posted by Howard Fosdick on Mon 13th Dec 2010 23:11 UTC
IconIt's hard to predict the future because we humans prefer to think in terms of familiar paradigms. Even the most brilliant of our species are subject to this flaw. Now, Microsoft faces its turn. The owner of the operating system that likely runs your personal computer, the company that achieved monopoly with Windows and ducked the Department of Justice's scythe to keep it, faces a midlife crisis as the world goes gaga over portable consumer devices. This is the story of what's happening to Microsoft in the handheld operating system markets -- and how it parallels the earlier, similar journeys of IBM Corporation and Digital Equipment Corporation. Can Microsoft achieve dominance on mobile devices?

Small Devices Grab "The Buzz"

Handheld consumer computer devices are the computing story of the decade. They are wildly popular.

For example, Gartner Group pegs last year's smartphone market growth at 24% (1). Netbooks only became classified as such in 2007 and yet they already account for perhaps 20% of the laptop market (2). Apple Inc.'s tablet PC, the iPad, sold a million units per month following its introduction in April 2010 and is projected to sell 20 million units in 2011 (3).

What trends are hidden inside this crazy pell-mell growth?

Here's one. For the past two years, mobile PC sales have increased greatly, while desktop PC sales have gently declined. By "mobile PCs" we mean laptop, notebook, netbook, and tablet PC's. Portable devices are gaining sales at the expense of stationary ones (4).

Here's more. Smartphones are cannibalizing the mobile phone market to the extent that many experts predict that they will eventually replace today's more common, but less capable, feature phones (5, 6). In 2010, over 45.5 million people in the United States owned smartphones. They continue to be the fastest growing segment of the mobile phone market (7). Smartphones have already all but killed off Personal Digital Assistants and other devices of their size that lack telephone functionality (8).

All this has led to speculation that smartphones may displace laptop computers to some degree or another (9, 10). A Lifehacker poll found that roughly 19% of its 3,000 respondents say smartphones have already replaced their laptop:

Smartphones Versus Laptops - Poll

Here's the history on how smartphones are out-growing laptops and taking over the mobile phone market:

Smartphones Versus Laptops - Growth

While smartphones thrive, the technology phenomenon of the year is the iPad. Within four months of its introduction in April, Apple sold over 3 million of the devices (13). Tablet PC's have been around for years. Yet the iPad's unprecedented popularity has made it, overnight, into the public's very definition of the tablet.

This leads many analysts to state that tablets have finally -- after two decades -- become a large, identifiable, stable market segment. Analysts believe tablets are undercuting the market for personal computers (14).

A CNet survey found that 32% of consumers say they no longer need laptops and netbooks due to their iPads (15).

Here is Forrester Research's take on this trend. They see shrinking market share for desktops and laptops, a stable share for netbooks, and growing a share for tablets:

Forrester Research Forecast

What Does It All Mean?

We're witnessing an historic shift in computing.

The buzz of excitement, money and innovation is focusing on a two new markets, that at long last are becoming better defined after decades of trial and niche sales and gestation. One market is the smartphone. It's the telephone that's also a computer. And a camera, browser, email client, texter, tweeter, geolocator, and ... whatever else fits in a handset.

The other new market is the tablet. It's bigger than a smartphone but smaller than a netbook. The key differentiator is its interface. The iPad has no stylus or keys or mouse. It's a multi-touch touch screen, with proximity and ambient light sensors, 3-axis accelerometer, magnetometer, and headset controls.

By this measure, netbooks are nothing new. They are just small laptops. Netbooks are traditional personal computer technology with the traditional PC interface. The tablet is a radically different approach to understanding how people use and interact with computers.

For years a small but vocal group has bemoaned the lack of innovation in the PC interface. Well, now they have it. But it's not in their laptop or PC. It's the tablet.

Microsoft Missed the Boat

What's interesting about handhelds from the operating system perspective is that the dominant personal computer OS supplier is a minor player. Microsoft missed the boat.

Take smartphones, for example. Here is Gartner's 2nd quarter 2010 estimate of world-wide OS market share (17, 18):

Smartphone Marketshare 2009
Windows is at 5%.

How about U.S. numbers? Here are the American market share leaders, as of July 2010:

Smartphone Market Share 2010
(19). Source: comScore

Microsoft is in fourth place (20, 21).

In tablets, the story is the same. While the term "tablet PC" has been around for years, it was, ironically, a Microsoft product announcement in 2001 that first made the term popular (22). While there are many opinions as to why Microsoft's Tablet PC flopped in 2002, most agree the company's desire to impose Windows on it was key (23).

In contrast, Apple introduced its iPad tablet this April, with explosive sales of millions of units in the months since. Apple and its iOS clearly define what the tablet has come to mean. Apple will sell 10 million iPads this year and an estimated 20 million in 2011 (24).

Competitors are scrambling to catch up to this newly accepted definition of what the public now considers to be a tablet. The first group of iPad competitors are Android based systems, with Windows following behind (25, 26).

So there it is. The company that monopolizes the operating system for personal computers has lost that dominance when it comes to the smaller consumer devices that represent the future of computing. Microsoft will be a part of the story to be sure, and a tough competitor, but it's already lost the chance to extend its OS monopoly downwards, into the newest devices creating all the industry buzz.

More on this, and possible outcomes, later. First, some useful history.

We've Been Here Before

History? One normally does not look to history to predict computing trends. Nevertheless, knowing history sometimes works wonders for understanding the present. Several industry leaders once faced the exact same dilemma Microsoft faces today. Their stories are instructional.

First up: IBM. Back when dinosaurs ruled the earth, the IBM Corporation gained a monopoly over the sole segment of business computing in its heyday, mainframe computers. In fact, IBM was so dominant that analysts referred to the market place as "IBM and the seven dwarfs." But the dwarfs couldn't stand up to IBM's dominance for long. By the 1970's the dwarfs were dead and IBM's only competitors were the "plug compatible manufacturers" -- companies that made IBM mainframe clones. Alternative architectures had all but disappeared.

IBM monopolized both mainframe hardware and the operating systems it ran. As a result, the United States Department of Justice pursued IBM for monopoly violations in a famous case that spanned the terms of four U.S. presidents -- from 1969 to 1982. DOJ never succeeded in even slowing IBM down (27). (Believe it or not, DOJ again took up the cudgel against IBM over mainframes last year, a full 27 years later! (28)).

The mainframe market was huge and all-important in its day. Then technology shifted. Minicomputers arose. IBM failed to appreciate the new technology or see the competitive threat, and as excitement shifted to this new market segment, new leaders came to the fore. Digital Equipment Corporation (DEC) led this booming new technology, trailed by its own collection of minicomputer dwarfs (the "mini dwarfs" ?).

And IBM? It eventually entered the minicomputer fray, with the System/7 in 1971 and the Series 1 in 1976. But it had forever lost its chance to extend its mainframe monopoly down into the new market segment.

Not until the early 1990's did IBM gain major market share in what was by then called the "midrange market," with its AS/400 and RS/6000 lines. By the 90's IBM had fought long and hard enough to earn its way into a three-way market share tie with Sun Microsystems and Hewlett-Packard for Unix servers. But it never extended its mainframe monopoly down to the mid-range market.

Next up: DEC. The same company that stung the mainframe giant during the rise of minicomputers entirely missed the boat when it came to facing its own technology shift. They were called "microcomputers" at first, though today everyone knows them as personal computers. Ken Olsen, DEC's founder and long-time CEO, famously dissed PC's in 1977 (29).

DEC's eventual, belated forrays into the PC arena were disastrous. (Remember the Rainbow?) The company gave up altogether on the PC market by 1986 (30).

DEC's minicomputer business was ultimately cannibalized by the personal computer technology it disdained. Ken Olsen was ousted in 1992 and the company was defunct by 1998 (31).

And now: Microsoft. Who benefited from DEC's inability to adjust to the personal computer? Initially there was a three-way alliance:

The Road Rules for Personal Computers

Microsoft eventually broke from the alliance with IBM, and emerged as the clear winner in the area of operating systems. The company attained the holy grail of monopoly with its Windows OS family. Microsoft also obtained monopoly status for its Microsoft Office suite.

As it did IBM during the mainframe era, the U.S. Department of Justice confronted Microsoft with charges of monopolistic behavior. First, Microsoft signed a consent degree in 1994 (32). DOJ did not believe that Microsoft held to that agreement. Therefore, it sued in 1998 for anti-trust violations.

Judge Thomas Penfield Jackson rendered a two-part verdict in 1999 (33). His Findings of Fact were that Microsoft had committed illegal monopolistic activity. His Remedy was that the company should be broken apart.

Microsoft would be dissected just like the U.S. Supreme Court dismantled Standard Oil in 1911.

On appeal, the D.C. Circuit Court of Appeals upheld Judge Jackson's Findings of Fact but over-turned his Remedy. The court turned the case over to Judge Colleen Kollar-Kotelly for a new Remedy. On September 6, 2001, the Department of Justice stated it was no longer seeking the breakup of Microsoft and would accept a lesser antitrust penalty (34).

At this point, the terrorist attack of 9/11 occurred. From her comments at the time, it seems clear that this event greatly influenced Judge Kollar-Kotelly's view of this court case. Within weeks she ruled that the two parties must now settle, saying ''The court cannot emphasize too strongly the importance of making these efforts to settle the case and resolve the parties' differences in this time of rapid national change.'' (35) (Boldface added by author).

Judge Kollar-Kotelly stampeded into a Remedy based on her reaction to the events of 9/11. The Remedy completely failed to address the reasons Microsoft obtained monopoly and the methods it employed to keep it.

Nine states' Attorney Generals refused to sign on to the resulting agreement between the federal government and Microsoft. They believed that it was insufficient to create competition in PC software markets. They were correct. The inappropriate remedies failed in the slightest to affect Microsoft's monopoly position with Windows and Microsoft Office.

More importantly, Microsoft has not changed it business practices away from monopolistic behavior. Its continuing losses in overseas litigation since 2000 over its business practices -- ranging from the E.U. (twice) to Russia to South Korea to India -- substantiate this view (36, 37, 38, 39, 40). If you're interested in the details of Microsoft's anti-competitive actions, Dr. Roy Schestowitz's TechRights web site chronicles many of them.

Today, Microsoft still holds its personal computer OS monopoly, just as IBM still holds its mainframe OS monopoly. But like IBM in the 1970's and DEC in the 1980's, Microsoft now faces a threatening platform shift. Will it meet the challenge?
New Technologies, New Leaders

Possible Outcomes

Thus far, this article has been factual with substantiating references. But in predicting the future we're drifting into the realms of opinion and informed speculation. Here are some possible future scenarios:

Best Case for Microsoft: Dominance in Handhelds -- The argument for this scenario is that the very definitions of these relatively new markets are unstable. Microsoft (or any other big player) could potentially disrupt and change the landscape very quickly. As proof of this -- Apple just did it in 2010, with its introduction of the iPad. Who's to say Microsoft won't do the same?

Microsoft has earned experience in these market sectors going back a decade. And it has competitive product in the brand-new Windows Phone 7. But competition on a level playing field may not be the point. If Microsoft can leverage its huge installed base of personal computer software to mobile devices by glueing them inseparably together, it can extend its OS dominance to the newer platforms. The goal for Microsoft is to exert its monopoly market force, as it does on personal computers, and to negate or void consumer choice.

Another point in its favor: Microsoft has proved it can react very quickly to a perceived threat. When netbooks came out in 2007,early reports claimed top market share for Linux. Microsoft swiftly overturned this situation. It kept Windows XP in sales and support longer than initially planned, and released its new Windows 7 operating system with a limited-resource Starter Edition (41). Today Microsoft leads share in netbook operating systems (42, 43).

Arguing against the scenario of Microsoft dominance are several key facts. First, let's talk about netbooks. Netbooks are nothing but smaller footprint laptops. They are personal computers in their interface and design -- not something radically different, likeiPad tablets or smartphones.

Microsoft was able to extend its monopoly to netbooks because the same manufacturers and OEM relationships are involved with netbooks as with laptops. These unequal relationships with OEM's are the basis for Microsoft's personal computer OS monopoly (44, 45, 46, 47, 48). Microsoft also works a win-win with these partners through its strategy of planned obsolescence (49). Thus Microsoft easily extended its OS monopoly to netbooks.

If Microsoft could have used monopoly power to extend its OS dominance into smaller devices it would certainly have done so already. The companies you need to have relationships with and cut deals with are completely different in the smartphone space. Thus far, this applies to the tablet space, too.

The competitors Microsoft faces in these new markets are big enough to hold their own. This is not a case of small innovators beach-heading a new market now ripe for takeover by major players. The major players are already in town... and beating Microsoft.

Apple is wildly innovative and deeply groks consumer cool. With the iPod, the iPhone, and the now the iPad, Apple jujitsus Microsoft by introducing new concepts and pioneering entirely new markets.

Google is new to the small-device game but showing great product with Android and Chrome OS. Google supports their OS's with Google Apps and a huge stable of mobile apps, disrupting possible ties to Microsoft Office and the personal computer software sector Microsoft dominates.Google's efforts will likely thwart Microsoft's desire to super-glue its personal computer software to the new smaller device markets.

In the smartphone space, competitors like BlackBerry OS and Symbian live there. It's what they were designed for. And RIM has just come out with its own tablet, the PlayBook, running BlackBerry Tablet OS (based on QNX).

With this kind of varied, muscular opposition in a relatively established marketplace, it appears very unlikely that Microsoft could achieve monopoly in handheld OS's as they did for personal computers.

Probability for this outcome: Low.

Worst Case for Microsoft: Failure in Handhelds -- In this scenario, Microsoft drops from contention as a major player in the evolving world of small consumer handhelds.

The argument here is that the Windows family of operating systems has little organic applicability to handhelds. PC's are fundamentally different from consumer handheldsand Microsoft doesn't understand their differences. Microsoft shows its lack of understanding by promoting its offering as "Windows," a label fatally associated with the prior technology wave, personal computers. The Windows brand is a negative, not a positive.

Those arguing this view cite the declining market share for Windows Mobile and extrapolite this decline into an irreversible trend (50, 51). For the last year various analysts in the computer industry trade press and the popular press have voiced sentiments such as these (52) --
  • "For all practical purposes, Windows Mobile is a dead platform" -- ZDnet (53)
  • "Windows Mobile has now been relegated resolutely to has-been status" -- CNet (54)
  • "[Windows Mobile] is bleeding market share in the space, and its future looks grim" -- Washington Post (55)

Several facts argue against the worst-case failure scenario for Microsoft. Without getting into an evaluation of Windows Phone 7, the important fact is that this is a brand new offering, unrelated to Windows Mobile. The comments above are history. They are not about Windows Phone 7 and the future.

Microsoft is not retrenching or retreating from the smartphone market. It's trying harder. It's re-entering with new, completely re-engineered product. This is a company that wants market and is fighting for it.

Small devices are still an evolving amorphous category, with plenty of niche specialities and segmentation yet to be finalized. It seems very unlikely that a company with Microsoft's deep pockets and highly skilled technologists can't grab good chunks of market when it invests and fights for it.

Lastly, Microsoft has shown it can enter a market late, after years of flirtation and research, then step in and do well. Witness Microsoft'ssuccess in the gaming market with the Xbox / Xbox 360 line.

It seems very unlikely Microsoft would fail badly in handhelds unless it backs away from these markets voluntarily -- which Windows Phone 7 proves it has no intention of doing.

Probability for this outcome: Low.

Most Likely Case for Microsoft: One of Several Giants Duking It Out --
The most likely future scenario for Microsoft in the still-maturing world of small devices is also the optimal case for consumers. This is the scenario where Microsoft is one of several large, well-financed and highly capable companies slugging it out in a truly competitive marketplace.

In personal computers, Microsoft easily holds its monopoly in the face of aggressive challenges from Apple and Linux. This is because competitors can not break a monopoly -- even in the extreme case when they offer free product (witness Linux and its 10,000 applications). A monopolistic market lacks competition.

Microsoft exercises its monopoly power through unequal relationships with manufacturers and OEMs. Microsoft also works a win-win with these partners through its strategy of planned obsolescence (56). These positive and negative inducements explain how the company so quickly overturned Linux's early lead in netbook share.

Substantiating this view is Microsoft's higher market share in the United States -- where it has essentially achieved status as a legally-accepted monopoly -- versus overseas markets, where it is still regularly litigated and constrained by foreign governments.

The situation is completely different in the arena of small consumer devices. Microsoft has been unable to extend its monopoly power to devices smaller than netbooks, as market share statistics prove. Its OEM and manufacturer relationships don't apply to these markets. Instead, the company must build new alliances, distribution channels, and marketing strategies, competing head-to-head with companies of its own throw-weight, like Google and Apple.

During its American anti-trust trial, Microsoft executives repeatedly stressed that all they wanted was fair competition. In these new markets, they face it.

Some predict Microsoft's future in these markets based solely on their personal evaluations of Windows Phone 7. But to judge Windows Phone 7, one must wait for the introductory hype to die down, and for real sales numbers to emerge. Give it six to twelve months before pronouncing the product's impact.

More importantly, Windows Phone 7 alone no more dictates Microsoft's future in small device OS's than did Windows Mobile. By replacing Windows Mobile with Windows Phone 7 Microsoft signalled they are willing to explore new directions and introduce new product to compete. The company intends to tie its future to success -- not any one product.

In the big picture, the most likely outcome in the OS competition for small devices is that Microsoft won't achieve monopoly or market dominance in these new markets, but it will always be a major player.

I believe Microsoft will fight its way back to be one of a small group of key players. The best historical analogy is how IBM achieved success in the mid-range Unix server market by the 1990s. Very late to the game, they fought back to a three-way tie with Sun and HP in the Unix server market they initially undervalued.

This scenario is a best-case outcome for consumers. They will enjoy the benefits of fair and full competition that are still largely lacking in the OS personal computer market.

Probability for this outcome: High.

Why This Matters

Why does all this matter? Competition benefits consumers.

If you're a potential purchaser of smartphones or tablets, the more you know about these markets before you buy, the better decision you can make. You don't want to bet your dollars on a product that may be orphaned or a company that loses out in the market place. You want a product with the critical mass to attract tons of apps.

If you're employed in the fast-moving computer professions, where the required skills rise and vanish many times over the course of an individual's career, predicting how markets evolve is critical to your career health. Those who make poor judgements risk the loss of their livelihood.

In my career I've seen several major technologies rise to prominence only to disappear some years later. Careers perished with them. The first step in keeping your career on track is to accurately identify market trends.

Whether you feel this article is insightful or off target, it has done its job if it prompts you to consider this subject and come up with your own analysis. Please contribute by attaching a comment with your views. Thank you.

Next Month

As some readers know, I've been writing a monthly series of OS News articles on how to keep mature computers useful and in service (listed below). Next month's article gets us back on track in the series. It addresses a valuable technique for making older computers useful again -- running multiple operating systems. This couples all the advantages of the existing Windows install with the benefits of free and open source software. The article will describe and compare different techniques for running multiple operating systems on a single computer.
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Howard Fosdick (President, FCI) is an independent consultant who supports databases and operating systems.He has occasionally consulted for software vendors as an industry analyst (although never about small devices!) You can reach him at contactfci at the domain name of sbcglobal and the domain extension of net.

Previous Articles on Revitalizing Computers

Smart Reuse with Open Source
How refurbishing defeats planned obsolescence
Scandal: Most "Recycled" Computers Are Not Recycled
What really happens to many "recycled" computers?
How to Revitalize Mature Computers Overview of how to refurbish mature computers
How to Secure Windows
A step-by-step procedure to secureWindows
How to Tune Up Windows
How to tune Windows (any version)
How to Run Multiple Operating Systems

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