perhaps people who live in glass houses should not throw stones.

  8. Clarence Moon wrote, “Microsoft has provided more than a billion people with such service for 30 years now.”

    In 2000, M$ was not providing me and my students any reliable service. Lose ’95 was failing daily. In 2003, M$ threatened to cut off support for NT, forcing Munich to reevaluate their reliability. Munich and I decided to go with more reliable IT. It also happens to cost less.

  9. Clarence Moon says:

    Users of GNU/Linux are not locked-in to any supplier.

    Exactly. Aside from the negativity you impute by saying “locked in” rather than “dependent on”, a customer/vendor partnership is exactly what most people or businesses want to have. They want to have suppliers who can satisfy their needs at a fair price and who are likely to be around to take care of those needs year after year.

    Trust and confidence are the watchwords here, Mr. Pogson. I am sure that you are not so miserly that you act this way in all things. How about your local gun dealer? Your grocer? Your doctor?

    I personally pay an extra amount for medical insurance coverage to have PPO coverage which, in the US, basically allows you to pick a specific physician rather than the less expensive HMO coverage which basically gives you the “next available” doctor when you visit your assigned clinic. Maybe they don’t do that in Canada, I understand that you have a national health situation. But here, having that continuity is important to me and I will pay for it.

    It is the same with other suppliers. I always take my cars to the same repair service organization, for example. I have a pest control and lawn service company that I like and expect to be able to call on whenever I need them.

    Finding the absolute lowest price provider is something that you seem to be interested in yourself, but do not think that everyone is that way. Most people want consistency and continuity as well as comfort and service. Like it or not, Microsoft has provided more than a billion people with such service for 30 years now.

  10. Users of GNU/Linux are not locked-in to any supplier. See Distrowatch.com

    The French police can easily fall back on Debian GNU/Linux, for instance which has been around much longer than Ubuntu.

    Terrible risk? How about the alternative, depending on M$ for IT?
    “Our best interest is served by effectively eliminating the special browser and the special server altogether and making the Windows desktop the “client” and Windows NT the server…” see http://www.justice.gov/atr/cases/exhibits/521.pdf

    M$ actually conceived of eliminating the web as we know it and replacing it with their infrastructure. Would it serve the French police and France to have their IT run by M$? The longer they stayed with M$ the more enslaved they would be.

    Let’s put this in perspective. France is a country of 63 million people, many of whom are extremely competent in IT. M$ is 92K people and most of them are salesmen. Making M$ in charge of IT is ludicrous.

  11. Clarence Moon says:

    It is a tiny gain at a terrible risk in my opinion, Mr. Pogson. It puts the French police out of step with the great majority of the rest of the world and it exposes them to the vagaries of depending on such a tiny entity as Canonical for a critical system capability.

    Canonical is subsidized by Shuttleworth’s personal fortunes and he has no obligation to continue that practice. Shuttleworth may get interested in something else, such as a butterfly collection, and suddenly Canonical is out of business. Too risky for most companies, I think.

  12. The French police change x% of their PCs annually and that is the rate they are migrating to GNU/Linux…

    Ask the taxpayers if millions of anything is small.

  13. Clarence Moon says:

    Beyond the stereotype of Inspector Closeau and the notion that the French, in general, are inept administrators, the case raises some intriguing questions. They propose to save some 2M euros over 85 thousand workstations, which is, using simple arithmetic, about $16 each, which doesn’t seem like such a dramatic improvement, budget-wise.

    Then, too, unless the case is hopelessly out of date, the claim is that they started in 2005 and have some 7,000 workstations converted. That is a pace that makes the snail-like progress in Munich look good.

    If that is the best that Ubuntu can muster for its horn tooting, they might think about hiring the guys that did the Microsoft study that you posted the other day.

  14. kozmcrae says:

    I was having a good run there for a while then aardvark had to go and spoil it. I guess he didn’t get the memo.

  15. aardvark says:

    @Mr McRae:

    I notice you are fairly short on expounding your own version of the truth.

    Once you’re done with the tedious trail of ad hominem attacks, can we expect you to put the actual spade-work in, like Mr Pogson?

    Or will you still be sitting on the sidelines, throwing peanuts from the gallery?

  16. Clarence Moon wrote, oblivious to the world around him, ” there is no one looking for any solution to such a non-problem. So nothing much happens.”

    Problem: IT keeps costing more as we add more proprietary apps and thick clients.
    Solution: Use web apps running on GNU/Linux on a server in-house or in-cloud and avoid re-re-reboots, malware, licensing fees, downtime, slowing down, BSODs, non-standard file formats etc.
    Example: French National Police

    “Prior to 2005, the police force found that spiralling licensing costs and time-consuming maintenance were placing a strain on its resources. It decided to move away from its Microsoft-based infrastructure and start using open-source software.
    Jean-Pascal Chateau, Commandant, La Gendarmerie Nationale, says: “We weren’t experiencing technical problems, but financial ones. For the same amount of work, yielding the same results, we realised that Windows would cost us €2 million more than Ubuntu every year.”

    The simple change from Windows and Office to Ubuntu and OpenOffice.org has saved us €2 million per year. And that’s not just down to licensing costs. The fact that we no longer need 4,500 dedicated departmental servers means that the savings just keep growing.”

  17. kozmcrae says:

    “Bottom line, there is no one looking for any solution to such a non-problem. So nothing much happens.”

    Clarence is an asshat. He speaks and expects the World to lay down and listen.

    You don’t hold the only truth Clarence. The World is moving on from Microsoft. People and businesses do hurt from Microsoft’s licensing policies. Just because they put up with it in the past doesn’t mean they will continue to do so.

  18. Clarence Moon says:

    Businesses are moving lots of users to the cloud or the terminal server and they can run…

    They “can” do a lot of things, the world is a widely varying place and there are many choices for anything. The more important fact is what people “do” do, I think. They are conditioned to use MS Office for office automation things. No one is having any difficulty and business keeps getting better and better. Bottom line, there is no one looking for any solution to such a non-problem. So nothing much happens.

    Cloud services are for data availability and protection, not for interoffice memos and such. An office workstation comes with MS Office almost everywhere and the cloud does not change that one whit.

  19. The world did not ship that many PCs. M$ double charges a lot of PCs by charging for upgrades like Vista to “7” and putting on a word-processor.

    Businesses are moving lots of users to the cloud or the terminal server and they can run LibreOffice or some derivative of it there. No need for a per seat or per user licensing fee to M$. Then there is inActive Directory which can easily be replaced by LDAP and some SSH scripts. Then there is SQL server which isn’t needed by anyone. Same for IIS. That leaves file/print serving and GNU/Linux can do that really well… What is left for M$?

  20. Clarence Moon says:

    The stock analysts are being short-sighted …

    Oh. Are you sure? They dress so neatly and people pay them so much money and attention. You would think that they would have to have delivered the goods at some time or another to merit such attention.

    As to the rest of your analysis, I can only say that the Windows division took in almost $20 billion bucks last year and, using your guesstimate of $50 a system, that is some 400 million PCs out the door with Windows on them. That’s a lot of PCs and the small companies that sell Linux based machines will have to work for a couple of hundred years, I think, to match that output.

    Your thesis that business application sales would decline due to home use of other OS products seems to not follow any conventional logic either. If businesses stay with Windows, as they have, they will surely stay with MS Office. One complements the other, I think. Even the business folk using Macs seem to use MS Office on them. I don’t think there is a connection.

    There is a lot of inertia in the system, Mr. Pogson, and you yourself recognize that, calling it “lock-in” and such. Absent any compelling reason for change, things are likely to just stay in their current groove.

  21. kozmcrae says:

    Clarence and his Ego said:

    “How do you account, though, for the upbeat views of the industry analysts and institutionl investors who have bid up shares of MSFT in recent months?”

    Clarence believes shareholders foretell the future health of the companies they hold stock in. How many times now has our government bailed out the high rollers?

    The truth is Clarence, shareholders know less than you or I do about the viability of Microsoft. For now you are probably just as well off putting your money in a saving deposit as you are in Microsoft.

    Industry analysts? Are you serious Clarence? Do you really believe *anyone* visiting these pages takes *anything* from an “industry analyst” with anything more than a grain of salt?

    “Analysts sell out – that’s their business model… But they are very concerned that they never look like they are selling out, so that makes them very prickly to work with.”

    –Microsoft, internal document

    Of the big tech companies Google has demonstrated to be on top of innovation curve repeatedly. If I were to gamble that’s where I’d put my money. Apple has too but they are also a litigation strategist. That is not the way forward but rather the mark of a company that has forsaken competition as the primary motivation for product improvement.

  22. The stock analysts are being short-sighted and base their reporting on dividends and P/E. The client division is something less than 1/4 or M$’s revenue so a downturn in that segment just offsets the growth in the other segments. When the other segments start to shrink, the analysts will reduce their joy. Is there any need for M$’s office suite and server products in a future with fewer client PCs? I think not. The cloud will compete with the office suite and client management does not need M$’s style of hand-holding when the clients are virtual or streamed GNU/Linux systems. Perhaps they will retain some major part in databasery but it certainly is not price-competitive. “8” on ARM will do nothing to prop up the other segments. The competition will continue to grow around ARM and intrude into the client space.

  23. Clarence Moon says:

    You do delight in forecasting doom and gloom for Microsoft, Mr. Pogson! You have been doing it for years and are becoming quite adept at the task.

    This piece seems to be a medley of almost all of your themes, namely the decline in share due to cell phone usage, the anticipated rise of the cloud and a hoped for lack of participation by Microsoft, the belief that ARM will negate the need for Windows, and that a decline in Windows will result in catastrope for their business software.

    How do you account, though, for the upbeat views of the industry analysts and institutionl investors who have bid up shares of MSFT in recent months? In another thread you suggested that your insight was due to your technical knowledge which was absent from the others. That seems like a thin reed to me. Surely the people putting all that money into their enthusiasm have done due dilligence and have some understanding of the products involved. Are you so sure you understand the market mechanisms in play?

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