/ 13 July 2011

Steve vs Steve: A tale of two CEOs

It’s unusual for consumers to know the name of the CEO of the company whose products they buy. Few people can name the CEO of Toyota, or LG. But how many of us know who runs Apple? Most ordinary folks have no trouble naming him.

Steve Jobs has built a personality cult around himself, either unintentionally or by design (probably a bit of both). The same cannot be said for Microsoft’s long-running CEO, Steve Ballmer. He’s well known in the tech industry, but outside of it most people think that his old boss, Bill Gates, still runs Microsoft.

So what? Being a successful CEO is about results, not PR fluff, right? Agreed, but by all measures Jobs is the clear winner in both categories. If you don’t believe me, take a look at a comparison of share prices since January 2000 when Ballmer took over as CEO.

That’s right, Apple is up over 1 200% and Microsoft is down over 50%. That means if you’d invested R100 in Apple in the year 2000, it would now be worth R1,280. The same money invested in Microsoft would be worth R46. Over the same period, IBM — an even more venerable tech giant — grew in value by 45%. Not great, but better than a loss.

Of course share price isn’t everything. A more important measure is market capitalisation — the total amount that all company’s existing shares are worth at the current share price. This gives a much better view on a company’s real value. Right now Apple’s market cap is $325-billion and Microsoft’s is $223-billion.

What’s most startling is that Apple only surpassed Microsoft in market cap in May last year, and already it is worth $100-billion more than its old rival. In fact, Apple is now worth as much as Microsoft, HP and Dell combined.

To many people, that’s a sign that Apple is overvalued. They may have a point since the best indicator of a company’s long-term value is its earnings. Apple only surpassed Microsoft in net profits for the first time in April this year. Apple made $5.99-billion in its last quarter versus Microsoft’s $5.23-billion.

So why the huge gap in share price and market cap? Simply put, the market does not have confidence in Microsoft’s long-term earning potential, whereas they believe Apple’s still has a long way to grow before it plateaus.

Where Microsoft is still shackled to its legacy platforms — the Windows operating system and Office automation tools — Apple has created an entirely new market every two years for the last decade. First the iPod, then iTunes, then the iPhone and its related app store and now the iPad. All of these markets are booming simultaneously, driving Apple’s market share and profits relentlessly upwards.

As a CEO you’re only as good as your last three major decisions. By that yardstick Ballmer is even further behind Jobs than the money suggests. So far this year he has struck an expensive deal with Nokia in a bid to buy his way into the mobile market (in which Microsoft has conspicuously failed, despite a decade of attempts), overpaid by at least 50% for Skype (which makes zero profits) and successfully alienated his rank and file employees with a pointless reshuffle.

And yet Ballmer is entirely unruffled by the fact that his company is stagnating around him. In fact he remains as arrogant as ever. Yesterday he announced that Microsoft had sold 400-million copies of Windows 7 — the latest version of its operating system. He couldn’t resist adding that “20 is too much, but 400, last time I checked, is a lot more than 20” — an obvious dig at Apple whose Mac OSX operating system is installed on an estimated 20-million computers.

This recalls his now infamous quote in 2007: “There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidised item. They may make a lot of money. But if you actually take a look at the 1.3-billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

Of course Apple went on to grab 25% of the smartphone market, selling hundreds of millions of phones. Microsoft, by contrast, does not even feature in the top five by market share. Ballmer acknowledged as much during the Windows 7 sales announcement, joking that “we’ve gone from very small [market share] to very small, but it’s been a heck of a year.” Really? Launching Windows Phone 7 three years too late is a “heck of a year”?

It’s this carefree arrogance that provoked David Einhorn, a major investor, to call for Ballmer’s resignation in May. Microsoft’s board ignored the suggestion, but it’s hard to understand why. You might say a self-congratulatory billionaire is not a good candidate to steer a company like Microsoft, but just look at what Jobs has done at Apple.

Of course Jobs is given too much personal credit for the success of Apple. He is, without a doubt, a visionary and an exceptional leader. But his greatest talent has always been finding and retaining incredibly talented staff. Many people think Apple would crumple without him, but I am less sure.

Jobs also has a generous helping of ego and hubris. Many people talk about the “reality distortion field” that surrounds him. Get too close, the wags say, and you will start believing that everything he says is possible.

And Apple has had its fair share of failures. For instance MobileMe, a service that remotely stores all of your phone’s data, never lived up to expectations. It is now being replaced by Apple’s newly released (and even more ambitious) iCloud service.

But that’s the thing about Jobs and Apple — they are willing to learn from their mistakes. In the late 1990s Apple nearly died — that tends to focus your mind. Microsoft, on the other hand, has been in creeping decline for over a decade. It needs to wake up.

Love or hate it, the planet benefits if Microsoft succeeds and grows. Its Bing search engine is currently the only credible competition for Google, and its software has helped create incalculable wealth and knowledge around the globe. It employs tens of thousands of the smartest people on earth who should be busy creating incredible new value.

The problem isn’t just Ballmer, but he represents the problem in all its facets. As long as he leads (or fails to lead) Microsoft, they will be doomed to a slow downward march to irrelevance.

Follow Alistair on Twitter: @afairweather

NOTE: A previous version of this column contained a calculation error. R1 invested in Apple in 2000 would now be worth R12.80 not R1280. Sorry.