This week will see PC-centric events from both Microsoft and Apple, with Microsoft launching its latest Surface devices on Wednesday and Apple updating its Mac line on Thursday. As such, it’s interesting to think about the context for these announcements as a way of thinking about what might be announced and how we should see it. It’s also interesting to think about these things in the context of earnings – Microsoft reported earnings last week and Apple will report on Tuesday this week. In both cases, ahead of these announcements.
Microsoft – a growing but small Surface revenue line
Microsoft’s earnings (see here for a deeper dive) showed the Surface revenue line is growing at a decent clip – 29% year on year and 38% on an annualized basis. Trailing 4-quarter revenues for the Surface are shown below:
However, quarterly revenues are settling into a pattern where the fourth quarter is the biggest and each subsequent quarter drops off a bit until the next refresh of the hardware. So, if the trend is to continue, this week’s event needs to give the line as big a boost as previous years’ events have. However, it seems more likely we’ll get modest spec bumps to the existing hardware alongside a new all-in-one PC. If that’s the case, revenue will more likely dip year on year for the first time because spec bumps alone likely won’t drive a new buying cycle for the existing products and an all-in-one won’t drive the same demand as the existing Surface products. Microsoft has effectively conceded as much, as its guidance for this quarter suggests a drop in Surface revenue.
In the grand scheme of things, Microsoft’s Surface revenue, though useful, is still a tiny fraction of overall PC revenues, or even of Mac or iPad revenue at Apple. This is a narrow strategic play for now and, although the all-in-one will expand the addressable market, it won’t do so dramatically. The original purpose of the Surface line was to show OEMs what could be done – what’s the purpose of this line now? Satya Nadella is famously more skeptical of the value of first-party hardware than Steve Ballmer was, so why stick with this product and what’s its future?
Apple – if iPad is the future, what is the Mac?
The question for Apple is quite different. The Mac was always Apple’s core business until first the iPod and then the iPhone came along, but has recently been either Apple’s second or third largest hardware product line by revenue and is consistently the third by shipments after the iPhone and iPad. Mac sales have been slipping lately, in part because it’s been such an unusually long time since much of the Mac line received a significant refresh.
Perhaps more significantly, Tim Cook has recently referred to the iPad Pro as “the clearest expression of our vision of the future of personal computing” and recent iPad Pro ads have referred to the iPad Pro as a computer. So, if the iPad Pro is both a computer and Apple’s vision of the future of computing, what is the Mac? In an interview with Backchannel a few months ago, Phil Schiller suggested a possible answer in talking about his philosophy of Apple products. He first said the philosophy should be to use the smallest or most portable device that was up to the task and then, when asked about the role of the desktop Macs, said:
“Its job is to challenge what we think a computer can do and do things that no computer has ever done before, be more and more powerful and capable so that we need a desktop because of its capabilities,” says Schiller. “Because if all it’s doing is competing with the notebook and being thinner and lighter, then it doesn’t need to be.”
The role of the laptop was described as basically doing almost everything a desktop could so, in some ways, it’s Schiller’s vision for the MacBook line, too. Given how the recent iPad Pro ads have highlighted the capabilities of that device relative to traditional computers, what is it that computers – and Macs specifically – can do iPads can’t? I’d guess we’ll get some answers to that question on Thursday. Given Schiller’s remarks, this will probably be about sheer power, among other things, but I’m curious to see what else is part of this story.
The broader picture – hardware capabilities versus philosophical differences
Despite all the individual motivations for both companies, perhaps the most interesting thing to think about is how competition between the Windows and Mac lines has evolved over time. For quite some time, Macs enjoyed meaningful hardware advantages – they were better looking, more portable, had better battery life, and so on, especially once the MacBook Air launched. It took several years before Windows laptops even came close in terms of some of these key features and so the hardware advantages were an important element of the competition between the two.
But recent advances in Intel chips and other enablers have permitted Windows manufacturers to get a lot closer in terms of hardware performance. While design differences are a matter of opinion, at least some Windows laptops are better looking and a number of premium Windows laptops now combine MacBook Air-like thinness and battery life. They even have trackpads that perform well too, something Windows laptops seemed bafflingly unable to achieve for a ridiculously long time. At this point, I’d argue the main differences between Macs and Windows PCs are philosophical rather than grounded in meaningful hardware performance differences. Do you prefer the Apple or Microsoft approach to software? Do you prefer the Apple or Dell (or HP or Lenovo) approach to hardware? Does the tight integration of those things matter to you and who does that better – Apple or Microsoft?
With that in mind, one of the most interesting questions in my mind with regard to this week’s events is how this competition looks at the end of the week. Has Apple re-established a meaningful hardware advantage that will again take Windows PCs years to claw back? Or does Apple reinforce the philosophical differences that have arguably become more important over recent years? The release of the 12″ MacBook last year suggested Apple could still open up hardware advantages in portability relative to Windows laptops but did so at the expense of performance, much as the original MacBook Air did. Can Apple now bring some of the same hardware chops to the more powerful members of the MacBook line, improving their portability without sacrificing power? Or will we see more subtle improvements in hardware performance combined with an emphasis on the power of macOS?
I’ve focused here on Apple’s role in moving this competition forward because we largely know the state of the Windows PC market. Yes, it’s possible Microsoft may innovate in interesting ways on the all-in-one side, but I think we’re all expecting more meaningful across-the-board updates from Apple rather than Microsoft this week. But Microsoft’s event may also change these competitive dynamics subtly. Rumors of a revamped Paint app for Windows would highlight an attempt to hit Apple in one of its traditional strongholds – bundled creativity software – so it will be interesting to see how that plays out as well. All told, I think what we see this week from both companies will set up a new phase in the competition between these two companies and their respective ecosystems.
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