APPL: I’ll Buy That For a Dollar


Last week, the web was abuzz with Apple’s market cap being greater than Microsoft’s. In a nutshell, my how times have changed.

Market capitalization is the theoretical value of a company – its share price times the number of total shares. Companies are actually worth more, but the model is flawed equally among rivals so it serves as a reasonable method of comparison.

Here are some market caps from last week:

XON $288bn (Exxon Mobile)

AAPL $230.5bn

MSFT $227.9bn

GE $177bn (GE really is sort of a technology company)

GOOG $156bn

T $145.5bn (AT&T; has been helped by aapl in a not insignificant way)

CSCO $136b

INTC $121b

ORCL $113bn

HPQ $110bn

AMZN $56bn

The fact that Apple has done so well over the past decade is remarkable, and few people a decade ago guessed Apple could pass Microsoft in Market Cap in 10 years. I am a customer of both of companies, but not particularly a fan of either. I use their products where appropriate and respect their accomplishments.

I don’t think it is likely Apple can hold its new found lead over Microsoft in market cap. To understand my reasons, it is important to understand how Apple did what it did.

Apple created and rode two powerful waves – while simultaneously Microsoft blew some big opportunities. The two big waves Apple rode were the SmartPhone and the Browser. Apple did more than ride the SmartPhone wave, it created it.

The iPhone is probably the most significant innovation in the past decade. It completely revolutionized and defined the concept of a SmartPhone. None of the then current cell phone manufacturers were able to stand -up to the carriers that insisted on crippled devices to protect their networks. Apple had nothing to lose and AT&T; felt trading hardware authority for Apple’s lucrative fan base was a reasonable bet – history was made. Arguably, the Google Phone would not have been possible had the iPhone not first cleared a path.

To quote myself from a different post:

At Google’s Atmosphere conference, Mary Meeker, Managing Director at Morgan Stanley, presented the mobile Internet as a the fifth computing wave. The first four waves were mainframes in the ’60s, mini-computers in the ’70s, PCs in the ’80s, Desktop Internet in the ’90s, and now mobile Internet. Each cycle has a 10-fold increase in users over the previous…She stated that within five years, the mobile device will be the primary means for people to connect to the Internet (at home and at work)…Mary said five forces are aligning to increase mobile demand: 3G, social networking, video, VoIP, and impressive devices. “The rate of change in innovation related to mobile Internet is unprecedented, I think, in world history.”

Being the center of the mobile wave does amazing things to Market Cap. Not to mention the iPod which has been at the center of the digital musical revolution and directly led to the iPhone.

The Browser was a significant wave to ride too. Not because Apple sells a browser, I don’t think they do, but because it leveled the playing field of desktop computing. Apple lost the desktop battle before (regardless of end-user preference). Windows won because it was broadly supported at the office. Ten years ago, it was a lot harder to split computing time with Microsoft and Apple computers – file portability at its best was a hassle and at worst completely impossible.

Microsoft Terminal Server, other thin client solutions, and most of the browser changed the rules. Most users are content with a browser and MS Office – the Mac offered that without functional penalty. Suddenly having a hardware/software solution that delivered a superior user experience was valuable, and the Mac along with its iPod and iPhone became cool and the choice of the digerati. Apple’s retail stores, initially considered a big gamble (launched right as Gateway was declaring their retail attempt a failure) turned out to be a master stroke as the CompUSAs and dot.coms just weren’t providing the channel experience Apple needed.

iPod, IPhone, Retail, and so many other decisions Apple made in the past decade have one important common thread – Steve Jobs. We all enjoy making fun of him, but he is without question one of the greatest business and design minds the computing industry has ever seen. It is easy to say he was lucky with the Apple II, but the luck argument wears thin after so many successes inside and outside of Apple.

So far so good. Apple earned their success, so why will it change? Several reasons.

1) iPhone tide appears to be changing. Granted we are weeks away from major announcements, but I am seeing a tide shift against the iPhone. The Adobe Flash debacle is one example. Big time iPhone supporters are defecting, here locally Brad Feld and Brett Greene have been very public about their defections – largely a result of AT&T.; The iPhone was so revolutionary that it has taken until recently for viable competition. But Google’s open approach is building momentum. In the past 18 months, Android is now available on 60 devices, made by 21 OEMs, available in 48 countries, on 59 carriers (iPhone, 1 OEM, 1 US Carrier). Google is reporting 10,000 activations every day (more than Apple). While many still agree the iPhone is superior, that won’t be easy to maintain.

2) Steve Jobs is getting older. It is sadly inevitable that Steve Jobs will someday leave Apple for the second time – and its effect will likely be similar to the first time. It is highly unlikely Apple can replace Steve with anyone half as capable. The impact will be gradual, just as Microsoft has gradually declined since Gates departed Microsoft. Visionaries are seldom senior executives and/or effective at sales. Just the announcement of his retirement will cause the stock to drop – the results of his replacement even more so.

3) Microsoft has made a lot of mistakes lately. The company blew their dominance in mobile phones and being two years late with Mobile 7 it will have a hell of challenge just to become part of the conversation. The company is throwing everything at Search (Bing) in an attempt to catch-up to Google. Apple has taken a huge chunk out of the home PC market. Microsoft’s Zune remains a footnote in music, and even its successful Xbox is dated. At Microsoft’s core is Exchange, Office, and Windows – and those products for the first time are experiencing real viable competition.

Despite this, Microsoft technologies remain strong at the Enterprise. These customers ignored Vista, but are embracing Windows 7. That means Windows, Office, and Exchange upgrades are planned for 2010. Factor in the Microsoft UC vision with Sharepoint, OCS, Active Directory, and even Azure – and Microsoft’s revenues just may be heading north. There were no major upgrades in 2009 adopted by the enterprise.

4) Google’s Android was discussed above, but Google is coming on strong with its vision of the cloud. Exactly what helped Apple may turn against it as users discover their needs can be met with far less expensive devices optimized to leverage the cloud. Ironically, Apple is ahead of the curve with its iPad. But several pad-like devices are expected soon based on Android and WebOS.

If iPhone OS and Android OS can meet most of our needs, why use MacOS or Win7 desktops at all? Today, there is still a need – but things can change quickly. Google is driving a cloud standard for printing and in addition to Android is working on Chrome OS – a browser OS. Netbooks continue to be popular, and the notion of Internet ubiquity is real. The cloud really does change computing – even Linux is making is greatest inroads (via the Netbook) to the desktop.

Google, with Apple’s assistance, is making impressive progress on HTML5 which will enable to the browser to match many functions only possible with software clients (desktop and phone). This trend makes the Internet and the browser more powerful at the cost of specialized client software. It threatens Apple’s greatest early mover advantage – the Appstore. Google specifically, is going directly after Apple’s key success in mobility and as a result of the browser.

I think about how many times my daily computing life touches Google vs. Microsoft or Apple and it is astonishing. This blog, my email, my calendar, my cell phone, my photos, the list goes on. And here is the kicker – all of these apps won on their own merit. Excel didn’t beat Lotus – Word beat WordPerfect and Microsoft bundled Excel with Word. Even more so for PowerPoint vs. Harvard Graphics. I am not suggesting Google will overtake Apple in Market Cap in the near term, but Google is well positioned as the Internet continues to dominate work flow. Google holds a broad portfolio of tools and applications that leverage the Internet far better than Apple or Microsoft and Goggle’s growth will come at the expense of larger firms. .

It isn’t over yet though. Apple just wowed the world with its iPad. A whole new concept in computing that most didn’t see. Apple innovation hasn’t shown any signs of slowing. But the market cap in the context of this post is a yardstick for comparison. Cupertino’s successes, as well as Redmond’s failures have contributed to Apples rise. My point is this trend is likely reversible.


Dave Michels