Though the two tech giants have played against each other for years, the different strategies with which Apple and Microsoft approach the tech world have only grown more apparent in recent years. When the two firms revealed their most recent quarterly earnings, it became clear that Apple has far outpaced Microsoft. But it can still learn from Microsoft’s past, as well as its own, as it looks to stay on top.
James B. Stewart reports for The New York Times about how and why Apple overtook Microsoft, noting that when Microsoft’s stock was at a record high in 1999, and its market cap at nearly $620 billion, the idea that Apple Computer would ever be bigger — let alone twice as large — as Microsoft would have been laughable.
At the time, Stewart writes, Apple was teetering on bankruptcy and Microsoft’s operating system was so dominant that the government deemed the company an unlawful monopoly. But the tables have turned, and as Microsoft and Apple announced their latest earnings, Apple’s market cap hit $683 billion, more than double Microsoft’s value of $338 billion.
In 1998, when interviewed for a story by Vanity Fair, Microsoft co-founder Bill Gates said that he couldn’t imagine a situation in which Apple would ever be bigger or more profitable than Microsoft. “He knows he can’t win,” Gates said of Apple co-founder Steve Jobs.
Two decades later, the picture has changed dramatically, and Stewart points out that how it’s happened includes some important lessons for Apple, which hopes to avoid Microsoft’s fate but nonetheless depends on the success of one product line — the iPhone — for the majority of its revenue, as Microsoft once did with Windows. How have the two companies gotten to where they are now?
How has the balance of power between them shifted? And perhaps more interestingly, what are the real differences between the two companies and the way they approach innovation in the competitive tech industry?
Size is an obvious difference between the two firms. Apple earned $18 billion in the most recent quarter, more than any company has ever made in a single quarter, on revenue of $75 billion. Its cash flow of $30 billion in one quarter was more than double what IBM generates in a full year, and its stock jumped more than 5% even as the market was down.
By contrast, Microsoft’s revenue was barely a third of Apple’s, and its operating income of $7.8 billion was less than a quarter of Apple’s. Microsoft shares dropped by more than 9% as investors worried about the company’s aging PC software market. The best days for the mature PC market are behind it, and a host of other devices, including tablets and smartphones, now compete for the time that consumers used to spend on their computers.
But as Microsoft rose to its height on the popularity of the PC, Apple similarly depends on the ubiquity of the smartphone. Apple is just as dependent on the iPhone as Microsoft once was on Windows. Microsoft has struggled to both protect its dominant position with the Windows franchise without that focus negatively affecting its ability to innovate in other areas.
By contrast, Walter Isaacson, who interviewed Jobs for his biography, said, “Steve ingrained in the DNA of Apple not to be afraid to cannibalize itself,” per The New York Times. Even as the iPod was “printing money,” Jobs realized that users would one day be able to store and listen to music on their phones, and Apple developed the iPhone. In the same way, the bigger iPhone is hurting sales of the iPad — and Isaacson agrees with many industry watchers in noting that developing the larger iPhones “was the right thing to do.”
While Microsoft has tried to diversify, senior Bernstein analyst Toni Sacconaghi characterizes it as a follower and Apple as a trendsetter. Microsoft belatedly bought Nokia to offer its own smartphone, but its tiny share of the smartphone market continues to shrink. On other fronts, Microsoft is growing its revenue from cloud computing, with Barron’s reporting that its cloud revenue is projected to reach $5.5 billion on an annual basis if Microsoft continues its current pace.
But as Microsoft’s cloud business grows, it cannibalizes sales of Windows and Office. Its cloud version of Office, called Office 365, is bringing in less revenue than the traditional version, leading to a 25% drop in licensing in the last quarter.
While it’s one thing for Apple to purposefully cannibalize its iPod or iPad business, it would be an entirely different situation for it to risk its iPhone business. Sixty-nine percent of Apple’s revenue and 100% of its revenue growth from its most recent quarter came from the iPhone, making the company extremely dependent on a single product line.
Additionally, Apple faces “the challenge of large numbers,” as it’s already the world’s largest company by a significant margin. It’s difficult for investors and analysts to imagine what’s next for the iPhone. Robert Cihra, a senior managing director and technology analyst at Evercore, told The New York Times, “It’s almost impossible to think of anything that will create a $140 billion business out of nothing.”
Both companies have achieved success by preparing for a future that most find difficult to imagine. Stewart writes that they’ve each had a vision for the future. Microsoft envisioned a computer on every person’s desk, but Apple envisioned one in every person’s pocket. For Apple, the computer happened to be a phone, which has since become the single most ubiquitous consumer device in the world.
Isaacson, the Jobs biographer, said to the Times: “Steve believed the world was going mobile, and he was right. And he believed that beauty matters. He was deeply moved by beautiful design. Objects of great functionality also had to be objects of desire.”
While Apple prepares to sell consumers its first smartwatch, Microsoft is gearing up to produce an augmented reality headset that users will control with hand gestures and voice commands. Quartz reports that while the HoloLens looks technically impressive, it would be hard to imagine Apple introducing something like it anytime soon, even if augmented reality is the future of computing.
Apple focuses its energy on products that can immediately become mainstream — portable music players, slim laptops, smartphones, and smartwatches — but products like an augmented reality headsets will be much more niche.
Quartz points out that this is also a question of fashion. The Apple Watch has already sparked ample debate about whether the device will be able to blend into a style-conscious wearer’s wardrobe. A headset that looks to be straight out of a science fiction movie would be a non-starter for customers who like their tech products sleek and unobtrusive.
Microsoft is already dominant in its core areas of business, which leaves it little room for growth. Apple doesn’t have massive market share in any of its core markets, even in the smartphone industry; its strategy leaves it ample room to grow. But the question remains: what comes after the iPhone? For analysts, investors, and even the tech community, there’s no obvious answer.
The dominant product lines from both companies will need to either expand into new markets or face possible decline.
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