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The reasons why the PC industry won’t ever recover

At the height of the PC market's growth, the industry was selling about 400 million units a year. This year vendors will be lucky if they sell 320 million and various market research firms predict that they will only shift 280 million in 2015. These same firms also predict that tablets will outsell PCs by 2015.

The reality of this declining PC demand has hit all PC vendors very hard. However, Microsoft has taken the brunt of this because its core product, Windows, is being thrashed by upstart operating systems like iOS and Android. The decline in PCs means a decline in Windows too. Microsoft's recent earnings report was dismal and analysts are not forecasting a rosy next quarter either.

In fact, IDC believes that for the entire year, PC sales will be down seven per cent. Last year PC sales were off close to 12 per cent. My own firm sees PC demand waning even more than IDC's forecast — seven per cent and more likely at least 10 per cent when we count up PC sales for 2013 in early 2014.

All this spells big trouble for Microsoft and any company that bet big on PCs and related products. However, the PC vendors can diversify and also sell tablets and smartphones, and they have the option of using Google's Android mobile OS for these products.

While Microsoft offers a version of Windows for tablets and smartphones too, PC vendors are no longer willing to bet only on Microsoft. In fact, their emphasis on Android and the marketing of these products against competing Microsoft products has hurt the acceptance of Windows mobile products.

The chart below from my friend Horace Dediu of Asymco shows the demands for PCs versus iOS/Android. From this you can deduce that demand for PCs has peaked and this part of the industry will never recover.

Of course, demand for PCs will not drop to zero soon, if ever. They remain the workhorses of business and SMB. Many families have a PC or laptop in the home that has become a communal information centre used for heavy-lifting tasks like filing taxes, and managing home finances. In many of these cases, backwards compatibility with existing Windows programs is still a driver in creating demand for standard Windows PCs.

For years, demand for PCs has been fuelled by an ecosystem of hardware, software, and services. For a while it was assumed that even if a lot of software moved to the cloud, PC demand would stay strong because of its ability to use existing Windows apps as part of the software ecosystem. In truth, the shifting of apps to the cloud is still a smart bet eventually. However, the growth of iOS and Android apps has put this cloud vision on hold for a while. At the same time, backwards compatibility with legacy Windows apps as a motivator for PC purchases is also in decay.

I don't think anyone could have predicted the potential impact localised mobile apps would have on the market, let alone Microsoft. However, the triple threat of competitive operating systems, apps, and tablets has taken the wind out of Microsoft's sails, and the entire PC industry is suffering from this fallout.

Most troubling for Microsoft is, according to the chart above, the volume for smartphones and tablets will eventually eclipse the PC market. And while demand for PC sales may stabilise somewhere in the 250 to 280 million per annum range, continual growth of tablets and smartphones due to their short upgrade cycles is set to fuel any real growth in the tech market of the future.

Even Intel has diversified beyond Microsoft and is now backing Android and Tizen. While it will not abandon Windows support given the fact that the industry will still sell a couple of hundred million PCs a year worldwide, it too sees the writing on the wall. With Microsoft partners now supporting competing operating systems, Microsoft, the undisputed king of PC software of yesteryear, is clearly past its heyday. It will continue to struggle as the market moves to favour smartphones and tablets ahead of its cash cow Windows franchise.

The good news for Microsoft is that it still rules the IT server market and its services are getting better. But even its Office franchise is threatened by apps for iOS and Android (not to mention cloud services) and it is easy to see that this part of the market will decline too. All this suggests that the PC of the past is gone for good and that the market for PCs will never rebound. From now on, any growth in the market will come from mobile and in that respect, Microsoft has already lost out to Apple and Google.