Apple Puts Microsoft in the Rearview Mirror

I've written many times about how tough the past decade has been for Microsoft ... about how the many antitrust actions against it first slowed and then hobbled the company, turning it into a less aggressive shadow of its former self ... about the executive defections and sometimes lackluster new products ... about the company's inability to successfully enter, let alone dominate, new markets ... about Microsoft's calcification and slowness ...

But nothing says more about the past decade at Microsoft, perhaps, than Apple. The one-time PC competitor that could never quite shake its also-ran stigma in Microsoft's most successful market is now dominating Microsoft in newer, more dynamic, and more lucrative markets like MP3 players and digital media and smartphones. And with the iPad, Apple seems to have latched on to a clearer vision for the future of computing than anything the entrenched software giant has offered over the past several years.

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"And this is how much bigger we are than Microsoft..."

And Apple, embarrassingly, has now surpassed Microsoft in every meaningful way possible. In May 2010, the company surpassed Microsoft's market cap, and while the two briefly bobbed back and forth in the first half of the year, Apple has taken off like a rocket thanks to its soaring stock price. Microsoft? As has been the case for the past many years, the software giant's share price has remained stagnant—a growth stock no more.

Then, in the final calendar quarter of 2010, Apple's revenues of $26.74 billion surpassed Microsoft's revenues of $19.95 billion, though Microsoft's profit of $6.63 billion barely eeked ahead of Apple's $6 billion. The die was cast, however, and eager Apple fans rubbed their hands in anticipation of a future quarter where Apple would financially leap past Microsoft for good.

That may have just happened. In the most recent calendar quarter (January to March 2011), Apple's net income and revenues ($5.99 billion and $24.67 billion, respectively) handily beat Microsoft's results ($5.23 billion and $16.43 billion, respectively).

And there's reason to believe this is a permanent trend and not an aberration. Whereas Microsoft's core markets are aging and even old-fashioned—desktop and server software like Windows and Office still account for 85 percent of the company's revenues—most of Apple's revenues come from product lines that didn't even exist five years ago: the iPhone, iPod touch, and iPad. And while both companies are struggling to make the move to cloud computing—Microsoft through cloud-hosted versions of its legacy servers, and Apple via a coming consumer-oriented service called iCloud—it is clearly Apple that has the edge overall.

And that's because it is Apple (and to a lesser degree, other companies like Google) that is driving the tech agenda today and providing the most eagerly sought-after new products. I once likened Apple's product announcements to religious revival events, but that description understates their popularity with the mainstream press and consumers. When Apple announces virtually any product, it's an event. Microsoft's announcements, often made via a sea of blogs that few people even know exist, seem to happen in a vacuum.

Even Apple's most ancient product line, the one-time also-ran Mac, is surging thanks to the so-called "halo effect" from iPhones, iPods, and iPads. And when you consider that both the Mac and iPad are essentially general-purpose computing devices, Apple's overall share of the PC market is substantial, much more than the sub-5-percent share that just the Mac commands. In many ways, Apple—not Microsoft—is determining the future of computing.

With all this as a backdrop, the US Department of Justice (DOJ) last week quietly agreed to end its decade-long antitrust oversight of Microsoft. The agency noted that it had accomplished what it set out to do, but the reality is that the Microsoft that emerges on the other side of this debacle is significantly hobbled and is still bound by even more stringent antitrust checks in Europe, checks that impact its products in all markets. The Microsoft of 2011 is not the same company that dejectedly accepted a DOJ settlement in 2001.

Thanks to its recent successes and belligerent behavior, Apple will increasingly find itself a target of antitrust concerns as well, of course. It would be wise to consider the lesson of Microsoft: If history is any guide, Apple's time at the apex of the technology industry could be brief but it will certainly be bitterly contested. Let's just hope that Microsoft wakes up quickly enough to join the fight.

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