October 26th, 2008

How long until Apple is bigger than Microsoft?

Posted by Adrian Kingsley-Hughes @ 9:48 am

Categories: Apple, Microsoft

Tags: Apple Inc., Microsoft Corp., Adrian Kingsley-Hughes, AppleInsider, GAAP, Financial Accounting, Finance

AppleInsider’s Prince MacLean offers some interesting weekend food for thought:

While Microsoft executives like to talk about Apple as an insignificant company with less than 5% of the worldwide market share of all PCs and servers sold, the Mac maker now has more cash than Microsoft and earns more than half of its profits and over three fourths its revenues.

The numbers are incredible:

Microsoft

Revenue: $15.1 billion | Net profits: $4.3 billion | Cash & cash equivalents: $20.7 billion

Apple (non-GAAP)

Revenue: $11.7 billion | Net profits: $2.4 billion | Cash: $25.5 billion

All of which raises an interesting question - How long until Apple is bigger than Microsoft? And before you scoff at that idea that dismiss me as an Apple zealot (which I am not), it very much is a possibility given that Microsoft’s quarterly revenues grew by by only 9%, while Apple’s (as measured non-GAAP) grew by a staggering 75%.

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The difference? Well, I think that it’s all down to the philosophies of the two companies, and how Microsoft might have made a long-term misjudgment as to where the money is.

For example:

• Do you really need a huge user-base to rake in huge profits? Microsoft believed you did, but Apple is hitting the high numbers on a low user base.
• Is the real money in having your OS on a computer, on in selling that OS/hardware package as a single product? It’s clear that Apple is gaining ground on Microsoft by selling a product that it controls very precisely. Apple also manages to score very highly when it comes to customer satisfaction.
• Is there still huge profits to be made on the desktop, or does Microsoft need to follow Apple’s model and go mobile.
• Advertising. Advertising! ADVERTISING!!! Compared to Apple, Microsoft’s advertising is awful. Rather than maintain that it’s a bigger, better company than Apple, Microsoft (along with probably most of the cellphone industry) needs to take a closer look at how Apple has managed to grad the profits that it has with such a small market share.
  Clue: Advertising, customer satisfaction, mega-hype!

Let’s be clear though, it’s not all plain sailing for Apple. The economy is a bit choppy right now and Apple isn’t totally recession-proof. But then again, neither is Microsoft.

Five years ago I don’t think that there were many people who seriously believed that Apple could seriously compete with Microsoft. How times have changed. It’ll be interesting to see how things stand a year from now.

[UPDATE: Quick response to a few comments:

• "The numbers are wrong for Apple!"
  Check out the GAAP and non-GAAP data. 
• "Apple is consumer-focused, and that is a weakness."
  Maybe, who knows in future quarters. But so far, with tech companies suffering, Apple isn't suffering. Rather than trying to predict the future, looking at what's been seems to suggest that Apple's tactic is so far successful.
  Also, let's not forget that Apple's consumer focus has helped increase its customer base in education and business.
• "The economic downturn will hit Apple hard."
  Maybe, but with no debt and more cash than Microsoft has, it is very well placed to weather the storm.
• "Microsoft's diversity is key."
  Hmmm, Xbox, Zune, Marketplace, MSN ... hardly racking in the cash. One problem I see with Microsoft right now is that the company is floundering in areas it doesn't understand.]

Thoughts?