Thursday, July 23, 2009

Microsoft's Ads Redux

A while back, I took Microsoft's new Laptop Hunter series of television advertisements to task for being ill-advised. This line pretty much summed up my point:
Price is the competitive advantage of generic brands and sweatshop-backed superstores.
and this was the crux of my argument:
Now, this [approach] will resonate with some people. There are always people who take a certain pride in buying things cheaply under the assumption that anytime you pay less you get a better value and it's a waste of time comparing the actual products. I doubt that people who think like that are a particularly large percentage of the population. Maybe they are, and maybe this is a brilliant ad, and I'm simply overestimating people. Only time will tell, but I suspect that these ads will help Apple as much as they help Microsoft and, if they have any effect at all, it will simply be to polarize the consumer market even further, giving Apple more of the higher-end, higher-profit sales, and cementing Windows as the operating system of the "cheap" computer. Most people will interpret "just as good" as meaning "not as good".
To the extent that I predicted that Microsoft's ads would not have an impact, I was completely 100% wrong. These ads have almost definitely impacted computer purchasing decisions over the last several months. However, unfortunately for Microsoft, the effect the ads seem to have had is exactly what I predicted. The PC market is getting polarized, with Apple becoming the OS of choice for high-end, high-margin computers.

Microsoft still has overall market share probably in the 80-90% range, which is more than substantial. In fact, it can't be described in any other way than "dominant". There are very few industries where any player has that kind of market share.

But, the bulk of the new computers being sold with Windows on them are sub-$1,000 systems. If you look at the systems being sold in that price range, they are mostly computers with outdated components like slower (and less) RAM and older integrated graphics chips. Now, there are plenty of consumers in this price range, and Microsoft is still making a lot of money from their OEM sales.

But, Apple is now dominating the more lucrative, higher-margin computers, and that dominance has been trending up fairly rapidly.

This is bad for Microsoft in a number of ways. First, the higher the percentage of low-end, basically obsolete computers that there are running Windows, the smaller the potential market for cool new OS-level features in future versions of Windows is. That means that the opportunities for selling higher-margin retail copies of Windows 7 to existing customers (as opposed to those being sold with a new computer) will be considerably less than the installed base. It's also bad for Microsoft's dominance in the PC game industry. One of the most commonly leveled (and perfectly true) accusations against the Mac is that there aren't many games for it. Cutting edge games, however, usually want to leverage the power of the latest and greatest hardware. If 91% of the systems costing $1,000 or more being sold are Macs, don't think game companies aren't going to take notice.

But, the biggest and worst problem for Microsoft is just what I stated above. They're setting themselves up as a generic brand. By competing only on price, and touting only price in their advertisements, rather than the actual technological advantages they do have (and they definitely do have some), their current marketing campaigns are instilling and reinforcing the idea that Microsoft creates bland, mediocre, but affordable and serviceable products. They are basically saying the same thing in their ads as Apple is.

You can argue all day long that your product is better, but if that runs contrary to what you're telling consumers with your marketing, then you're just pissing in the wind. In terms of future sales, it doesn't matter whether Windows is better, it matters whether consumers believe it is better, and Microsoft has stopped telling consumers that.



5 comments:

Joel Bernstein said...

That report is pretty misleading, for two reasons:

1. It's confusing revenue share with market share

2. The numbers (I think, hard to tell from the article) only apply to retail purchases (cutting out most gamers, for one thing).

Overall, it's a pretty damn sloppy article pushing a shocking sensationalist number (91%!) for publicity reasons whether it means anything or not.

I agree with your overall point, though. I LOLed at the girl who bought a PC laptop for video editing

Jeff LaMarche said...

Joel:

That is a good point.

I'm not sure the article is confusing the two, but the headline certainly is. The market share numbers for this quarter aren't available so far as I know, but previous quarter had Apple with 66% of the $1,000+ market, which is still pretty substantial, and shows a trend that Microsoft should be worried about. Microsoft already has a lock on the sub-$1,000 market and Apple's simply not their competition there.

As for gamers, I'm just not sure what the situation is there. There doesn't seem to be good numbers (that I could find) about what percentage of Windows machines are scratch-built (or what percentage of scratch-built machines use legal, licensed copies of Windows, for that matter). It seems to me that the number of high-end scratch built systems has been declining with the rise of manufacturers specializing in gaming machines like AlienWare and CyberPower, but it's not clear if the numbers include smaller retailers like them or not. I also have no idea how the economy is impacting this segment either (I'm guessing it is substantially, who's going to buy a $5,000 gaming PC when you could buy a PS3, Xbox, Wii, and a lot of games for the same amount of cash? But, there's just too little data. I'm not sure the hardcore PC gamer is a big enough demographic to skew these numbers, though it certainly could be.

Of course the article is sloppy and sensationalist. This is American media, after all. ;)

I still think my point is basically valid. If you're Microsoft and you want to kidney punch Apple in your advertisements, you don't try and compete on price. Show kids playing games on a crazy-fast, cool-looking custom gaming PC! Show people using really great software that doesn't exist for the Mac. Show people doing awesome things that are either easier on Windows or better yet, possible on Windows but not on the Mac.

Microsoft can't beat Apple by doing what's worked for Apple, and that seems to be their strategy lately (Zune? Microsoft Store?!). And they can't beat Apple by emphasizing price alone.

Microsoft has advantages. Some, like the underlying security enhancements in Vista are hard to capitalize on but Windows still has a number of advantages that can be touted in a commercials, yet Microsoft keeps harping on price like they're Costco.

I don't get it. It's like they think they've lost the fight already despite being way ahead.

baspey said...

A $1000 computer isn't twice better than a $500 computer... A $2000 computer isn't twice better than a $1000 computer... It's a natural law that applies to all products: the price rises much faster than the quality (you pay a lot more to have a little better).

Expensive computers have the most expensive top-notch components of today, components that will become very cheap in 2 years, and equip all the basic computers. If you buy a cheap computer today, you get what others have paid a fortune, only 2 years ago.

Is that extra-power worth the extra-cash. Personally, I don't think so. I like to have the best bang for the buck, and cheap computers can do everything I need (it's been a long time now that even the cheapest computers are over-powered for browsing the net, making some word processing, playing WoW).

In my life, I have spent a lot of money on computers. But I've come to realize that nowadays, even cheap computers are such incredible beasts, why pay more ?

I think that many of those who buy a $1000 computer have a luxury attitude. For them, money isn't a problem. No, they buy a cool brand (Apple), and never mind if a cheaper computer would have been enough.

Theo said...

@baspey:
My own experiences with PCs and Macs tell me that Apple is currently sitting (quality-wise) on that line where to get noticeably higher quality they would, indeed, have to raise prices quite a bit. Fortunately, other than the Mac Pro line, where the targeted market can actually appreciate the extra power gained by using the server-grade Xeon chips, they've done a pretty good job of staying on the sweet side of that line.

Unfortunately, the PC side of things has displayed a tendency to drop into the range where to save a bit more money you have to sacrifice a *lot* on the quality side. Even more unfortunately, their tendency to compete on price alone has meant that they haven't been afraid to sacrifice significant quality to shave $20 off their costs.

nick said...

I laugh at people thinking less than 2k is a decent machine.

I personally built my Quad core system with a dual core vid card. When I play WAW, WAR, WOW, etc. I look for laggy people with these crap systems and enjoy killing them over and over and over again. It's my way of saying "See how crappy your 1k machine is."

I spent 2k on my machine, but now looking back. I should have just bought a Mac. Games are starting to appear more and more.

All of these laptops they buy are horrible and then when they get home they will say "Windows is so slow!". MS shouldn't be pushing the price position because all these people are doing is paying top money for junkyard parts. And giving computers a bad name. I love my windows on my fast machine and all of the gripes are non existent on my system.

Marketers rely on idiots. And when they play online games, 3d modeling, or audio/video editing they will get tons of lag and realize how screwed they really are.