Bloomberg News

Microsoft, IBM Struggle to Manage Mobile-Computing Shift

April 19, 2013

Microsoft to IBM Struggle to Manage Mobile-Computing Shift

Shoppers use a Microsoft Corp. Surface tablet computer at a pop-up store in the Westfield San Francisco Centre in San Francisco. Microsoft has sold little more than a million of the lower-end RT version, and about 400,000 Surface Pros since their debut. Photographer: David Paul Morris/Bloomberg

Microsoft Corp. (MSFT) and International Business Machines Corp. (IBM) (IBM), two architects of the U.S. computer industry, are feeling the pain as consumers and businesses flock to mobile devices.

Microsoft, the world’s largest software company, yesterday reported no growth in Windows sales in its latest quarter, after accounting for upgrades sold in the past. IBM is struggling to boost hardware sales as more companies let employees use their own devices at work. Meanwhile Google Inc. (GOOG), which is expanding beyond its search-engine roots with Android software for smartphones and tablets, is keeping pace with the shift, reporting better-than-projected profits from mobile advertising.

As consumers check e-mail, browse the Web and watch television and movies on the go, PC shipments plummeted 14 percent in the first quarter, the worst decline since researcher IDC began tracking data in 1994. Microsoft and others aren’t moving fast enough to end their reliance on traditional computing, according to Brent Thill, an analyst at UBS Investment Bank.

“It’s been a tough start to the year,” said San Francisco-based Thill.

Chipmaker Advanced Micro Devices Inc. (AMD), which aims to generate 20 percent of sales outside the PC industry by the fourth quarter, forecast second-quarter sales yesterday that may surpass some analysts’ estimates as it diversifies.

Uphill Battle

The latest quarterly results underscore the uphill battle hardware and software makers face in catering to a new generation of consumers, whose first computing device is often a smartphone or tablet.

Tablet PC shipments will accelerate to more than 240 million units worldwide in 2013, exceeding the 207 million notebook PCs projected to ship this year, according to NPD DisplaySearch.

“There is no doubt that the device market is evolving,” Peter Klein, Microsoft’s chief financial officer, said on a conference call. “Consumers and businesses are increasingly shifting their focus to touch and mobility.”

Many businesses are choosing to install Windows 7, an older version, on existing PCs instead of buying new hardware with Windows 8, according to IDC.

Companies are also slowing down the pace at which they replace PCs as more people bring their own technology to work. Almost a fifth of chief information officers said they’re supporting employees’ own PCs and tablets, according to an April 8 Citigroup Inc. survey of 260 CIOs across the globe.

New Windows

Microsoft released Windows 8 in October to gain a foothold in the market for tablet computers, dominated by Apple Inc. (AAPL) since the iPad’s 2010 debut. Microsoft’s new operating system features a redesigned user interface that centers around interactive information tiles, and the company has released its own tablet, called Surface, to showcase the software.

Microsoft has sold little more than a million of the lower- end RT version, and about 400,000 Surface Pros since their debut, three people with knowledge of the company’s sales said in March. The company had ordered about 3 million Surface RTs, the people said. Microsoft hasn’t disclosed Surface sales.

Meanwhile, Android will power more tablets than Apple’s iOS software for the first time this year, according to IDC. Devices running Google’s software will climb to 49 percent of the market in 2013, while Apple’s share will slip to 46 percent, IDC said last month.

Growth Opportunities

“Microsoft is so darn entrenched that they’ve had the luxury of failing and recovering,” said Alan Dabbiere, chairman of Atlanta-based AirWatch LLC, a provider of mobile-management software used by large companies to track employees’ mobile phones and tablets.

IBM and Microsoft still have ample opportunity to grab business in mobile computing, since smartphone and tablet applications rely on servers and software, products where both companies are strong, Dabbiere said.

“There are plenty of Microsoft-centric enterprises that would love to see Microsoft get it right, and there are plenty of others that are quite pleased that they no longer have the lock on the market they used to have.”

AMD, which is projected to post revenue of $4.56 billion this year, the lowest in a decade, is trying to diversify toward supplying chips for other computing products. The next version of Microsoft’s Xbox game console will feature AMD chips, people with knowledge of the matter said this month.

For the first quarter, AMD reported a net loss of $146 million, or 19 cents a share, while sales declined 31 percent to $1.09 billion.

Branching Out

Microsoft is trading at a 51 percent discount to Google on a price-to-earnings basis, according to data compiled by Bloomberg. IBM is undervalued on the same basis by 39 percent.

IBM, grappling with sluggish demand for hardware and consulting work, has been pushing into faster-growing, more lucrative markets such as data analysis and mobile-phone security. Lenovo Group Ltd. (992), the Chinese company that bought IBM’s PC business in 2005, is the most likely bidder for IBM’s low-end server business, a person familiar with the matter said yesterday.

IBM is investing in software and services that can help customers in banking, retail, health care and other industries design automated business processes that incorporate smartphones and tablets, and now has more than 1,000 customers for such work, Vice President Mike Riegel said in an interview before the earnings were announced. IBM has also made more than 10 mobile- computing acquisitions since 2011, and holds more than 125 mobile-computing patents.

“This is a big increase the last two years,” said Riegel.

Server Strategy

Intel Corp. (INTC), the world’s largest semiconductor maker, forecast second-quarter sales on April 16 that may exceed some analysts’ estimates as strong demand for server chips helps make up for a slump in the PC market.

Improving demand for powerful chips at the heart of corporate networks will blunt the impact of falling PC sales and help Intel boost revenue for the year, IBM Chief Financial Officer Stacy Smith said. While the shift to smartphones and tablets from PCs contributed to Intel’s third-straight decline in quarterly revenue, its server-chip sales have benefited from the increased Web traffic these mobile devices bring.

Hewlett-Packard, Dell

Two of the largest PC makers, Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL), are both scheduled to report earnings May 21. Sales at Hewlett-Packard, the top PC supplier, may fall 8 percent to $28.2 billion in the fiscal second quarter that ends this month, according to the average estimate of analysts surveyed by Bloomberg.

Hewlett-Packard, which gets about 28 percent of its sales from desktop and notebook computers, is trying to shift further into higher-margin networking and storage computers that businesses can use to deliver software over the Web. The company this month delivered a powerful, energy-sipping computer called Moonshot designed to win a place in the data centers powering the world’s largest websites.

Dell’s sales may fall 6 percent -- the fifth straight decline -- to $13.6 billion in the fiscal first quarter that ends this month. Chief Executive Officer Michael Dell and private-equity firm Silver Lake Management LLC are trying to take the company private in a $24.4 billion leveraged buyout to accelerate the move away from PCs to data center equipment and software.

Blackstone Group LP (BX:US), a rival bidder for Dell, withdrew its offer for the company, people with knowledge of the situation said yesterday. Another bidder, billionaire Carl Icahn, has also submitted an offer.

“The story’s still in transition,” said Thill.

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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