Acer and Microsoft: A tale of mutual decline

In three years, Acer has fallen from the world's second-largest PC vendor to hitting a 12-year low. James Sanders explores Acer's recent misfortunes and how this affects the industry at large.

With the recent departure of Acer's CEO, JT Wang, the good fortune of OEMs appears to be ending, as Microsoft is now encroaching on their territory with their own devices like the Surface and Surface Pro. Despite the Surface receiving a lukewarm reception and being a $900 million write-down for Microsoft, the state of the PC market has shifted significantly from where it was before the launch of Windows 8. For this and other reasons, Microsoft’s CEO, Steve Ballmer, has abruptly announced his intention to leave when a successor has been named. While it appears that the root of these problems is Microsoft, there is plenty of blame to go around for the present state of things.

A brief history of Acer's decline

If one was to hasten to pick any one decision that ultimately resulted in Acer’s fate being sealed, it would be the 2011 exit of CEO Gianfranco Lanci. Under Lanci’s leadership, Acer’s valuation doubled from $10 billion to $20 billion. In addition, Acer’s global market share increased substantially and led to the purchase of Gateway Inc. (and by extension, budget manufacturer eMachines) in 2007, to increase their presence in the United States. Packard Bell, which had a thriving European operation, despite shuttering U.S. operations in 1999, was purchased by Acer in 2008 for the same reason.

Lanci’s departure was a result of his desire to reform Acer to widen their focus to mobile phone and tablet products. This strategy was presumably to counter HP, who had then recently acquired Palm and was preparing the release of the HP Pre 3 smartphone and TouchPad. Other PC vendors, such as Lenovo and Sony (then Sony Ericsson), were also preparing Android phones and tablets at the time. 

Ultimately, expanding these operations required more engineers and global talent to be hired for product design and engineering. The interests controlling Acer feared this was a “de-Taiwanization” of the company, which led to end of Lanci’s tenure at the firm. Somewhat reflexively, Lanci’s successor, JT Wang, declared in August of 2011 that “tablet PC fever is starting to cool down.”

Under Wang’s leadership, Acer ceased production of netbooks at the end of 2012, in favor of similarly-functioned Chromebooks sans the Microsoft licensing fee. Acer has increased their tablet offerings, spanning both Windows and Android products, but sits at 2.5% market share as of Q3 2013. With the release of the iPad Air, Samsung Note 10.1 (2014), Kindle Fire HDX, and possible refresh of Google’s Nexus 10 in time for the holiday season, Acer’s market share in tablets is expected to decline. 

For Q3 2013, Acer’s PC market share was 9.8%, which is a 22.8% decline from Q3 2012, according to Gartner. Acer isn’t the only one suffering, because PC sales have declined over the last six consecutive quarters. The problem of shrinking sales is an industry-wide problem, the root cause of which may be Microsoft.

Microsoft's hardware initiatives and new software direction

With the exception of Microsoft’s range of input devices, such as the Natural Keyboard and SideWinder joystick, Microsoft’s attempts at producing hardware have been lackluster, fraught with quality control issues, and generally poorly received. The Xbox 360 had failure rates estimated at 33%, with issues surrounding bad heat dissipation to the improper use of lead-free solder unsuited to the temperatures the device reaches. The Microsoft KIN smartphone was discontinued after 48 days for simply being unwanted. The Zune, Microsoft’s answer to the iPod, was not quite a failure as much as it was a bumpy transition; it was incapable of playing music wrapped in Microsoft’s own PlaysForSure DRM scheme.

Given these less-than-stellar results from previous hardware ventures, the announcement of the Surface came as something of a shock to the industry at large. Microsoft and OEMs have heretofore subsisted on a mutual partnership, one that Microsoft seems to be abandoning. They have doubled down with the release of the Surface 2 and Surface Pro 2 but have been struggling to unload their first-generation tablets on consumers. Over the summer, Microsoft was giving away Surface tablets to attendees of the ISTE conference and announced education-exclusive pricing of $199 for the 32 GB Surface RT. This Black Friday, Best Buy will offer the 32 GB Surface RT for $200.

Aside from Microsoft’s foray into hardware, the case can be made that the problem is that consumers do not want Windows 8. Recall the aforementioned Gartner survey, which indicates that Q3 2013 is the sixth consecutive quarter of worldwide PC shipments. Windows 8 hit RTM on August 1, 2012, with general availability on October 26, 2012. The first full quarter after general availability, Q1 2013, was met with a 14% drop in sales compared to Q1 2012, according to IDG. The interface changes that accompany Windows 8.1 are not a substantive improvement. 

Windows 7 reached general availability on October 22, 2009. According to NetMarketShare, the market share for Windows 7 in Q4 2010 -- approximately a year from release -- was 20.27%. At present, we are slightly over a year from the release of Windows 8, and the combined market share of Windows 8 and 8.1 this month is 9.25%. Windows XP, which faces the end of extended support in April 2014, remains at 31.24%. Windows 8 is not a successful product by any meaningful metric, and perhaps the toughest challenge any company can face is when their biggest competitor is their own back catalogue.

Final thoughts

Acer’s misfortunes are a symptom of an industry-wide ailment, for which there is no immediate hope of a correction. The only vague prospect of salvation is the eventual naming of Steve Ballmer’s replacement as CEO of Microsoft. Who do you think would be best suited to run Acer or Microsoft, and how would you change the present state of things at those firms? Let us know in the comments section below.