Another significant milestone in the evolution of Apple Inc. (Nasdaq: AAPL) is being marked this week. Microsoft Corp. (Nasdaq: MSFT), the long-term nemesis of the consumer electronics company, announced its first-quarter results, and the numbers showed the software vendor's revenue had fallen behind Apple's for the first time in about 20 years.
It's a triumph of sort, not just for Apple but also for the electronics hardware market. Until Apple's sales eclipsed Microsoft's, I had begun to think that being in the electronics hardware business might be the kiss of death. It still could be, but Apple, by marrying software with great hardware design and one of the best marketing outreach programs in the electronics industry, is demonstrating what OEMs must do to fight the wave of commoditization that has devastated sales and eroded profit margins over the last decade.
Microsoft is growing, just not as fast as Apple, and this must be bittersweet for the folks in Redmond, Wash. Despite having a strong March quarter, Microsoft is trailing Apple on two major financial metrics:
The software giant's revenues in the March quarter -- its fiscal 2011 third quarter -- rose to $16.4 billion from $14.5 billion, up 13 percent, while Apple in the same quarter reported revenues of $24.7 billion, up 83 percent from the comparable 2010 quarter. During the same quarter, profits at Microsoft were $5.2 billion but $6 billion at Apple. Analysts, meanwhile, forecast Apple's June-quarter revenues will be approximately $24.5 billion compared with $16.2 billion for Microsoft.
Little wonder, therefore, that Apple's market value ($319.5 billion) is almost $100 billion more than Microsoft's ($224.4 billion) at the end of trading on Thursday, April 28.
It's easy to draw the wrong conclusions from these numbers. Yes, Apple is focused on hardware, including wireless products such as the iPhone and the iPad, while Microsoft is mainly a software vendor, generating a huge portion of its sales from the weakening personal computer market. Apple, which also sells PCs, is growing faster in the segment than the market average by leveraging its brand name to maintain a fanatical support base in the Macintosh community; buyers of Apple's Macs typically pay a premium over comparable Windows PCs.
But it would be naïve to simply describe Apple as a hardware vendor. The company is better seen as a community developer and enabler, offering equipment and services that enhance consumer and corporate usage of electronics products. Just as Apple refused to open-source the software interface with its Mac computers, it did the same with its wireless handsets and tablet PCs to become the biggest and most valuable technology company in the world. In other words, electronics OEMs can maintain market share and generate both huge sales and profits if they play in the "right" equipment market and couple this with a great software interface that allows them to develop a unique ecosystem for the products.
I think many companies are either missing this bigger picture or failing to make the transition as smoothly and effectively as Apple has. Cisco Systems Inc. (Nasdaq: CSCO) is one of those companies that have not yet connected the dots among great hardware, the community of users, and a fantastic ecosystem. The company is reorganizing operations and has ordered the closure of its Flip camera division. The Flip is a great product -- I own one -- but beyond point-and-shoot, my relationship with the product is as fascinating as the one I have with my garden shovel.
I don't know that all OEM products can lend themselves to the Apple magic, but not finding a way to build a vibrant ecosystem around your product will accelerate the price erosion we fancily call "commoditization" today.
And as for Apple, perhaps the gloaters should hold off. Apple may have passed Microsoft in revenue, profits, and market value, but its competitiveness comes with some caveats. In the March quarter, for instance, the sales gap between Microsoft and Apple was more than $8 billion, but the profit gap was less than $1 billion. The implication is that Apple is sweating more to generate comparable profits. I like Apple, but Microsoft isn't looking so bad, either.