salesforce.com CEO Marc Benioff thinks Bill Gates should return to Microsoft Corporation (NASDAQ:MSFT) as CEO. He's not alone. With Steve Ballmer set to retire, the Windows-maker is in need of a new CEO. Who better to fill the spot than the man who started the company in the first place?
Unfortunately, Microsoft Corporation (NASDAQ:MSFT) is in a tough spot, and based on Bill Gates' recent comments, not even he could turn the company around. Microsoft's management, including chairman Gates, just doesn't seem to understand the nature of the PC market.
Two different theories of the PC
Fundamentally, it goes back to the definition of the PC. At the AllThingsD conference back in 2010, Microsoft Corporation (NASDAQ:MSFT)'s Ballmer and Apple Inc. (NASDAQ:AAPL) CEO Steve Jobs offered very different theories about the future of the PC market.
When we were an agrarian nation, all cars were trucks, because that's what you needed on the farm. But as vehicles started to be used in the urban centers...cars got more popular... now... maybe one out of every 25 vehicles, 30 vehicles is a truck, where it used to be 100%. PCs are gonna be like trucks. They're still gonna be around, they're still gonna have a lot of value, but they're gonna be used by one out of X people.
I think PCs are gonna continue to shift in form factor... real question is what's a PC? ... There may be a reason why they call them "Mack" trucks, but Windows PCs are not gonna be trucks -- they're not -- they will continue to be the mass popularizer of a variety of things people want to do with information.
In short, Jobs offered a view of the market that was highly fragmented. One with different devices satisfying different niches. Tablets would never fully replace traditional PCs, but for many users, they would be enough. In contrast, Ballmer appeared to predict the emergence of a single unified device, one that combined the benefits of a tablet (portability) with the benefits of a traditional PC (content creation, power).
More recently, in an interview with CNBC, Gates echoed Ballmer's comments, arguing that Microsoft Corporation (NASDAQ:MSFT)'s Surface was that ideal, hybrid device:
In terms of the devices themselves, Windows 8 really is revolutionary in that it takes the benefits of a tablet and the benefits of a PC, and it's able to support both of those... Surface, Surface Pro, you've got that portability of a tablet, but... the richness of the PC... iPad... users are frustrated, they can't type, they can't create documents... We're providing them with the benefits...without giving up what they expect in a PC.
The Surface RT bombs and Windows 8 fails
But Microsoft Corporation (NASDAQ:MSFT)'s vision of a unified product is clearly wrong -- the market has spoken.
Last quarter, Microsoft took a $900 million writedown on the Surface. Microsoft admitted that its tablet had not sold as well as expected, and that it was forced to cut the price by 30% in order to boost demand. It also noted that among consumers, demand for traditional PCs had fallen roughly 20%.
Consumers just don't seem to want what Microsoft is selling. Evidently, people are not as frustrated with the iPad as Gates believes. Last quarter, Apple Inc. (NASDAQ:AAPL) sold 14.6 million iPads; in comparison, Microsoft sold just 1.7 million Surface devices from its debut last October through the end of June.
Throwing good money after bad
Microsoft's recent reorganization intends to shift the company to one focused around "devices and services" -- a strategy it said it will stick with even after it brings in a new CEO. This is why I find Microsoft's situation so alarming -- management just doesn't get it.
Even after the Surface RT's price cut, Apple Inc. (NASDAQ:AAPL)'s iPad is still a better buy than the Surface RT, and will probably continue to be for the foreseeable future. With its far better selection of apps, the iPad offers a much better tablet experience.