Microsoft vs Apple: Monopolist vs Innovator (part 3)

4) Microsoft's chance against Google in the search market

This is a piece about MSFT and AAPL, but I think I have valid reasons to bring Google into the picture. In my opinion, Google is one of the very rare companies that enjoys an MSFT type monopolist position, and at the same time, maintains the AAPL type of innovation. In addition, innovation is the only key that Microsoft could use to break into GOOG's territory.

This is a big topic, here I'd like to share some general thoughts which I will explore further in my future posts.

First, the external pressure from being a search engine monopolist is much less than being Microsoft. GOOG has better control over the usage of its product, after all, it is an application sitting on Google's servers.

Second, Google matches Apple in the innovation power. Apple's innovation is in users' experience, which is the combination of original ideas and brilliant designs. And Google simply manufactures genius ideas, for example, AdSense.

Third, Combining the first and the second point, Google matches Apple in the capability to continue their path towards more innovations - the corresponding mechanism, culture, atmosphere all have been well established.

Fourth, Google spent billions of dollars, developing a lot of normal as well as 'geeky' applications, then offered them to the public for free. There are many reasons behind this, and I believe one of them is that they just have too much money (hehe). Another one, they are building Google into a platform for 'everything', thus growing the users' dependencies, resulting in the increased threshold for the competitors.

Fifth, even after Google turns into a business behemoth, it maintains the image as a technology company (another reason why it developed and distributed those 'geeky' applications), but Microsoft, since the days it fought and killed Netscape, has turned its public image into something like 'it is all about business' . This is another barrier that MSFT has to break. Talking about search, MSFT feels too clumsy, similar as Yahoo feels too shallow, but Google feels just right, simple, capable and a technology savvy.

Sixth, MSFT needs a big break-through in innovation ideas to challenge GOOG. But as mentioned above, its culture is about being a solid implementer, instead of an innovator. As a result, I don't see MSFT making even a dent in Google's market share in the near future.

Seventh, GMail is original, Yahoo Mail is solid, Hotmail is like a piece of junk. Nothing can explain this type of failure and it is a sign how badly Microsoft manages its internet project. Another one, does anybody really understand what the heck Windows Live is? Micorosft's issue in the search market is not something so complicated that can only be explained at a deeper level by factors such as the culture, atmosphere, etc, they have some very basic and obvious problems to address. I see a re-organization a must before there is any hope to turn things around.
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Microsoft vs Apple: Monopolist vs Innovator (part 2)

3) Competition pattern between MSFT and AAPL

In the famous PC vs Mac Apple commercial, we laugh at the PC guy that makes a fool out of himself every time. While don't forget the fact, which is not even hidden, that these two dudes are friends. It would be too bold to claim that Microsoft and Apple are friends in the real world, but the relationship between these two is never like that between Intel and AMD.

One simple fact is that it is impossible for MSFT to control 100% of the OS market, and another one, there are always people looking for alternatives when something becomes too popular. These actually guaranteed Apple a niche but very stable market. As it is somewhat out of the reach of MSFT and is relatively small, there is no sign indicating that the OS monopolist is worried or taking serious measures to fight for it. The series of 'I am a PC' commercials from Microsoft, led by Bill Gates himself, reads to me more like taking a high road, focusing on cleaning its own name without initiating attacks to Apple. From the Apple side, it keeps its low-end laptop around $1000, a price tag of a medium/high end PC system, while it could have easily got into a much wider market by releasing laptops between the $600 and $900 price range. My opinion, Apple has three concerns here. The first is to maintain the good margin it has been enjoying all along. The second is to maintain Apple as a somewhat luxury image. And the third, maybe the most important one, Apple would like to increase its market share in a controlled manner, rather than an explosive manner. I believe Apple has the weapon to boost its market share significantly overnight (for example, licensing Mac OS), but I doubt even Apple itself thinks it is ready to handle the consequential issues.

It seems that there is some type of implicit agreements between these two. As long as AAPL doesn't openly license its OS, it will never seriously threaten MSFT. In acknowledgment of this, MSFT has no issues seeing Apple take away some customers who would like to pay a premium to be cool and happy. As a result, we see MSFT in firm control of the overall market, while Apple enjoys a 'care-free' operation environment, as well as good profit and growth opportunities even though it only has a smaller piece of the pie.

With all these said, I have a big NO for the question 'shall Apple license the Mac OS?' It is like Apple is to bet with EVERYTHING it has for something that is doubtful it can handle, and doubtful it wants. Think about the immediately intensified pressure from MSFT and the long-term internal/external pressures similar to that of MSFT (discussed in the previous post), I think Apple is far from being ready. (read the speculated scenario if Apple starts licensing its OS here).

One more topic to cover: MSFT's chance against Google in the search market.

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Microsoft Vs Apple: Monopolist vs Innovator (part 1)

Both Microsoft and Apple belong to the Most Innovative Companies category, however, we rarely see anything original from MSFT, instead, they are widely accused of copying ideas from Apple. I guess the reason MSFT is in this category is because the Windows OS has an innovative meaning to the entire human being. And this type of innovation doesn't necessarily indicates creativity, which, on the other hand, is the exact characteristics that differentiates Apple from the rest.

On the other hand, Microsoft is the indisputable monopolist in the Operating System world, owning around 88% of the market, and Mac OS, around 10%. However, according to many users that had experience in Mac, the OS from Apple is so much cooler than Vista, and for years, there have been voices arguing that Apple should license the OS to the OEMs, the same way that Microsoft sells its flagship product.

Here are some thoughts on the rivalry.

1) Why is Microsoft less creative?

With such a dominating market share, you may think that the business operation environment for MSFT won't be that tough. But it is the opposite - MSFT is constantly under immense internal/external pressure, which exhausts its power to stay innovative.

First, internally, the Windows OS, if not the most complex software system in human history, is well qualified to be one of the most complex ones. Virtually it is like a platform of your daily life, somewhat matching the unlimited possibilities in real life. To develop and support such a system is a daunting task for any single company. Think about it, billions of dollars in budget, thousands of developers, hundreds of modules, dozens of versions, iterations, releases, integrations, testings, code bases, documents ... there is an endless task list. If you have the experience managing a one million dollar project, you know it only takes a few mistakes to see your process spin out of control. Then try to imagine this monster at MSFT's hand. I have no clue how MSFT manages the life-cycle of Windows, but for sure it is a process demanding rigor, consistency, cautious planning and solid implementation. I won't say these values prohibit creativity, but for sure, they won't encourage creativity.

Second, Windows is an OS independent of the hardware, and MSFT only specifies the minimum hardware requirements. We understand that this is required for MSFT to maximize its market share. And the result is, MSFT has to deal with the compatibility issue with hundreds of hardware variations. On the other hand, the OS is a platform, i.e., it opens its interface for thousands of other software companies to build upon, which creates another compatibility issue. Then adding the challenges created by rapid evolving technologies and backward compatibility, these could easily turn into a disaster that devours the company. Again this is the daily task of MSFT.

Third, Windows is estimated to have more than 1 billion users worldwide, which means it is open to unlimited possibilities/challenges/risks created by the immense brain power of a vast crowd, where exist countless usage patterns/habits, unbelievable stupidity and unimaginable brilliance, geeks, hackers, pirates, virus writers, Windows lovers, Microsoft haters..... As an indicator, MSFT never escaped from the criticism about the security flaws of Windows, even after spending billions of dollars year after year attempting to fix it. Here, code quality actually is only one side of the story, the other side, the enormous user base.

In summary, all these demanding tasks that fill the daily life of MSFT ultimately defined the overall operation atmosphere and corporate culture. Here, the top priority is about being solid, thorough, proactive and making less mistakes. Then how about creativity - stay original and novel? Sure it is nice to have, but it is fine to live without it. It is a shame to copy ideas invented by others. But business-wise, what is the big deal? As long as it is legal, it simply means less cost.


2) Why is Apple more innovative?

At first glance, it looks in the CPU market we have a similar competition pattern with Intel controlling the market and AMD as a challenger. Here, the dominating market share gives Intel extra power over AMD, because it may directly squeeze the margin of AMD by reducing the price of its own chips. You may think that in the OS world, MSFT would have the same leverage over Apple, but not really.

The secret lies in Apple's bundling strategy, i.e., it doesn't allow the Mas OS to be installed on any non-Apple branded hardware. In other words, Apple refuses to open its software to the open public. What does Apple gain from this? It avoids the full-blown competition, as well as the big headaches that MSFT has to deal with (listed above). Furthermore, from the space that the monopolist's power can't reach, Apple created itself a very stable niche market with a group of very loyal users.

First, through bundling, Apple has full control over the hardware platform its software runs on, virtually eliminating all hardware compatibility issues that MSFT has, and rendering the backward compatibility into a minor problem. This translates directly into a lean product management process and less cost. Second, Apple has full control over the look and feel of its product, thus retaining the leverage to consistently maintain the luxury and sleek style of its product, which caters well to its target customer. Third, fat margin. A Mac normally cost twice as a PC with similar processing power. And fourth, a small but friendly user base, characterized by higher income and education, which frees Apple from dealing with all sorts of malicious behaviors that are very common in the Windows world. As an example, the user doesn't even need an anti-virus software on their Mac. In summary, with MSFT taking on all the hatred and accusation, Apple operates under an environment with much less internal and external pressure, thus gaining the luxury to be internally focused, thus more innovative.

Two Topics I plan to cover, first, the competition pattern between MSFT and AAPL and second, Microsoft's chance against Google in the search market. Please visit my blog for the latest updates.

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Apple Will Be the Same Apple Even Without Steve Jobs

In my previous post, I expressed my concerns over Apple's innovation power in case that Steve Jobs won't return from his medical leave (read it here). From reading the comments on the article, I had the impression that some of the readers thought of me as a short of the Apple stock. Actually I am not. In the disclaimer, I stated that 'I am considering selling my AAPL shares', maybe the more accurate words would be 'reevaluating my positions'.

But is it even worth to reevaluate? Under normal market conditions, sure we should look into the uncertainties introduced by Steve's leave. But we are in this unprecedented bear market and there are a lot of solid companies out there with a stock price at a bargain level. In other words, we have investment options that may bring in similar returns, but with lower risks, then why bother with AAPL? For me, I seriously considered switching my holdings of AAPL to Nike (read the analysis of NKE here).

I admit it is the emotions that drove me to look deeper into Apple's situation - I don't feel ready to give up Apple and I like their products. I owned several versions of iPod, and I am managing my music library with iTunes. I am waiting for my Sprint contract to expire in April to get rid of their crappy service, then I am going to buy an iPhone. Good chance my year-end gift would be a Mac Book. So my starting point is like this, if Steve's leave is a big negative factor, are there any positive ones that would keep Apple on its old and glorious track? My answer is Yes, there are quite a few. Honestly, I was a little surprised by my conclusion.

1) This is a logical inference. Steve Jobs was at the helm of Apple for more than 10 years, had been continuously and aggressively driving Apple from one innovation to another. There has to be something got embedded into Apple's corporate culture and management system, which, somewhat should be self-sustainable even without the big man on the top. For example, Apple still retains the top-talented designer team that envisioned and sketched generations of their beloved gadgets; there should be some process that guarantees the original ideas and innovative efforts to receive proper attention and, some form of established routines to facilitate the interactions between the design team, the technical team and the management. I briefly touched this point in my old post, and as an outsider of Apple company, I can't provide any proof. But again, I believe these are valid inferences.

2) Under Steve Jobs, Apple is a company with clear focuses. It has a very limited and straightforward product line, basically iPod, iPhone and Mac. IPod and iPhone share the same design concepts, and both leverage the capabilities of the Mac OS. This allows AAPL to pool its resources to develop winner products, while at the same time retain a relatively simple and agile organization structure, thus creating an innovation-friendly environment at the macro level. I'd like to say this is a strategy deliberately maintained by Apple. An example, it started accumulating cash since Steve Jobs took the office, and for the time being, has around 30 billion cash in the pocket. It could have used it to expand into other territories, but it didn't. In other words, as long as Apple continues this strategy, maintains its focus and avoids impudent business moves, they should be able to keep their innovation power from endangered by unnecessary or unprepared market pressures.

3) This may be my most important finding. Through years of brilliant design and innovation, AAPL developed a certain form of 'Personal Attachment' between the customers and its products. This is rarely seen in the technology world. This solid and expanding 'Fan Base', to an extent, provides a buffer between the company and the external competition, thus offering Apple a very open and forgiving atmosphere and a very healthy mindset for innovation.

I always hear people say, 'Apple never competes in price', which I agree and behind this simple statement, actually lies its unmatchable brilliance. You may not agree with me that all gadgets Apple manufactures in nature are commodities, but the fact is there are load of companies selling them at only a fraction of Apple's price tag. Simply put, Apple managed to differentiate itself from others by unique design in look and feel (hardware), providing different (better) user experience (software), clever marketing (those easily memorable commercials) and in the personal computer field, it actually benefits from Microsoft's monopoly position, which creates the appetite to look for alternatives. (one extra comment here, actually something interesting and bewildering to me. I know to be creative in software is at a more sophisticated level, but in hardware design, just the look and feel, for me it is virtually all about paying good money to find the talented personnel, I don't understand why there is no match with Apple even here. Or is it because I brain-washed by Apple's commercials?) Apple's success created two far-reaching results, the popular cravings to its products, and the second, it obtains the tight hold of its target customer - actually a group of people with relatively higher income. In return, the pressures that normally link to the commodity player are pretty much taken off Apple's shoulder, such as maintaining the market share, the thin margin, the excessive marketing efforts, and the timing (be the first few to rush the products into the market). As a result, you see today's Apple, taking its time to be creative and elegant, which is a form of 'temperament' that I don't see with any other companies.

I'd like to say only the greatest strategist is capable of leading Apple into this position, and no doubt, Steve Jobs is the one. Personal opinion, this is the greatest contribution as well as most precious legacy from him. On the other hand, Steve's leave won't take Apple off this position, and more importantly it doesn't necessarily require a CEO as great as him to maintain this position. In summary, Apple is already there, a certain pattern between the innovation, the products and the market has been in place; even just relying on the momentum should be enough to keep it safe on the right track for several years.

One more comment to make, I don't sense anything revolutionary in Mr. Cook, instead, he was regarded as a 'business operation maestro'. I view this as a big positive. After all, what we need for Apple is not an unproven innovator, but rather an executor that is well qualified to continue Steve's path.

4) Apple already reached the end of its innovation. I know it is a bold statement, but think about it, the way Apple makes a digital music player is the way it makes a iPod Touch, the way it makes a wireless phone is the way it makes an iPhone, and the way it makes a personal computer is the way it makes a Mac Book. Do you think anybody, or any company (including Apple itself) is capable of topping that? Another perspective, once you hold your own iPod touch or iPhone in your hand, do you think it is even necessary for any companies to come up with anything that is 'Better'?

Let's take the controversy away and make some realistic points. Innovation comes at two different levels, the concept level and the implementation level. Using Microsoft as the example - it completed the innovation at the concept level in 1980s and 1990s with the introduction of the initial generations of Windows Operation System, and since then, the innovation is mostly at the implementation level, including architecture redesign, adding more functions, features, etc. Obviously, it requires a prophet type of person on the top during the concept stage. For MSFT, Bill Gates is the one. But once the company stepped into the second stage of innovation, he is not that critical anymore. For Apple, it already completed the innovation at the concept level for all three fields it plays in. What Steve Jobs accomplished is not just a few versions of MP3 player/wireless phone/computer, but a concept/package/platform of how these gadgets should be built. Without Steve Jobs, Apple is not today's Apple, but in this implementation stage, Tim Cook should do OK.

With all these said, I'd like to say the impact of Steve's leave is somewhat exaggerated. The great CEO already lifted Apple to one level where the company is self-sustainable. We all know that eventually he will leave, then is it really bad if it is now? For me, his mission is completed, excellently completed, and I'd like to see how his successors will continue. Steve left the legacy which may turn Apple into an all-time greatest company, and if the new management team holds it well, AAPL might simply become a stock of a life-time.

Apple (AAPL): Still the Unique Innovator without Jobs?

As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.

I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just a MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).

So why it is Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance to return to the helm again - at least according to some analysts.

Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.

1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.

Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.

2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.

From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.

I'd like to say the Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.

As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.

Disclosure: I am holding a long position in AAPL, but am considering selling it.