Microsoft's Surface: Tablet computing is an example of what Harvard business guru Clay Christensen dubs a disruptive innovation. Photo: Bloomberg
When Microsoft announced its financial results for the second quarter, the market panicked. The firm's stock dropped 10 per cent in after-hours trading, even though revenue and profits both topped their numbers from the second quarter of 2012.
Why did the market freak out? The biggest reason was that Microsoft booked a $US900 million charge for "inventory adjustments" for its Surface tablets. In plain English, Microsoft admitted that its heavily promoted tablet is selling poorly. And that's an ominous sign for the firm's long-term prospects. Tablets and smartphones are the future of computing, and Microsoft is falling farther behind the market leaders, Apple and Google.
Even so, Microsoft chief executive Steve Ballmer shouldn't be too depressed. Microsoft probably won't lead the next generation of high-tech innovation. But history suggests that Windows and Office, its existing cash cows, will continue generating profits for years to come. The numbers bear this out: Second-quarter revenue was up 10 per cent, to $US19.9 billion. And profits were $US6 billion, compared to a small loss a year ago.
Tablet computing is an example of what Harvard business guru Clay Christensen dubbed a disruptive innovation. While the term has become so overused as to render it almost meaningless, Christensen gave it a precise definition. Disruptive innovations are those that are dramatically simpler and cheaper than what's already on the market - in this case, the PC.
Tablets are less powerful than full-featured PCs. But their simplicity and low cost allow many more people to experiment with them - witness the hundreds of thousands of apps in the Apple and Google app stores. That has led to a rapid pace of innovation in mobile software. Over time, disruptive technologies like tablets outstrip the capabilities of the older technology like PCs, despite the latter's greater complexity and initial sophistication.
This pattern has played out before in the computer industry. In the early 1970s, the cutting-edge machines of the computing industry were "minicomputers," which cost tens of thousands of dollars and were the size of washing machines.
Then start-ups such as Apple began introducing "microcomputers," known today as PCs. They were small enough to fit on your desk and cost only a couple of thousand dollars. These early PCs had extremely limited capabilities. But millions of people who couldn't afford a minicomputer could afford a PC. And so the PC market grew much faster than the minicomputer market, making Bill Gates, Steve Jobs and other PC pioneers wealthy men.
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