Microsoft's Windows Blue(s)

by Mark W. Hibben
4/11/13

Poking a Hole in Expectations

The reports out of IDC and Gartner on April 10 that worldwide personal computer shipments sharply declined in the first quarter of the year have shocked the markets and produced sell-offs in major PC makers as well as Intel (down 2.4%), Microsoft (down 4.9%) and even Apple (down 0.26%) as of this writing. IDC estimates that PC sales fell by about 14% y/y to 76 million units, while Gartner estimates the decline to be only 11% with worldwide sales of 79 million. Most of the blame for the shipment declines has been laid at the feet of Microsoft.

The declines poke a hole in the expectation promoted by Microsoft and its fans that Windows 8 (along with RT and Phone) would be a “game changer” that would crush Apple and restore Microsoft preeminence. In the IDC press release, IDC VP Bob O'Donnell was particularly harsh in his criticism: "At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market." And however bad things may be for Windows 8, the reality for Windows/RT can only be worse. As I pointed out in my satirical piece “Does Apple's Transparency Breed Contempt”, Bloomberg has estimated that Surface Pro (Windows 8) is outselling Surface RT by 2/1.

The various PC makers will probably see revenue declines in their PC sales about equal to the IDC/Gartner numbers, with the exception of Apple. IDC indicated that the percent declines won't be as bad for Apple, but didn't give any specific figures. For Microsoft, the declines in Windows 8 licensing will probably be much worse. The suspicion I voiced in “Apple's Transparency” that Microsoft had front-loaded sales of Windows 8 licenses to OEMs in Q4 2012 in order to report greater than 60 million unit sales will probably turn out to be correct.

However, this really depends on the proportion of Windows 8 sales compared to Windows 7 sales, which is currently unknown. There's plenty of anecdotal evidence that non-touch enabled Windows 7 laptops are commanding a higher price than their Win8 counterparts, indicating strong residual demand for Windows 7. At the end of the year, there were still a lot of non-touch PCs in the manufacturing pipelines that Windows PC makers needed to clear out in Q1.

Adrian Covert's Apple-Beating Vision

Simultaneous to the release of the shipment data on April 10, Adrian Covert published an article proclaiming yet another “Apple-beating” Microsoft Windows initiative. Such articles appear to pander to antipathy for all things Apple on the part of many Microsoft supporters and investors, as well as their impaired memory. Wasn't Windows 8/RT/Phone supposed to crush Apple? Hasn't much of the pessimism about Apple since the end of last year been fueled by the expectation that Microsoft was doing precisely that?

Covert's article was based on a Digitimes report that came out on Monday April 8 that Microsoft was working on a version of Windows, codenamed Windows Blue, that would “merge Windows (PC) with Windows Phone.” The article went on, “The Windows Blue project is being developed by a team separate from the Windows and Windows Phone departments and its purpose is to merge the two operating systems to compete against Google's Android and Chrome, according to the rumors.” While acknowledging that the rumors are unconfirmed, Covert trumpeted that “Blue could end being a huge deal. Dissolving the barrier between mobile and desktop would be nothing short of impressive.”

Apparently oblivious to hardware considerations, Covert doesn't understand the implications of the convergence he describes. Microsoft has already done the best job they could of converging Windows 8/RT/Phone given that Windows 8 runs on Intel processors and RT/Phone run on ARM processors. The only way to produce further convergence would be to move to a single processor platform. For a number of reasons, it wouldn't be feasible to move to an all ARM architecture, so the only direction Microsoft can go is to an all Intel architecture. Since Intel makes Atom x86 chips for mobile phones as well as tablets, convergence to all-Intel is perfectly doable.

The rumor really resonated with me since I've been predicting/advocating just such a move since I wrote “Why Microsoft Needs Intel's Haswell CPU”. As a developer contemplating a Windows 8 project, I would like nothing better than to see this happen. A converged platform would be much more attractive to developers in general. Do I believe the rumor? I'm sure that Microsoft has been looking at the feasibility of moving its Windows Phone platform to Intel. I don't doubt that demo projects are already under way. Companies like Microsoft, Google and Apple always have these kinds of R&D projects going. Many will never see the light of day. For the time being, I believe that an Intel-based Windows phone remains decisionable.

No Cause for Celebration

For Microsoft investors, such a move would be no cause for celebration, since it would mean that Microsoft was throwing in the towel on its Windows on ARM initiatives. Furthermore, existing Windows RT and Windows Phone 8 customers would be left out in the cold as developers curtail ARM related activities, and Microsoft makes clear that it will support the platforms for only a finite period of time.

Instead of fantasizing about crushing Apple, Microsoft investors need to take a very clear-eyed look at the current state of the company, with especial focus on what must be done to repair the damage done to its valuable Windows franchise. A converged platform is no guarantee of success, either for Windows phones, tablets or PCs. It's clear that the tile-based Metro interface, which is a feature of all three platforms, is having trouble gaining consumer acceptance. Abandoning pop-up menus, windowed apps, and the desktop weren't necessary to implement a touch-screen interface for PCs, and I believe they need to be reintegrated into Windows. But whatever Microsoft does, the next Windows itself needs to become a fully integrated and consistent operating system.

 

Why the TV Networks Hate Aereo

by Mark W. Hibben
4/10/13

Not Open and Shut

Aereo is a small startup funded in part by Barry Diller's IAC that provides a unique service to its subscribers in the greater New York City area by streaming over the Internet local television programs. Claiming copyright infringement, the parent companies of the major networks, News Corporation, Disney, Comcast and CBS have sued Aereo in what may become a landmark case that could change broadcast TV in the U.S. for ever.

Unlike the Cable, Satellite and Internet (CSI) services that carry TV programming, Aereo pays no licensing fees to the broadcasters. Sounds like an open and shut case of digital piracy doesn't it? I'm sure that's what the parent companies of the four major networks (Fox, ABC, NBC, CBS) thought when they got together to sue Aereo and request a preliminary injunction shutting Aereo down. The shut down didn't happen, and Aereo went live. About a week ago an appeals court upheld the lower court ruling denying the injunction request, much to the dismay of the broadcasters. The decision prompted News Corporation (parent of Fox) COO Chase Carey to write on the News Corporation web site:

“We believe that Aereo is pirating our broadcast signal. . . We have no choice but to develop business solutions that ensure we continue to remain in the driver’s seat of our own destiny. One option could be converting the FOX broadcast network to a pay channel, which we would do in collaboration with both our content partners and affiliates.”

Of course, not getting the injunction doesn't mean that the suit is lost, but it's not a good sign, and now the court case will probably take another year or two to be decided. In the mean time, Aereo has announced plans to expand to 22 other cities, raising the stakes for both sides.

Rube Goldberg-like

Aereo's system is not so much a technical solution as a legal one. Aereo provides a separate TV antenna for each of its subscribers. The subscriber controls the programing received through the antenna and also a remote DVR service that Aereo provides. In effect, the subscriber is just renting the antenna and digital recording and streaming service from Aereo in order to view over the air (OTA) programming that they have every right to view.

The disenting judge in the Court of Appeals decision denying the broadcasters' injunction called the Aereo system “a Rube Goldberg-like contrivance, overengineered in an attempt to avoid the reach of the Copyright Act. . . “ This may be true, but I have a feeling that Aereo and its backers, such as IAC may prevail against the Networks. IAC was founded by Barry Diller as a diversified Internet services company and owns websites such as Ask.com. match.com and vimeo.

The case reminds me of the famous 1984 Betamax Case (Sony Corp. of America vs Universal City Studios, Inc.) in which the studios tried to suppress the use of VCRs by individuals as an act of copyright infringement. The case went all the way to the Supreme Court, which ruled in favor of Sony that it was okay for individuals to copy TV programs for later viewing.

Aereo's technical approach has been contrived to emulate the kind of usage scenario of the Betamax Case, an individual simply recording or retransmitting the program for later viewing or viewing in a different location.

What's at Stake

The TV Networks survived the Betamax and all that came after, and you might well wonder what harm Aereo really does. Subscribers still see the same commercials they would if they were viewing OTA. The answer is that rebroadcast licensing fees from cable, satellite, and Internet have become a very large part of the revenues for the TV Networks.

Exactly how large a part is not always clear. Comcast, the parent company of NBC/Universal provides the most precise breakdown: Broadcast TV revenue in 2012 was $8.154 billion of which $5.842 billion (71.6%) came from advertising, $1.474 billion (18.1%) came from rebroadcast fees, and $0.834 billion came from disk and iTunes licensing.

Disney, the owner of ABC, also provides a breakdown of revenues for its Media Networks segment, which includes the ABC TV Network and also many other cable only channels such as ESPN. In 2012 total revenue of the Media Networks segment was $19.436 billion with $9.36 billion (48%) from affiliate fees, $7.7 billion (39.6%) from advertising and $2.377 billion (12.2%) for other sale and distribution fees.

CBS provides no insight into the advertising/licensing breakdown for the Entertainment group, which had $7.7 billion in revenue in 2012, but did note in an SEC filing that their 3% y/y revenue growth “was led by a 13% increase in revenues from the licensing of television programming, driven by higher licensing revenues from digital streaming . . . “

News Corporation stated their 2012 Television revenue as $4.734 billion, 14% of total revenue, but gave no breakdown for revenue sources.

The Poison Pill Strategy

How serious was Chase Carey in threatening to convert Fox to a pay channel? Most have interpreted this to mean converting Fox into a CSI-only channel. The FCC has estimated that about 90% of television households in the U.S. receive broadcast stations from a cable or satellite service, so Fox wouldn't be losing much audience. However, an over-the-air pay service is also feasible. In the 70's and 80's pay broadcast TV provided subscribers with set top “de-scramblers” to make their TV picture viewable. Today, the digital broadcasts of a TV station could be encrypted with a similar requirement for a set-top decryption box. Digital encryption would be more secure and less susceptible to piracy. Digital encryption would also require relatively little investment in hardware on the part of the broadcasters.

Abandoning OTA broadcasting altogether might be preferable for these diversified media companies by lowering operating costs. News Corporation, Comcast, Disney and CBS already have substantial interests and activities in non-OTA distribution such as cable and Internet.

The FCC would not fight very hard to keep the broadcasters from vacating their channels. When digital TV was established in 2009, the FCC took the opportunity to abolish channels 52-69 (the so-called 700 MHz band) and has auctioned off portions of it for cellular communication use. Similarly, the FCC is putting the squeeze on TV broadcasters to vacate additional spectrum in the remaining UHF channels through an “incentive auction” process that the FCC is currently formulating.

Whether the broadcasters resort to digital encryption or simply abandon their TV broadcast spectrum in favor of CSI, it's clear that they are not prepared to cede to Diller and company the very large revenue streams that content licensing generates.