Microsoft & Apple - a tale of two companies
With both Apple & Microsoft recently releasing their most recent quarterly results - I thought it might be interesting to examine where both companies started, are heading now and how they'll do moving forward..
Both companies trace their lineage back over 40 years now. Microsoft was founded in April of 1975 by Bill Gates and Paul Allen with Apple following a year later in April of 1976 - with Co-founders Steve Jobs, Steve Wozniak and Ronald Wayne.
Microsoft was all about software with their primary focus on a BASIC interpreter for the Altair 8000 while Apple's focus was on the hardware with the Apple 1 computer.
Even though Apple went public some 6 years before Microsoft in 1980, Microsoft exploded due to the PC boon and its Windows and Office product lines. For many years MS was the largest company in the world when measured by market capitalization and reached a then record valuation of $618.9B on 12/31/99.
But then the dot com bust happened and over the next few years MS saw it's valuation drop in half and fell from the #1 ranking in 2002 with a market cap of some $264B. It has never returned to the #1 spot.
Apple didn't fair much better. While it saw growth in the early 90's with the introduction of the Mac, by 1997 Apple was in dire financial straights and in fact MS invested $150M in Apple as part of a joint agreement to bring the popular Office product line to the Mac. Still to this day one of the most popular products on Mac is MS Office.
After Steve Jobs hiatus to start Next Computers, then Pixar Studios, he returned to Apple in 1997 and introduced the iMac. But Apple still floundered with a market cap <$20B. Apple began it's resurgence in 2001 with the introduction of the iPod music device along with the iTunes Store and the first Apple retail stores in CA and VA.
But what everyone knows that changed the game was the iPhone. Announced in Jan 2007 it completely changed the industry and Apple. By the end of 2009 the now Apple, Inc - reached #10 in market cap valued at some $189B while MS was #3 valued at $270B.
By the 2nd quarter of 2010, Apple moved past Microsoft with a $228B market cap to MS's $201B. Apple has not looked back since. Beginning in 2012 Apple has been the #1 company in the world and recently set the all time market cap valuation of $902.6B. It is expected that if Apple meets expectations for their Q1 of FY 18 it will be the first company to exceed $1T in market cap.
MS during that same period from 2007 to the retirement of Steve Ballmer in 2014 saw it's rank waiver between #10 and #3 and it's valuation grow to $382B. But Apple had long run past MS with a cap of $647B. And while MS tried to compete in the mobile space - it's Windows Phone offerings failed. MS had one potential new area of growth in Office 365 and an entry into cloud services with Azure.
MS's new CEO Satya Nadella has now focused MS squarely in the cloud services space with Office 365 and Azure and in the last 3 years MS has seen it's market cap jump to $568B - finally approaching the mark it had set way back in 1999. With that move as well as selling off the failed Nokia purchase and expanding the Surface line of PCs - MS seems to be on stable footing again.
So where are both companies heading. Let's start with Microsoft.
For Q1 FY 18 - MS had $24.5B in revenue. It has over 120M users on Office365 and Azure is continuing to grow at an amazing 90% year over year growth rate. The corporate movement to the cloud is continuing to pick up pace and with more and more new applications being developed under what is described as "modern" apps based on containerization and micro-services customers are flocking to Azure which is a very strong competitor to Amazon Web Services.
To me there are two areas of concern. First was that MS announced that some 40% of all servers in Azure are running Linux. So while Azure grew 90% the division which also includes Windows Server(s) only grew 17%. Many modern apps today do not run on Windows Server(s) and so MS may continue to see that market slide.
Second is the Personal Computing division which includes Windows 10, Surface, xBox and Search (Bing) which was effectively flat for Q1. Now the new xBox will have some impact, but as I've noted in other posts, Windows 10 is not driving new PC sales as PC sales continue to fall.
Now Apple - For Apple's Q4 FY 17 - it had $52.7B in revenue - so over double where MS is today. $28.8B of that revenue is from iPhone sales alone - some 46.7M units in Q4 while other product lines like iPad, Mac, Watch and Beats contributed another $15.2B. Apple's Digital Services - so iTunes, AppStore, ApplePay, etc contributed another $8.5B.
With Apple while they do have some product diversity with iPhone, iPad and Mac - Apple lives and dies on iPhone. So the way that Apple grows it's top line is to A) sell more iPhones and B) increase the margin per unit. And so while Apple has certainly increased the price points with iPhone 8s and X - will it do enough enough volume. At release a lot of folks where buying iPhone 7's instead of 8's due to the lower price point. So the question becomes how much longer is the model sustainable. With the iPhone X already at $1000, will we be seeing $1,500 iPhones in the coming years and if so will people pay it ?
As for where these two companies are heading, that's an interesting question.
For MS - they will continue to drive their two big Cloud Services - Office365 and Azure. In fact MS has also introduced Microsoft 365 - which adds Windows 10, AD and Security service models. Over the next 5 - 10 years I see corporate computing moving away from Commercial Off the Shelf (COTS) applications running on physical or virtual machines to As a Service (XaaS) models and the corporate data centers shrinking. While not very easy today - it is possible for many corps to move a large portion of their workloads to the cloud today. That will be come easier and easier in the coming years as older business applications get replaced. In additional with more and more focus on modern applications like IoT, Big Data and AI, cloud services like Azure and AWS will be where most of those applications will end up.
Where MS has a challenge is in the endpoint space. With the failure of Windows Mobile - MS is having a harder and harder time getting developers to build apps for Windows. I don't care whether the platform is UWP or PWA, the focus of app development today is mobile and if you can't get the apps you need - why run that OS. And with mobile devices outselling PCs by a nearly 7 to 1 ratio and Android now the leading OS - MS will be challenged there.
For Apple - they will continue to ride iPhone horse as long as they can. And while they have seen increases in Mac sales, it's still a very small portion of an ever shrinking PC market. iPads do okay but are a small portion of Apple's revenue and products that were once thought to be the "next big thing" - like Apple TV are a niche product. What Apple does have is exceptional brand loyalty and very good margins. For me the question will be will there be any impact of Apple falling to #3 in sales volume as Huawei continues to get ever closer in volume with each passing quarter.
In my opinion what Apple is missing is good cloud services. When compared to even simple things like storage, MS, Google and others offer better. And while Apple does have their Facetime, Messenger and Pay service - they haven't expanded beyond their internal ecosystem. For example on my iPhones, I don't use iCloud services - I use OneDrive. And with everyone having a store and many 3rd party apps from MS, Google, Amazon available for iPhone they are missing that opportunity.
So as of today Apple is #1 and MS is #3 and I don't see that changing in the next few years. And with Google and Amazon @ #2 and #4 respectively it will be interesting to see what new businesses will driver either to the next level.
Both companies trace their lineage back over 40 years now. Microsoft was founded in April of 1975 by Bill Gates and Paul Allen with Apple following a year later in April of 1976 - with Co-founders Steve Jobs, Steve Wozniak and Ronald Wayne.
Microsoft was all about software with their primary focus on a BASIC interpreter for the Altair 8000 while Apple's focus was on the hardware with the Apple 1 computer.
Even though Apple went public some 6 years before Microsoft in 1980, Microsoft exploded due to the PC boon and its Windows and Office product lines. For many years MS was the largest company in the world when measured by market capitalization and reached a then record valuation of $618.9B on 12/31/99.
But then the dot com bust happened and over the next few years MS saw it's valuation drop in half and fell from the #1 ranking in 2002 with a market cap of some $264B. It has never returned to the #1 spot.
Apple didn't fair much better. While it saw growth in the early 90's with the introduction of the Mac, by 1997 Apple was in dire financial straights and in fact MS invested $150M in Apple as part of a joint agreement to bring the popular Office product line to the Mac. Still to this day one of the most popular products on Mac is MS Office.
After Steve Jobs hiatus to start Next Computers, then Pixar Studios, he returned to Apple in 1997 and introduced the iMac. But Apple still floundered with a market cap <$20B. Apple began it's resurgence in 2001 with the introduction of the iPod music device along with the iTunes Store and the first Apple retail stores in CA and VA.
But what everyone knows that changed the game was the iPhone. Announced in Jan 2007 it completely changed the industry and Apple. By the end of 2009 the now Apple, Inc - reached #10 in market cap valued at some $189B while MS was #3 valued at $270B.
By the 2nd quarter of 2010, Apple moved past Microsoft with a $228B market cap to MS's $201B. Apple has not looked back since. Beginning in 2012 Apple has been the #1 company in the world and recently set the all time market cap valuation of $902.6B. It is expected that if Apple meets expectations for their Q1 of FY 18 it will be the first company to exceed $1T in market cap.
MS during that same period from 2007 to the retirement of Steve Ballmer in 2014 saw it's rank waiver between #10 and #3 and it's valuation grow to $382B. But Apple had long run past MS with a cap of $647B. And while MS tried to compete in the mobile space - it's Windows Phone offerings failed. MS had one potential new area of growth in Office 365 and an entry into cloud services with Azure.
MS's new CEO Satya Nadella has now focused MS squarely in the cloud services space with Office 365 and Azure and in the last 3 years MS has seen it's market cap jump to $568B - finally approaching the mark it had set way back in 1999. With that move as well as selling off the failed Nokia purchase and expanding the Surface line of PCs - MS seems to be on stable footing again.
So where are both companies heading. Let's start with Microsoft.
For Q1 FY 18 - MS had $24.5B in revenue. It has over 120M users on Office365 and Azure is continuing to grow at an amazing 90% year over year growth rate. The corporate movement to the cloud is continuing to pick up pace and with more and more new applications being developed under what is described as "modern" apps based on containerization and micro-services customers are flocking to Azure which is a very strong competitor to Amazon Web Services.
To me there are two areas of concern. First was that MS announced that some 40% of all servers in Azure are running Linux. So while Azure grew 90% the division which also includes Windows Server(s) only grew 17%. Many modern apps today do not run on Windows Server(s) and so MS may continue to see that market slide.
Second is the Personal Computing division which includes Windows 10, Surface, xBox and Search (Bing) which was effectively flat for Q1. Now the new xBox will have some impact, but as I've noted in other posts, Windows 10 is not driving new PC sales as PC sales continue to fall.
Now Apple - For Apple's Q4 FY 17 - it had $52.7B in revenue - so over double where MS is today. $28.8B of that revenue is from iPhone sales alone - some 46.7M units in Q4 while other product lines like iPad, Mac, Watch and Beats contributed another $15.2B. Apple's Digital Services - so iTunes, AppStore, ApplePay, etc contributed another $8.5B.
With Apple while they do have some product diversity with iPhone, iPad and Mac - Apple lives and dies on iPhone. So the way that Apple grows it's top line is to A) sell more iPhones and B) increase the margin per unit. And so while Apple has certainly increased the price points with iPhone 8s and X - will it do enough enough volume. At release a lot of folks where buying iPhone 7's instead of 8's due to the lower price point. So the question becomes how much longer is the model sustainable. With the iPhone X already at $1000, will we be seeing $1,500 iPhones in the coming years and if so will people pay it ?
As for where these two companies are heading, that's an interesting question.
For MS - they will continue to drive their two big Cloud Services - Office365 and Azure. In fact MS has also introduced Microsoft 365 - which adds Windows 10, AD and Security service models. Over the next 5 - 10 years I see corporate computing moving away from Commercial Off the Shelf (COTS) applications running on physical or virtual machines to As a Service (XaaS) models and the corporate data centers shrinking. While not very easy today - it is possible for many corps to move a large portion of their workloads to the cloud today. That will be come easier and easier in the coming years as older business applications get replaced. In additional with more and more focus on modern applications like IoT, Big Data and AI, cloud services like Azure and AWS will be where most of those applications will end up.
Where MS has a challenge is in the endpoint space. With the failure of Windows Mobile - MS is having a harder and harder time getting developers to build apps for Windows. I don't care whether the platform is UWP or PWA, the focus of app development today is mobile and if you can't get the apps you need - why run that OS. And with mobile devices outselling PCs by a nearly 7 to 1 ratio and Android now the leading OS - MS will be challenged there.
For Apple - they will continue to ride iPhone horse as long as they can. And while they have seen increases in Mac sales, it's still a very small portion of an ever shrinking PC market. iPads do okay but are a small portion of Apple's revenue and products that were once thought to be the "next big thing" - like Apple TV are a niche product. What Apple does have is exceptional brand loyalty and very good margins. For me the question will be will there be any impact of Apple falling to #3 in sales volume as Huawei continues to get ever closer in volume with each passing quarter.
In my opinion what Apple is missing is good cloud services. When compared to even simple things like storage, MS, Google and others offer better. And while Apple does have their Facetime, Messenger and Pay service - they haven't expanded beyond their internal ecosystem. For example on my iPhones, I don't use iCloud services - I use OneDrive. And with everyone having a store and many 3rd party apps from MS, Google, Amazon available for iPhone they are missing that opportunity.
So as of today Apple is #1 and MS is #3 and I don't see that changing in the next few years. And with Google and Amazon @ #2 and #4 respectively it will be interesting to see what new businesses will driver either to the next level.
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