The idea that Apple Computer could ever be bigger — much alone twice as big — seemed ridiculous in 1999, when Microsoft stock was at a record high and its market value was about $620 billion.
Apple was on the verge of going bankrupt. Microsoft’s operating system was so dominant in personal computers, which were at the time the centre of the technological universe, that the government declared the firm to be an illegal monopoly.
Both Microsoft and Apple announced their latest earnings this week, and the unexpected happened: Apple’s market capitalization surpassed $683 billion, more than double Microsoft’s current worth of $338 billion.
Timothy D. Cook, Apple’s CEO, described the quarter as “historic” and the earnings as “fantastic” during the company’s earnings conference call on Tuesday. He said the sheer amount of sales was “impossible to understand,” noting that Apple sold more than 34,000 iPhones every hour, 24 hours a day, throughout the quarter.
On $75 billion in revenue, Apple earned $18 billion, the most of any corporation in a single quarter. Toni Sacconaghi, a senior Bernstein analyst, highlighted that its free cash flow of $30 billion in a quarter was more than double what IBM, another once-dominant computer corporation, earns in a year. Even though the general market was down, the stock increased by more than 5%.
A much more subdued version of the original Microsoft’s top executive, Satya Nadella, has mentioned “challenges” in his efforts to modernise the company and reduce its reliance on the Windows operating system.
Microsoft’s revenue was less than a third of Apple’s, and its operating income was less than a quarter of Apple’s at $7.8 billion. Investors are concerned about Microsoft’s ageing personal computer software industry, which has caused its stock to plummet by more than 9%.
When Vanity Fair interviewed Microsoft co-founder Bill Gates in 1998, Mr. Gates “couldn’t conceive a circumstance in which Apple would ever be bigger and more profitable than Microsoft,” Robert X. Cringely, the pen name of technology journalist Mark Stephens, told me this week.
Mr. Gates remarked of Apple co-founder Steve Jobs at the time, “He knows he can’t win.”
Apple, though, has triumphed in less than two decades. The events that led to this have some key lessons for Apple to learn if it wants to escape the same fate as Microsoft. After all, Apple is now as reliant on the performance of a single product line — the iPhone accounted for 69 percent of its revenue last quarter — as Microsoft was on Windows.
Both Apple and Microsoft have a vision, which is necessary for a company to be successful. Apple’s, on the other hand, was more revolutionary and, as it turned out, foresighted. When IBM mainframes took up entire rooms, Microsoft viewed a computer on everyone’s desk as a daring idea.
Apple, on the other hand, took it a step farther, envisioning a computer in every pocket. That computer also happened to be a phone, the world’s most widely used consumer electronic gadget. Apple managed to wreak havoc on two major industries.
Mr. Sacconaghi stated, “Apple has shown great foresight in inventing and expanding substantial new consumer electronics segments.” “It’s quite difficult to come up with unique, disruptive innovation.” It’s exceedingly tough to do it several times, as Apple has. It’s like Pixar making hit after hit. Apple deserves a pat on the back.”
“Steve believed the world was becoming mobile, and he was correct,” said Walter Isaacson, who interviewed Mr. Jobs for his biography of the Apple co-founder and CEO. And he was a firm believer in the importance of beauty. Beautiful design had a profound effect on him. Objects with high usefulness had to be attractive as well.”
Microsoft, like many other successful corporations, cultivated its dominant position at the expense of potentially disruptive technologies. Robert Cihra, a senior managing director and technology analyst at Evercore, stated, “You have to admit that Microsoft has been successful and it still is.””However, it’s evident that they’ve struggled to safeguard the Windows brand while not allowing it to hold them back in other areas.” Even Microsoft, I believe, would admit that they have been overly obsessed with defending Windows in the past, to their detriment.”
Mr. Isaacson, on the other hand, claimed that “Steve entrenched in the DNA of Apple not to be scared to cannibalize itself.” “When the iPod was creating money, he predicted that phone makers will find out how to put music on phones one day. That’s the first step we need to take. The larger iPhone is now affecting iPad sales, but it was the right thing to do.”
“Apple wiped out their iPod business,” Mr. Cihra concurred. They’re happier selling 74.5 million iPhones than they would be selling that many iPods, which they wouldn’t be selling anyhow since someone else would have snatched them.”
Microsoft has sought and continues to diversify under Mr. Nadella. But, according to Mr. Sacconaghi, “it’s been more of a follower, whereas Apple has been more of a pioneer, trying to redefine an industry.”
By purchasing Nokia late in the game, Microsoft is putting its own smartphone, the Windows Phone, in direct rivalry with Apple. While the device has received positive reviews, Mr. Cihra believes that “consumers do not need a third option” to the Android and iOS systems. Microsoft’s already small smartphone market share has been dwindling.
Perhaps more surprisingly, Apple’s methodology of integrating all parts of a product’s design and assembly, which other manufacturers had long abandoned, has been validated. Microsoft used to be willing to focus on software, leaving processors to firms like Intel and PCs to a variety of other organisations.
Mr. Isaacson stated, “For a long period, Microsoft appeared to have the better business strategy.” “However, it failed to produce ethereal beauty items in the end.” Steve believed that every brushstroke had to be controlled from start to finish. He was a perfectionist, not a control freak.”
Mr. Cihra stated that Apple “demonstrated that you want to own the hardware, not just the platform.” “Everyone but Apple gave up on that approach with the introduction of PCs. The upside leverage, though, is enormous if you get that model correct. Anywhere is a good place to get an Android device. You must, however, go to Apple if you want an iPhone.
“If you can achieve it, you’ll get pricing power and incredible profits.” Apple’s profit margins were just under 40% in the most recent quarter.
Then there’s Apple’s smooth leadership transfer to Mr. Cook, who took over as CEO soon before Mr. Jobs died in 2011. It’s not that Bill Gates’ immediate successor, Steve Ballmer, and now Mr. Nadella haven’t done a good job at the leadership of Microsoft. Microsoft shares were close to a record high until this week’s drop. Mr. Gates, on the other hand, is still alive and well, and stays active in the company.
According to Mr. Isaacson, Mr. Jobs “told me that Tim Cook would be an inspirational leader.” “He knew Tim wouldn’t wake up every morning wondering what Steve Jobs would do. Steve would never make an iPhone that was any larger. He was sceptical of the idea. Tim, on the other hand, did it because it was the proper thing to do.”
Some investors are concerned that Apple may become enslaved by its own success. Mr. Sacconaghi pointed out that the iPhone accounted for 69 percent of Apple’s revenue and 100 percent of its revenue increase in the quarter, making the business extremely reliant on one product line.
“A new paradigm change is always a possibility,” he remarked. “No one understands what it is, but the iPhone is Apple’s life and death.” “Until it isn’t, it’s a fantastic franchise.”
Mr. Cihra also mentioned that Apple is dealing with “the difficulty of enormous numbers.” The number “scares people” with a market valuation approaching $700 billion, he said. “How can it get any bigger?” says the narrator. “How could that be?” Apple is already the world’s most valuable firm by a considerable margin.
However, he pointed out that Apple stock appeared to be a bargain on many fronts. “The price is still reasonable,” he remarked. “It’s less than 13 times next year’s earnings and less than 10 times cash flow,” according to the report, both of which are below the market average. “Those are really small multiples. They have $140 billion in cash on their books and generate $60 billion in cash per year. All of the figures are tremendous, which makes it difficult for people to comprehend.”
Microsoft’s primary businesses are already dominated, according to Mr. Cihra, leaving the limited possibility for expansion. “Apple still doesn’t have a huge market share in any of its key areas,” he remarked.
Its market share is only in the mid-teens even among smartphones. Apple’s strategy has been to carve out a small piece of a large pie. It’s really a one-of-a-kind model with a lot of possibility for expansion.”
Can Apple stick to Mr. Jobs’ disruptive philosophy now that it’s as prosperous as Microsoft? Mr. Cihra pointed out that it was one thing for Apple to cannibalize its iPod or Mac businesses, but it was quite another to jeopardize its iPhone dominance.
Mr. Cihra stated, “It’s becoming more difficult for Apple.” “What will be the next iPhone?” investors wonder. There isn’t a straightforward solution. It’s difficult to imagine anything that could generate a $140 billion firm from nothing.”
Final Words on Microsoft being dominated:
Apple might be dominating Microsoft in some aspects, but it is also struggling in developing and innovating new products, Microsoft on other hand is moving in the same lane. It would be interesting to see what these tech giant companies will bring for us in the near future.