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Hardware Trumps Software, Sort of

Another significant milestone in the evolution of {complink 379|Apple Inc.} is being marked this week. {complink 3426|Microsoft Corp.}, 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. {complink 1131|Cisco Systems Inc.} 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.

24 comments on “Hardware Trumps Software, Sort of

  1. Backorder
    April 29, 2011

    Great post. I was looking into another report which mentions Apple trumping Nokia as the biggest handset manufacturer in terms of revnues this last quarter. However, just as the apple computers sell at a premium, so do the handsets. The number of handsets sold by Nokia was 108 M units as compared to Apple's 18 M Units. Still Apple (12 B$)exceeded Nokia(9.5 B$) in revenues! The reason – Average Selling Price of Apple phones is $ 638 as against Nokia's $ 87. Clearly, Apple has figured out the marketing and positioning much better than anyone else in the fray.

  2. Ashu001
    April 29, 2011

    Bolaji,

    As a retail shareholder who is interested in Dividends as well as Low PE numbers ,Microsoft represents far better value for money than Apple.

    There is way too much Hype associated with Apple today.Hype and the Hedge funds who keep piling in again and again and again pushing the stock Higher and Higher and Higher,until the pack of cards collapses…

    Regards

    Ashish.

  3. Taimoor Zubar
    April 29, 2011

    As far as the average selling price and number of units sold by both Apple and Nokia is concerned, I think both of the companies have their own strategies which do not have much in common. Apple is only catering towards the high-end of the market with smartphones, whereas Nokia is catering to all kinds of phones ranging from low-priced models to smartphones. However, you need to realize that Apple is a diverse company which has products ranging from PCs to laptops and from tablets to smartphones, whereas Nokia is only into cellphones. I think if you consider Apple's revenue out of the sales of iPhones only, it would be far lesser than Nokia's revenue. Hence, I would still consider Nokia to be a market leader in the cell phone industry.

  4. prabhakar_deosthali
    April 30, 2011

    While we are comparing the revenues of Apple and Microsoft , we must also take into account the huge  revenue loss worldwide by microsoft because of piracy of its Winodws and MS-offiec software. By rough estimates this loss amount to about 25to 30% of the revenues of the company. Apple being a major revenue in hardware sale has much less revenue  loss due to piracy.

  5. Backorder
    April 30, 2011

    TaimoorZ, you are right that Apple is much more diverse and has revenue streams from iPad and Mac. But, the point that I make is that even the handset revenues for Apple have now exceeded those of Nokia for the concluded Q1 2011. Please refer to the latest strategy analytics report which mentions that the Q1 revenues from handsets for Apple were at $ 11.9 B against $ 9.4 B for Nokia. Nokia is the market leader in terms of total no. of units sold with 109 M units in Q1 against Apple's 19 M units. The pole position for apple in revnues is due to the higher ASP of its products.

  6. jbond
    April 30, 2011

    You make a very good point. The hype surrounding Apple is huge. As more hedge fund managers and others continue to pile their money in Apple and forcing the price up, they are headed for a monumental collapse if Apple was to start having problems. Even though Microsoft was always the “big fish in the sea” it is hard to compare the two companies. Microsoft is primarily a software company, while Apple is mainly a hardware company.

  7. saranyatil
    April 30, 2011

    While we are comparing revenues of both the companies there are lot of parameters to be considered. its just not the number of units each sold, the main theme is what segment each company is targetting. huge sales for Nokia comes from basic models next higher config one's, where as Apple sells only smart phones actually if we see each one is having different views targetting different segments, now with microsoft software getting into Nokia smart phones we need to wait and see the market.

  8. Backorder
    April 30, 2011

    Nokia has definitely made a decisive move with windows and many people are looking forward to their smartphones. At the same time, it is trying to lean-up with reduction in european and western workforce and also getting rid of consuming businesses. It has decided to outsource the symbian development to accenture, for instance. But, Is it not too late for Nokia? Plus, Is it really helping the image of Nokia which might have been its trump card with your average middle class developing world mobile user? The problem on Nokia's hands is simple: How to retain the 108 Munits, move them up in the ASPs and at the same time eat into the smartphones market.

  9. Himanshugupta
    April 30, 2011

    It in one scence shows either the popularity or dependence on Windows or office. I would not consider 25-30% loss in MS's revenue because they are those people who cannot afford to buy the software anyway. MS can gain some grounds by selling their software at a discounted price but i donot think it will make a huge difference in their profit. The only solution is develop an ecosystem around their software as has been the recent effort to partnership with Nokia.

  10. hwong
    April 30, 2011

    Sometimes I wonder why people would spend so much more money on apple products. For example, the apple 17inch laptop MacBook pro that just came out featuring intel quad core is selling $2499. The similar product by HP envy only cost $1499. There is a big price gap here. What is it with apple that people are willing to pay premium ? I am guessing it's the look, design, brand image and the interoperability.

  11. Ms. Daisy
    April 30, 2011

    I am eagerly waiting for the Microsoft collaboration with Nokia. The integration should boost Nokia's status if all goes well.

  12. SP
    April 30, 2011

    Well whatever we say no one can deny that Apple has made its mark in the way they do the business and be th ewinner

  13. DataCrunch
    May 1, 2011

    The good thing about Microsoft is that the company has become predictable, which is also the bad thing about the company.  No doubt that Microsoft is a solid and stable company, but it may have to enter new markets even if it were to lose money in those markets to gain some excitement and momentum on the stock.  Perhaps spinning out it business divisions into separate companies.  The stock is undervalued for the amount of revenues and profits the company produces quarter after quarter.  Microsoft has to become that rebel company again.        

  14. Parser
    May 1, 2011

    It is amazingly interesting comparison. I remember time when Microsoft was buying non-voting stocks of Apple to help them out and assuring that the Office software would be available for Mac computers.

    Apple is sweating more to make profit because it is mostly a hardware company. Putting a price tag on software is more arbitrary.

    Landing to Apple’s magic is only by innovation. After all thanks to innovation Apple is making billions with the most expensive products during major downturn in economy. 

  15. Parser
    May 1, 2011

    If you compare technical spec side by side for those computers you will see superior technical performance and architecture used in the Apple computer. If you compare identically build computers to Apple you will find out that style and Apple name is less than 10% above the other computer price. I call it Apple sales tax, but I am willing to pay it to get the best industrial design there is. Yes, it feels to me like a sculpture where many artists expressed their talents, and they did. Just like people buy paintings, sculptures and other artistic items paying thousands of dollars only for the artistic expression. In this case it is only 10% of the useful value. 

  16. jbelkin
    May 1, 2011

    MS shareholders might wonder why MS still bothers throwing money down the consumer money pit when clearly consumers want nothing to do with Microsoft. Even XBox will NEVER climb out of the $15 BILLION dollar pit. MS has spent $50 billion to make $35 BILLION – nice math) Or the BILLIONS spent chasing Zune, Webtv, watches, MSN and now a billion dollars to buy Nokia's friendship – shreholders have watched MS throw $100 BILLION? into the toilet the past ten years – what's the shareholder value? zero gains in the past ten years?

  17. jbelkin
    May 1, 2011

    A) If you're actually comparing WIN PC specs to Apple Mac specs “apples to apples,” the actual price difference might be $100 – and Apple will still wins on bootup, battery life, resolution and weight (comparing laptops as you did), things WIN PC makers gloss over … or the fact you can run Mac OSX on 2 GB of RAm with no issues (unless you;re doing video editing) while 2 Gb of RAm on a WIN PC means it might just start up.

    B) But it all depends on your audience. If you're a call center – of course, the bottom line is the bottom line since the PC is just really a terminal so a buck saved is a buck saved but if you are handing out a laptop to bring in sales – going bottom line is not the best answer if you believe in technology and time is money – do you hand your sales team bus ticket for out of town trips because it's cheaper? For a lot of companies, hardware coes out of a difference budget and IT is another budget so what does the hardware capital line buyer care if the system is riddled with security holes or every component is the cheapest possible one? It's not their budget a year later, it's maintance or IT.

    C) Macs are build better with no software security issues. I know that sounds like a talking unicorn but it's simply the truth. ZERO viruses, ZERO trojans, ZERO malware, etc … etc … so spending $100 more upfront means less hardware downtime and a tiny fraction of software & resources needed to monitor for WIN PC intrusions. This is why gov't market share of Macs are up nearly 200% and why most security agencies have switched to Macs. But again, it depends on who you are buying a laptop for – employees who need one as a tool or are your employees just use it like a desk lamp? Macs also hold their value. Most used Macs sell for 50-75% of retail after 2-3 years. Why? Because they are built better. (and software upgrades don't bork machines).

    D) Just because Macs also look better, don't confuse that as somehow diminisging the other factor that make Macs a better computer experience – OS, UI & components. IT might cost a few more bucks upfront but they cost less to run, have the highest satisfaction rating, the best reliability and no software security issues. In other words, lower TCO – Is fewer downtime worth more to you? To a CFO, of course but to IT or the maintance contract holder – why switch to something that requires fewer workers and a smaller budget? They have a vested interest in not switching because it affects the size of their budget … but that is the difference between Apple (innovation) and MS (bureaucracy).

  18. t.alex
    May 1, 2011

    Yes, and it keep coming out new products as well. Why do you need to by an Apple product now when you know that 6 months ahead there will be another release?

  19. Anand
    May 2, 2011

    Just wondering if APPLE has peaked ? With inflation on rise and people spending capability dwindling fast, not sure if people will still buy iPhone for $638 as against Nokia's $ 87 in future. Not to forget Android phones are catching up fast with iPhone features. Steve Jobs stepping down as CEO of APPLE is one more big concern for APPLE.

  20. DataCrunch
    May 2, 2011

    Here's an interesting chart comparing App Store revenues and growth rates for the top players:

    It was interesting to see a large percentage increase for Nokia's Ovi Sotre.

  21. eemom
    May 2, 2011

    I do wonder if Apple can keep up the revenue stream as well as the profit margin.  Apple's results reflect products that are leading the market right now.  The iPad is just starting to experience competition, although demand for it seems to be quite high.  The demand of the iPad coupled with the iPhone announcement with Verizon is contributing a great deal to Apple's current numbers.  Can Apple sustain that type of on-going growth?

  22. mfbertozzi
    May 3, 2011

    Hi Dave, about Nokia Ovi I can report feeling quite shared at large; Apple has had a strategy and step – by – step has made exactly that path. Nokia has made several changes: Symbian at the beninning, then tried to adopt a light platform, then the moving on Microsoft and in parellel they have launched 10M$ call for innovators developers on QT platform. Where is QT now? At the end, it not easy to map Nokia Ovi current position then associated market will suffer also in the near future.

  23. Wale Bakare
    May 3, 2011

    Apple's distinctive innovation in the world of technologies has often set the company apart from others as well as being ahead in sales of Computer, Smartphone and tablet computers.

    Apple's software is very unique this has always complementing its brand of hardware rollouts – Mac PC, iPhone and iPad. Apple's shrewdness in artistry of software apps shall continue for a while. In actual fact, all the hardware designs today are being push upward by excellent software development. Meanwhile, Cisco and Microsoft, i believe all in the same class.

    Well may be Microsoft recent partnership with Nokia will increase Microsoft market value. Who knows?

  24. Hardcore
    May 4, 2011

     

    I have to point out a number of inaccuracies

    'Mac' computers/products are just as prone to viruses trojans and malware as other computer systems, just there are less of these programs being developed for OS X.

    Specifically we need to recognize that a 'MAC' is actually two distinct elements (3 if you count design)

    1. The electronic hardware of the platform is very similar in design to a standard P.C, so much so that it can run most software a standard PC can run, this includes loading windows or linux directly onto the underlying storage device.

    2. OS X: a derivative of the Unix/Linux operating systems, as a result it is quite feasible to take OS X and load it onto any compatible Intel computer that is NOT manufactured by Apple, and the system will still operate, albeit slower or less reliable, but that is depending on the hardware.

    It is possible to build a 3rd system out of available sub-components that out performs a top line 'MAC' computer, that includes RELIABILITY.

    Returning to viri,Trojans & Malware

    An Apple computer loaded with a non-Apple OS, has the same probability of acquiring a Virus/Trojan/Malware as any other intel based computer.

    A 3rd party Intel computer loaded with OS X, has the SAME probability of acquiring Virus/Trojan/Malware as standard Apple built hardware running OS X

    For the larger part it is the OS that imbues the defenses against Virus/Trojan/Malware to the hardware of the system. BUT that does not in any sense of the concept imbue total immunity against Virus/Trojan/Malware under OS X, just there is a decreased opportunity for such Virus/Trojan/Malware to gain a foothold inside the OS X system.

    This is one of the major reasons that Apple will not allow a 3rd party to run the OS X operating system, specifically because they understand that they could never compete against these other 3rd parties as regards price and hardware functionality/ performance.

    Asus (Taiwan motherboard manufacturer), generally turns a complete mother board design round in less than 3 months, this is from inception to final product shipment, there would be no way Apple could compete against such a market, such a scenario would make Apples complete stock redundant every 3-6 months.

     

    To truly compare such systems, it has little to do with hardware, but rather the operating systems.

     

    HC

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