On January 29, 2015, James B. Stewart of Common Sense wrote: “How, and Why, Apple Overtook Microsoft.” (All quotes are from this article unless otherwise attributed.)
When Microsoft stock was at a record high in 1999, and its market capitalization was nearly $620 billion, the notion that Apple Computer would ever be bigger — let alone twice as big — was laughable. Apple was teetering on bankruptcy. And Microsoft’s operating system was so dominant in personal computers, then the center of the technology universe, that the government deemed the company an unlawful monopoly.
This week, both Microsoft and Apple unveiled their latest earnings, and the once unthinkable became reality: Apple’s market capitalization hit $683 billion, more than double Microsoft’s current value of $338 billion.
[pullquote]Apple’s profit this year is $5 billion more than last year. Perspective: Microsoft’s entire quarterly profit this year was $5.8 billion. ~ Farhad Manjoo[/pullquote]
Apple’s rise from near bankruptcy to the largest tech company in the world is one of the most fascinating business stories of our times. Virtually no one predicted that Apple would survive, much less thrive, from their fall in the late nineties. As Apple has rewritten the record books, business professors have had to rewrite their business books, too. Apple has been studied as much or more than any company on the planet yet, despite the intense scrutiny, Apple remains inscrutable. Apple’s success, both past and present, continues to baffle and confound friends, critics, journalists, analysts, and investors alike.
At this point the whole journo-analyst class, myself included, has to concede we were wrong about Apple having to make a cheaper iPhone. ~ Farhad Manjoo
With an introduction like the one I’ve quoted, above, you would think that the purpose of an article entitled “How, and Why, Apple Overtook Microsoft” would be to praise Apple, not bury them. However, other than those first few laudatory paragraphs, the remainder of the article focuses not on Apple’s rise, but, rather, on the likely reasons for their demise.
Sharing Microsoft’s Fate?
Apple has won. How this happened contains some important lessons — including for Apple itself, if it wants to avoid Microsoft’s fate. Apple, after all, is now as dependent on the success of one product line — the iPhone accounted for 69 percent of its revenue — as Microsoft once was with Windows.
Suggesting that there are lessons to be learned from Apple’s unprecedented rise is obvious. However, suggesting that the Apple of today is in a similar position to the Microsoft of yesterday, simply because Apple is dependent upon a single product, is dubious. And suggesting that Apple needs to learn from Microsoft’s mistakes in order to avoid Microsoft’s fate is, frankly, ludicrous.
Don’t get me wrong, I think it’s great to study Microsoft and other companies. There’s much that can be learned. But Apple is as unlike Microsoft as a company can be. It is perfectly reasonable to suggest reasons why Apple may, one day, plateau and be superseded by another tech company. It is perfect unreasonable to suggest that Apple will falter in the same way and for the same reasons that Microsoft did.
The most successful companies need a vision, and both Apple and Microsoft have one. But Apple’s was more radical and, as it turns out, more farsighted. Microsoft foresaw a computer on every person’s desk, a radical idea when IBM mainframes took up entire rooms. But Apple went a big step further: Its vision was a computer in every pocket. That computer also just happened to be a phone, the most ubiquitous consumer device in the world. Apple ended up disrupting two huge markets.
I respectfully disagree with the author’s oversimplified take on the respective visions of Microsoft and Apple. First, the author is subtly misquoting Microsoft’s vision statement, which was:
A computer on every desk and in every home. ~ Bill Gates,1980
This was one of the greatest corporate vision statements of all time. While it is true that Microsoft virtually achieved their audacious mission and has struggled to replace it with a worthy successor, I would suggest that it wasn’t the achievement of, but rather the corruption of, Microsoft’s mission statement that caused Microsoft to lose their way. [pullquote]Idle Observation: most or all of the companies described as ‘missing mobile’ were in fact in mobile 6-7 years before Apple. ~ Benedict Evans[/pullquote] After all, Microsoft didn’t ignore mobile computing. On the contrary, they were into mobile computing far earlier than Apple was.
It wasn’t Microsoft’s original mission statement that kept them from conquering mobile. Rather, it was the morphing of Microsoft’s vision from “A computer on every desk and in every home” to “Microsoft Windows on every computer” that derailed their mobile efforts. This oh-so-subtle shift in vision had oh-so-dramatic practical implications. Windows became the be-all and end-all for Microsoft and, inevitably, the “Windows everywhere” mantra became corrosive as it left no room for innovation anywhere but within the framework of Windows.
Microsoft missed mobile because mobile devices demanded a different user input (touch) and a different user operating system optimized for touch. If Microsoft had remained true to their original mission of computing everywhere, they might have created a mobile operating system to compete with their Windows desktop operating system. Instead, Microsoft tried to shoehorn Windows into every device — from watches to phones, to televisions and to “big ass” tables. Windows, not computing, became the cash cow that was worshiped at Microsoft and all other competing innovations were sacrificed upon its altar.
Like many successful companies, Microsoft nurtured its dominant position, but at the risk of missing potentially disruptive innovations. “You have to acknowledge that Microsoft has been successful and it still is,” said Robert Cihra, a senior managing director and technology analyst at Evercore. “But clearly, they’ve struggled over how to protect the Windows franchise while not having that hold them back in other areas. I think even Microsoft would agree that they’ve been too concerned with protecting Windows over the years, to their detriment.”
As Tim Bajarin put it:
(The Microsoft of today is) about making Microsoft relevant to all platforms and mining for dollars well beyond the Windows franchise. This is fantastic for Microsoft and I believe this new strategy is going to make them more relevant to the tech world.
I agree. Microsoft’s future is cross-platform services that work everywhere. Yet even today, in a vastly changed — and I would argue, vastly improved — Microsoft, CEO Satya Nadella, who should know better, continues to worship, and suggest that others should worship, Windows.
We want to move from people needing Windows to choosing Windows to loving Windows. ~ Satya Nadella
Microsoft cannot seem to shake their Windows dependency, still focused as they are on what is good for Microsoft instead of what is good for their customer.
“We absolutely believe Windows is the home for the very best of Microsoft experiences.”
What about the customer experience?” ~ Ben Thompson
And what of Apple’s vision? Was their vision really ever “a computer in every pocket”? Hardly. Remember, Apple’s revival started with the candy colored iMacs; continued on with the brilliantly designed Powerbook notebook computers that are now the template for practically every notebook computer on the market today; and took a huge leap forward with the iPod which, if anything, was a device tethered to a computer and which specialized in music distribution. Even the iPhone came AFTER Apple had been exploring the tablet form factor that later become the iPad. Apple’s mission was anything but “a computer in every pocket.”
So what is Apple’s vision?
We’ve always believed that our role in life is to make the best, not the most. ~ Tim Cook
We think about doing a great product. And we think that if we do that well, that other things will take care of themselves. And so that’s what we’re focused on. ~ Tim Cook
If Apple had a more radical vision than Microsoft, it was a vision to make the very best computing devices possible, cannibalization be damned.
Mr. Sacconaghi said. “Unique, disruptive innovation is really hard to do. Doing it multiple times, as Apple has, is extremely difficult. It’s the equivalent of Pixar producing one hit after another. You have to give kudos to Apple.”
By contrast, “Steve ingrained in the DNA of Apple not to be afraid to cannibalize itself,” Mr. Isaacson said. “When the iPod was printing money, he said that someday the people making phones will figure out they can put music on phones. We have to do that first. Now, what you’re seeing is that the bigger iPhone may be hurting sales of iPads, but it was the right thing to do.”
Diversification Or Losing Focus?
Microsoft has repeatedly tried to diversify, and continues to do so under Mr. Nadella. But “it’s been more of a follower whereas Apple has been more of a trendsetter, trying to reinvent an industry,” Mr. Sacconaghi said.
[pullquote](D)iversification simply telegraphs lack of a definite strategy. ~ Farooq Butt[/pullquote]
Diversification is all well and good, but a laser focus is healthier and better. I would argue that Microsoft wasn’t diversifying so much as they were flailing around trying to discover what was next. During their heyday, Microsoft had too little competition, too much money, and too little idea of how to spend that money.
Does that sound like any other company we know? A company that actually brags about their lack of focus by calling their random projects “moon shots”?
Apple, on the other hand, has more money than God and while it is fair say they have no idea what to do with it all, it is not at all fair to say they’re spending it on random Project X moon shots. Apple seems to have a very clear idea of where they are going and they use their purchases to advance their purposes, whereas Microsoft and Google sometimes try to use their purchases to discover their purpose.
What Is There Left For Apple To Do?
Apple is also running into “the challenge of large numbers,” Mr. Cihra said. With a market capitalization approaching $700 billion, the number “scares people,” he said. “How can it get much bigger? How is that possible?” Apple is already the world’s largest company, by a significant margin.
“It’s getting tougher for Apple,” Mr. Cihra said. “The question investors have is, what’s the next iPhone? There’s no obvious answer. It’s almost impossible to think of anything that will create a $140 billion business out of nothing.”
Every year, pundits ask “What is there left for Apple to do?”. And every year, Apple provides a resounding answer that exceeds all expectations. And every year, those self-same pundits use Apple’s success as a cudgel with which to beat down future expectations. You think I’m exaggerating? Take a gander at the past parade of pundits predicting peril for Apple:
“I’m more convinced than ever that, after an initial frenzy of publicity and sales to early adopters, iPhone sales will be unspectacular… iPhone may well become Apple’s next Newton.” ~ David Haskin, Computerworld, 26 February 2007
“Apple begins selling its revolutionary iPhone this summer and it will mark the end of the string of hits for the company.” ~ Todd Sullivan, Seeking Alpha, 15 May 2007
“Apple is a company that has to come up with hit after hit after hit, every 12 to 18 months, but once you do the iPhone on Verizon, what’s the next thing past this?” ~ Patrick Becker Jr, Becker Capital Management, 7 March 2011
“Still, the iPod, iPhone, and iPad are all some of the top selling products in their categories, so why are people losing their faith in the money-making machine that is Apple? Maybe it’s because they’ve done it all. What is there left for Apple to do?” ~ Emily Knapp, Wall St Cheat Sheet, 24 May 2011
“If you look at any institution in history – look at the Roman Empire – anything in history, and what it looks like when it’s peaking. Look at Apple, and how can you say it’s not peaking?” ~ Trip Hawkins, Founder and CEO of Digital Chocolate, 3 Aug 2011
“I was talking recently to someone who knew Apple well and I asked him if the people now running the company would be able to keep creating new things the way Apple had under Steve Jobs. His answer was simply ‘no.’ I already feared that would be the answer. I asked more to see how he’d qualify it. But he didn’t qualify it at all. No, there will be no more great new stuff beyond whatever’s currently in the pipeline. So if Apple’s not going to make the next iPad, who is?” ~ Paul Graham, March 2012
“It’s been years — considered a long time in tech — since Apple delivered a “mind-blowing” product…” ~ Jon Swartz, USA Today, 4 October 2012
“Apple has nothing new in the pipeline.” ~ Henry Blodgett
“Apple has become a value trap, This is a company with no growth, and profit margins that are way too high vis a vis the competition.” ~ Doug Kass, Seabreeze Partners Management, 17 Sept 2013
“Deutsche Bank’s view is that Apple likely has few surprises left.” ~ 10/2/14
The Secret To Apple’s Success
James B. Stewart devoted an entire article to explaining “How, and Why, Apple Overtook Microsoft” and yet it’s clear that he doesn’t, and many other pundits don’t, have a clue as to how Apple succeeded. And if we don’t understand how Apple succeeded, what right do we have to claim — and what excuse do we have for claiming — that we know the reasons why Apple will fail?
I notice a consistent pattern in Apple’s critics. Those that understand Apple the least, criticize Apple the most. If you want me to believe that you understand the reasons why Apple will fall, first demonstrate to me that you understand the reasons why Apple grew at all and grew so tall. Until then, I’ll remain skeptical of the doomsayers. For while I have great respect for the opinions of many Apple observers, I still believe that the secret to Apple’s success…remains a secret.
The secret of business is to know something that nobody else knows. ~ Aristotle Onassis
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. ~ Peter Thiel