Microsoft and Apple: No Longer Really Competitors

It is interesting to compare Microsoft and Apple based on their financials. Clearly they are two distinctly different kinds of companies going in very different directions.

Apple

The Apple financials showcase a company in change. Only with Apple would you see stock price decline after massive profits. The issue is that they are really a one-product company, and that one product is the iPhone, which accounts for more than 60 percent of their revenue now.

Best guess on the Apple Watch is it may have contributed as much as 2 to 3 percent to the top line in sales. Given that demand seems to be falling for the product, they are likely wise not to break this out. They are pointing out that they sold more Apple Watches than iPods or iPhones initially, but the Apple watch is an accessory to a dominant offering, the iPhone. By contrast, the iPod was initially an accessory to the Mac (it didn’t support the PC until the following year), and the iPhone sold into a market dominated by other powerful players. The Apple Watch is tied to the most successful smartphone platform and sells into a market that is largely bereft of successful products. So it has huge advantages neither the iPod nor the iPhone initially had and should have even been stronger than initial iPad sales. Apparently it was not (otherwise they would have likely said so).

Despite all the gloom and doom on PC sales, Mac sales were up nearly 9 percent. But against the iPhone growing at 35 percent, this product area is rapidly becoming insignificant.

The iPad is in sharp decline, 18 percent, reflecting the real danger if subsidies (which force a semi-annual refresh on iPhones) were to be more widely outlawed. The iPad isn’t losing against competitive products for the most part; it is losing against installed iPads. Basically folks are saying what they have is good enough and not buying new iPads.

In the end, Apple appears to be rapidly moving to become a one-product company with that product most at risk, not from competitors, but from any change that would remove the built-in semiannual replacement cycle. The other risk is that their phone is so good, that the next phone isn’t good enough to replace it.

Microsoft

It is hard to believe that it was once largely inconceivable that Microsoft would be valued less and make less than Apple—yet here we are. Looking at Microsoft’s financials, we’ll take out the one-time charges of $8.4 billion, most of which were related to writing off Nokia, which is the analog to the iPhone. Where Apple is strong, Microsoft is incredibly weak. But Microsoft is also far more diverse. They have come a long way from the Windows company that they once were. Now significant portions of their revenue come from the cloud, which was up a whopping 88 percent but still far from dominant in the segment. Server products were up 9 percent (reflecting some weakness likely tied to concerns overseas about the NSA disclosures and back doors). Dynamics(CRM, etc.) revenues were up 6 percent, playing to the mid-market, Office was down 4 percent, and Windows volume licensing was down 4 percent, with OEM licenses down a whopping 22 percent (typical in a ramp to a major OS launch fixing a problem OS). Folks really don’t want to buy Windows 8 at the moment. Office is being cannibalized by Office 365, but there should be a sharp recovery in Windows, assuming Windows 10 is successful.

Working through the numbers, licensing (Windows/Office) is about 14 percent of Microsoft’s business, Xbox is around 9 percent of revenue, phone hardware 6 percent, back office (divided across a variety of products) about 47 percent, and other is about 24 percent.

So while Apple is largely the iPhone, Microsoft’s revenue stream is highly diversified and not that interconnected. It shouldn’t be a surprise that Microsoft’s strongest growth is coming from their online business given their CEO came from that area.

Competitors That Don’t Compete

Apple is a massive power with the iPhone; Microsoft’s phone efforts are material but barely. Microsoft is growing to be a massive power in the cloud; Apple doesn’t break out cloud revenues, but they likely are barely material as well.

Apple’s vulnerabilities aren’t competitive at the moment, they are in their increasing inability to convince folks their new products are enough better than their old ones to replace them and any adverse regulatory impact on carrier subsidies. Neither Google nor Microsoft represent a credible threat.

Microsoft’s vulnerabilities are in its massive diversity: any hit in one product area will likely be overwhelmed by the rest of the product set, and their executives could be overwhelmed by this product diversity. If Apple and Google took 100 percent of the phone market, Microsoft wouldn’t be hurt badly. The loss of Windows is survivable as well. In fact, there is no one product class that Microsoft couldn’t lose and not survive. Amazon Web Services likely represents a bigger overall threat to Microsoft than Google and Apple combined, but Microsoft’s massive growth in this area demonstrates that they are overcoming this threat as well.

Windows 10 could be ultimately massively successful and wipe out the Mac, and I doubt Apple would even breathe hard. Or the iPhone could be ultimately successful and wipe out the Microsoft phone, and that would have even less impact on Microsoft. In the end, both companies likely should realize that over the years they have drifted so far apart they aren’t even really competing anymore.

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