Microsoft's elephant in the OS room: Apple

Are all of those Apple OS X vs. Vista commercials making an impact? Microsoft's client revenue--Vista and XP came in below expectations--and the company cited three primary reasons: A tough comparison from year ago levels, OEM inventory build and piracy. But the elephant on the conference call may have been Apple and its Mac.

Microsoft's three reasons for the client malaise are all legitimate. What's curious is that piracy--always a big deal for Microsoft--was mentioned 12 times on the conference call by CFO Christopher Liddell and analysts, who were following the software giant's lead. The takeaway: Microsoft is facing tough growth comparisons and any blip in piracy levels can be the difference between Vista and XP hitting Wall Street targets. If Microsoft didn't need that extra percent of growth or two it's unlikely we'd get a conference call where piracy chatter was dominant.

Also see: Salesforce dumping 4,000 PCs for Macs?

But let's dig deeper: Could it be that the real elephant in the room was Apple? Let's be real: Apple isn't taking over operating system dominance, but it is growin

g fast enough to take away a few incremental dollars from Microsoft.

Pacific Crest analyst Brendan Barnicle connects a few dots in a research report:

Microsoft provided three explanations for the shortfall in Client revenue. First, that the OEM channel had built inventory ahead of the Vista launch last year, which drove 20% unit growth last year and made for a difficult comparison; second, that inventories at OEMs were higher than normal after fiscal Q2 (Dec.), which resulted in less OEM demand in the current quarter; and third, that it experienced higher piracy rates in Asia in the quarter.

While we cannot confirm the piracy rates, we have looked into inventory levels at the OEMs, and the Pacific Crest hardware analysts do not believe that the OEMs built inventories a year ago or in the last quarter. Microsoft's first two explanations are not consistent with our hardware analysis.

Microsoft's Client revenue results are also inconsistent with results from Intel and elsewhere in the PC supply chain. Apple, however, could provide an explanation for the shortfall, if it is taking market share. Microsoft certainly did not admit to losing share to Apple, but the most recent NPD data, which is provided below, suggest that there could be some share shift from Microsoft to Apple.

Anecdotally, Barnicle is on to something.

Consider the monthly NPD stats for the first quarter.

Now contrast that with what Apple CFO Peter Oppenheimer had to say about Mac growth. Apple shipped 2.29 million Macs in its March quarter, a tally that was well ahead of expectations.

Oppenheimer noted:

We are extremely pleased to have shipped 2.29 million Macs, just shy of the record number of Macs we sold this past holiday quarter and representing 51% growth over the prior March quarter's results.

This is a 3.5 times the overall PC market rate of growth for the March quarter based on the latest forecast published by IDC, up from the 2 to 3 times market growth rate we have been reporting almost every quarter for the last three years.

Sales of desktops grew 37%, driven by strong demand for the iMac, as well as increased sales of Mac Pro, which we updated in January.

Sales of portables grew 61%, driven by continued strong demand for Macbook and Macbook Pros, both of which were refreshed during the quarter, as well as the successful launch of the Macbook Air. Macbook Air represents a new portable category for Apple and customers have responded very well to its breakthrough design and ultra portability.

Apple's global market share is only 3.3 percent among the 69.5 million PC shipped in the March quarter, according to IDC. But that market share tally is up from 2.5 percent in the March quarter a year ago. Why do those Apple gains matter? Those Mac sales most likely came at the expense of a new Windows machine.

Barnicle goes out another limb and argues that Apple is even taking away a little enterprise share. He writes:

In our Pacific Crest Mosaic surveys, we have seen increasing evidence of Apple taking share in the enterprise market. While Apple is not the only reason for the Microsoft Client shortfall, it seems plausible that it could be a larger factor than acknowledged by Microsoft. As a result, we are somewhat skeptical of Microsoft's assumption that its Client revenue will snap back next quarter.

Barnicle's take has some merit. Oppenheimer noted that a third of the Fortune 500 was signed up for the iPhone enterprise beta program. If these folks are interested in the iPhone chances are good that they aren't averse to bring Macs into their IT shops.

Meanwhile, Apple activity has been picking up on our sister site TechRepublic, a community of IT professionals. Consider the following:

• Between 2000 and 2005, TR members made 97 forum posts that contained "Apple".
• In 2006 that number skyrocketed to 62-a 220 percent to increase over a 19.4-post average for the period between 2000-2005.
• In 2007, there were 108 posts TR-a 74 percent jump.
• In 2008, that 2007 figure is likely to be eclipsed.

TR's audience is comprised of the folks that actually implement stuff. It's not the fanboy crowd. One sample response from an IT exec:

I started out as a Windows/Novell man, but now I advocate for Mac purchases and make them as much as I can. Two main reasons I do this: 1) on the whole, they require less time to support, much less time, actually, because the OS runs better and there are fewer malware concerns; 2) I practice the philosophy of keeping it simple. Mac software is easy to use and, more importantly, easy to teach to my IT employees. Macs and their server software are quite sophisticated, really, but I think back how many times did I actually try to make some kind of circus-like trust-object-hoolahoop-like security rights in Novell? Maybe once or twice in 10 years.

Rest assured that the Apple quote was buffeted by a bunch of Windows supporters as is often the case on ZDNet. But those pro-Mac comments are becoming increasingly common among IT types. It remains to be seen whether Apple can be a real enterprise player, but it doesn't have to do much to be a thorn in Microsoft's side. All Apple has to do is nibble and it will be harder for Microsoft to hit its client revenue growth targets--especially against tough comparisons.