Apple gains the upper hand over Microsoft

Apple surged past Microsoft as the world’s biggest tech company based on market value on Wednesday, the latest milestone in the tech manufacturer’s revival.

In January 2000, Steve Ballmer took over as head of Microsoft. It was a company that bestrode the technology world, with a market capitalisation of $556-billion compared with its one-time deadly rival in personal computers, Apple, whose returning chief executive Steve Jobs was gradually nursing it back to health. Even so, Apple was a minnow: its market value was just $15,6-billion.

But on Wednesday the final step in the transformation was complete as Apple’s market capitalisation of $222,1-billion — and rising — passed Microsoft’s $219,2-billion, which has been on a slow downward path for months. Taking debt into account, Apple’s business has already passed Microsoft’s in value.

That trend only looks like continuing. This week sees the launch in Britain and eight other countries of Apple’s iPad, a format that Microsoft co-founder Bill Gates touted in 2001 but could never persuade computer manufacturers to make, or customers to buy. By contrast Apple has already become the biggest tablet computer company in the world since the iPad’s launch in the United States. Next month Jobs will unveil the next generation of iPhone — the device that Ballmer dismissed back at its launch in 2007 as having “no chance”. Since then sales of the iPhone have rocketed and it has become the gateway to the mobile internet and led to an explosion in downloadable mobile “apps”.

Digital music
David Yoffie, a Harvard Business School professor, told the Wall Street Journal that Microsoft has suffered in comparison with Apple because the consumer market — Apple’s focus — has outpaced the growth of spending on technology by businesses, Microsoft’s traditional area of strength. “Apple has had the wind at its back,” said Yoffie. “Microsoft is playing catch-up.”

But as well as the astonishing success of Apple’s products in recent years, Microsoft’s downfall has been caused by Google. In Ballmer’s 10 years, Google has gone from a loss-making startup to a huge company that dominates the online search industry. In January 2000, Google was just a search engine and did not have an advertising platform. Its AdWords product wasn’t launched until October. AdSense, which lets publishers use Google to sell ad space on their sites and is the real money-spinner, only appeared in 2003. On Ballmer’s watch, Google has gone from almost nothing to an open wound in Microsoft’s profit stream.

It is a substantial wound, too. Microsoft’s online services division — encompassing search, Hotmail and its “Live” services — last made a profit at the end of 2005; since then it has lost almost $5-billion. Google has been sucking up all the advertising revenue, and profit, from that sector. The division made a loss of $713-million in its latest quarterly results published in April, up from $411-million a year ago. Former Wall Street analyst Henry Blodget was withering: “If this business [online] weren’t hidden within the belly of a monstrous cash-generation engine, Windows and Office, shareholders would have long since revolted and shut it down.”

Microsoft still makes more profit than Apple or Google, but the question is can it make profits from anything other than its Windows operating system and Office software suite? They still bring in the vast majority of those profits.

Microsoft has other, internal, problems. This week it announced a radical shake-up in the entertainment and devices division (E&D) that makes its Xbox 360 games console, Windows Mobile Phones and Zune music player. First there is Microsoft’s failure to catch the iPod, launched in 2001, whose success allowed Apple to dominate the market for digital music players and then make a grab for the online music market with the launch of its iTunes store in 2003.

Its grip is so tight that the US justice department has recently been interviewing music labels and internet music companies with a view to possibly launching an competition inquiry. Second, there were problems with Microsoft’s Xbox 360, with which manufacturing flaws meant a $1-billion writedown and thousands of frustrated customers as machines overheated and had to be swapped.

The reorganisation of E&D is expected to refocus on Windows Mobile, which has been hurt again by HP’s decision to abandon Windows for its forthcoming tablet computer after buying ailing American smartphone company Palm. Tablet computers have also started to appear that use Google’s rival Android operating system. Next month, mobile phone company O2 will start selling the Dell Streak, which runs Android, in the UK.

Niche player
Matt Rosoff, of Directions on Microsoft, a private firm devoted to tracking the US company, said the shake-up at E&D looked like Ballmer was “taking tighter reins over Microsoft’s mobile strategy”. He added: “You see press reports where it is Google v Apple and Microsoft isn’t even considered a player. It has got to be frustrating for them.”

In stark contrast, Apple’s stock is expected to keep growing, especially with the iPad launch and then the release of the so-called iPhone 4G. The release of the latest version of Apple’s phone will also present the Cupertino-based company with the same dilemma it had in the home computer market: whether to remain a fashionable, but lucrative, niche player or go mass-market. After a shaky start, Google’s Android platform has become a real challenger as more handset manufacturers embrace it and create cheaper devices.

When the iPhone appeared, Ballmer argued it would never be anything other than a niche player and he could yet be right, but Microsoft has done no better. Sales of its Windows Mobile software for phones have slumped in the past three years, and the platform has been rapidly overtaken first by the iPhone and then by Android, which is given away free to handset manufacturers.

For Microsoft, which depends on paid licences for its software, Android presents an even bigger potential problem than the iPhone. HTC, formerly Microsoft’s biggest customer for Windows Mobile, is now one of the biggest for Android. In February, Dan Frommer, of Business Insider, called the idea that Microsoft could charge for Windows Mobile “joke of the week”.

“Microsoft is dead in the water in this business. If it wants to get moving again, it needs to do everything it can to help itself. And in mobile software, that means competing for ‘free’ with ‘free’.”

Whether Ballmer will have the stomach to do that is not clear. But without a winning mobile or search strategy, the market is clearly continuing to write Microsoft down. If Ballmer cannot turn it around, shareholders may finally grow restless. — Guardian News and Media 2010


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