27
Jan 11

Apple’s final humiliation of Microsoft

Given the latest financial reports, it defies belief that just 13 years ago Apple was wheezing on its deathbed.

Even  harder to believe, Steve Jobs was forced to grovel before Bill Gates to keep Apple viable with a $150 million investment and a public pledge to support Office for Mac for five years.

How different are things today? Well, as we all know, last year Apple surpassed Microsoft to become the most valuable technology company on earth.

Some shrugged that off because, market value aside, Microsoft still made far more profit than Apple. The profit margins in the software biz are much higher. In fact, Microsoft has trounced Apple in the profit department for 20 consecutive years.

Don’t count on 21.

According to Reuters, Apple is about to deliver the final blow. Microsoft is expected to announce a $5.93 billion profit for the last quarter — while Apple has already announced its $6 billion profit for the same quarter. (Correction 4:00 pm 1/27: Reuters’ analysts missed. Microsoft hit $6.63 billion in profits. For now, still the leader. For how many more quarters, your guess.)

But it gets juicier.

Philip Elmer-Dewitt writes for Fortune that while several research firms reported fairly poor numbers for PCs last quarter, a firm called Canalys saw a whopping 19% growth in PCs during this time. That’s because they counted tablets as PCs — and iPads sold by the millions.

By including iPad sales, Canalys shows Apple’s PC sales growing an astounding 241% over last year. This pushes them into the #3 spot worldwide, ahead of Dell and Lenovo, second only to HP and Acer.

Hold it right there, you say. Tablets are not PCs. That’s just twisting the numbers to make Apple look better. And yes, many would agree. (Just read the comments below the Elmer-Dewitt article.)

Your honor, I call Steve Ballmer to the witness stand. Here’s what Ballmer said when interviewed by Walt Mossberg at the All Things Digital conference last June. Skip to the 3:26 mark to see this exchange:

Mossberg: …this is semantics maybe, but, you’re using the term PC — I thought I just heard you use the term PC — to kind of envelop the things that I think a lot of average people don’t think of as PCs, like the iPad, or other tablets that might be coming. Is that kind of thing a PC?

Ballmer: Sure, of course it is.

Mossberg: It is.

Ballmer: Of course it is. It’s a different form factor of PC.

While it hurts to be on the same side of an argument as Steve Ballmer, I agree. Ballmer’s comments validate the Canalys numbers. With Apple now at 10.8% of the worldwide PC shipments, they’re a stone’s throw behind Acer’s 12.8%. And not imaginably far behind HP’s 17.7%.

This is shaping up to be an interesting decade.

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  • Don108

    Steve Jobs was ABSOLUTELY NOT “forced to grovel before Bill Gates.” Jobs discovered that much of Microsoft’s media player code was STOLEN from Apple’s Quicktime. He could have sued–and won–for billions AND forced MS to removed the stolen code. Instead he cross licensed the code (which you either didn’t know or didn’t bother to mention) and got Bill Gates to support the Mac with continued Office support and a tiny amount of cash. Apple had far more than that amount on hand and MS could have taken it from their petty cash drawer. You really need to do more research before posting myths and pretending they’re facts.

  • Don108 seems to be a fanboy. While I agree with the non=groveling argument.

    MS sustained a long run over Apple. I would guess that Apple will not be able to have such a sustained run as MS has enjoyed. Apple has to keep serving up something fresh to feed the consumer mentality that keeps it alive. Case in point the upgrades to products which are really accepted omissions of functionality from previous versions. People just don’t know how to push away from the Apple table. Eventually the food source will dry up.

    Looking forward to the long term play out.

  • ken segall

    @Don108:
    I’m not speaking literally when I say Steve Jobs was “forced to grovel.” But Apple’s business was indeed at its lowest point, and the deal with Microsoft was a humbling moment for Steve and for Apple. Necessary, but humbling. Had Apple gone to court, nobody knows what would have happened — and with Apple fading rapidly, Steve certainly didn’t have a few years to squander hoping the courts would ultimately agree. He bit his lip and struck a deal with his nemesis, using the legal settlement to get what he wanted from Microsoft: a $150 million investment (hardly a tiny amount of cash back then), and a pledge to support the Mac platform for five years. This shot in the arm from Microsoft helped Apple win back some of the public’s confidence. More important, it gave Steve the breathing room to do the remarkable things he wanted to do. The greatest plan in the world would be meaningless if the company went belly-up first.

    Read the text of Steve’s speech to Macworld 1997 announcing the Microsoft deal here: http://bit.ly/ebFPuz. He very clearly says that it is counter-productive to have destructive relationships, and that a positive relationship with Microsoft would be mutually beneficial. Most believe that Steve made this deal only because he didn’t have much choice. He had to move past the problems, prove that Apple was viable and then build from there. But the symbology of the projected “Big Brother Gates” overshadowing the onstage Steve Jobs has been written about countless times. It was not exactly a moment of Apple strength.

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  • winc06

    Well, Don108 has all his facts right no matter what people are pleased to call him. The MS investment while not small in absolute terms was dwarfed by Apple’s cash on hand. Apple did not need the cash. No one groveled or was humbled. MS was still being prosecuted as a monopoly and the money, a small amount for them, allowed them a legal argument that they supported their competitors as did the pledge to finally write the new version of Office for the Mac. It was win-win for everyone.

  • Peter

    The QuickTime thing was winding it’s way through the courts, as well as various other suits against Microsoft.

    But Apple had plenty of other problems–their biggest being that they were “going out of business.” They weren’t really, Apple had plenty of cash. But because they were seen as “going out of business,” they had to spend that cash. Nobody wanted to be left holding the bag.

    Apple had the choice of waiting around to see what the court decided or settle. Steve basically settled for what Apple needed: Respect.

    Again, at the time, Apple was seen as “going out of business.” Much of the financial press saw this as Microsoft “backing up” Apple–if Apple were to go out of business, Microsoft would buy them. So Apple was now a safe bet–you didn’t have to worry about selling Apple a bunch of chips, for example, and then have Apple go bankrupt and you either never getting paid for those chips or getting paid pennies on the dollar in bankruptcy court.

    Again, at the time, Apple had something like 4 billion dollars in the bank. The $150 million investment in Apple from Microsoft wasn’t necessary except as a show of support.

    Who knows? Maybe someday we’ll see Apple anoint the Xbox or Kinect as being “cool” and help out ol’ Microsoft. :^D

  • Bladrnr

    Ken,
    Excellent post. I believe the final nail in the coffin will be hammered home today when MSFT announces their profits to be less than Apple’s. From there it’s full steam ahead for Apple. They will leave MSFT in the dust. MSFT is old money trying to find their way but unable to do so because they have too many arms and too many legs struggling in different directions. Even King of the Windows Fanboys, Paul Thurrott, wrote two articles just this week on the demise and fall of his favorite company.

    I agree with you Ken about the groveling. It was humbling for Steve publicly but I have to wonder if in the back of his mind he knew what he was doing. He had no intention of standing still and being an also-ran next to Gates. He needed Office for Mac; Bill needed the DOJ off his back. It was a momentary truce so Apple could buy some time to get their house in order. Four years later the iPod/iTunes made its debut and Apple has been hitting home runs ever since.

    Does anyone really think MSFT has a prayer of being the company they used to be?

    Anyone? Anyone? Bueller?

  • rd

    Like I predicted a little premature.

    $6.63 billion

    Revenue: $19.95 billion vs. $19.14 billion consensus, $19.73 billion “high” estimate
    EPS: $0.77 vs. $0.68 consensus, $0.73 “high” estimate
    Net income: $6.63 billion vs $5.92 billion expected
    Windows & Windows Live revenue: $5.04 billion vs $4.92 billion expected
    Business (mostly Office) revenue: $6.03 billion vs. $5.32 billion expected
    Server & Tools revenue: $4.29 billion vs $4.13 billion expected
    Entertainment & Devices (Xbox, Kinect, phones) revenue: $3.70 billion vs $4.06 billion expected

  • ken segall

    Yes, Apple had a nice cash reserve back in 1997. About $2 billion and change. (Chart of Apple’s cash here: http://bit.ly/hRzvbV.) But as Peter points out in his comment, the prevailing feeling was that Apple was going down the tubes. A succession of Apple non-Steve CEOs had failed. The press was filled with stories about Apple being shuttered or bought by another company. Bringing back Steve was Apple’s last chance to survive.

    The cash reserve would allow Apple to pay the bills for a while, but it didn’t solve Steve’s biggest problem: how to make Apple relevant again. What Steve did was as ballsy as anything he’s ever done. He made a deal with the company who’d been his enemy. I’m not saying it wasn’t brilliant. I’m just saying that in better times, Steve would never even have considered this. It was because Apple was under attack and in danger of going away, that cutting a deal with Microsoft was the best way forward. This is the sense in which I refer to Steve being “humbled.” Apple was forced to fight its way out of a corner.

    If you don’t believe me, Google “Apple Microsoft 1997” and read any story that comes up. Every one I read talked about an Apple so in need of positive news, it would strike a deal with its former enemy to buy some time for itself. Though the experience may have been humbling, by no means did Steve Jobs roll over. He completely took advantage of the fact that Microsoft was in serious anti-trust trouble with the Feds, and used that to his advantage to get a load of cash on top of the public commitment to support the Mac platform.

    What I did not mention in this article was that in addition to the $150 million Microsoft invested in nonvoting Apple stock, they forked over an undisclosed sum directly to Apple. The exact amount seems to have remained secret, but the analysts guess it was in the $800-900 million area.

  • James

    I’m going to have to agree with Peter. Apple and Steve Jobs did no groveling. Apple had an ironclad case of copyright infringement against Microsoft. It would likely have been granted summary judgement.

    The offending parties essentially admitted to copying the code when they were working on a contract for Apple. So unless there was some contractual snafu that I never heard about, Microsoft was going to lose in court and perhaps lose Windows Media Player as a viable platform.

    It was Bill Gates that had to make the deal because of the lawsuit hanging over Microsoft’s head. Microsoft had big plans for WMP and owning the digital media market. Remember “knifing the baby” from the anti-trust trial.

    Also, the $150 million was part of the announced settlement, there was never any report on what the secret portion was. I’ve read that it was many times the size of the publicly announced settlement.

  • ken segall

    @rd:
    Dang! That’s the last time I ever trust Reuters. Guess Apple will have to wait another quarter or two to overtake Microsoft in profits.

  • james

    http://www.apple.com/pr/library/2011/01/18results.html Apple sold 4.13M Macs in the quarter and 7.33 M iPads (ipod sales declined).

    http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY11/Q2/default.aspx

    Microsoft made $7 million a day more profit than apple ($630 Million over 90 days). It made $73M a day, $3M per hour, $50,000 a minute, $852 per second someone else making a whisker more wouldn’t be a humiliation

  • realitybytes

    The Microsoft secret settlement was in fact a high multiple of the public investment and was in fact paid over a few years. The best part of the trial was the unveiling of the “Easter Egg code” that Apple engineers had hidden within Quicktime that was revealed in the Microsoft player code. A lot of Microsoft faces in court went white as their mouths dropped.

  • BDD

    I stick by Steve’s words from Macworld Boston 1997, where he said that Apple just had to do a good job, and that the era of competition between the companies was over. Since they *are* business competitors, I took this to mean the cultish, do-everything-to-beat-them attitude of Apple at the time. Since then, I’ve chosen to ignore this aspect of their relationship, and watched as Apple (under Steve) lived up to that mantra. It’s too bad many others (Microsoft and Apple fans alike) haven’t, and the crap that is posted in some forums reads like liberal vs conservative political drool. I guess this underscores the power of marketing, and the effect it can have one ones self-worth if they buy into it. While I enjoy a good ad campaign (which is mostly why I’m here), I’m not affected by any of them, buying choices or lifestyle reflection (Blah… pathetic), or otherwise. I just look for some ideas I can steal to promote my restaurant (ha!). But I’ve digressed…

    My point is, it’s gratifying to see that the platform I choose to use hasn’t died, and has been bolstered by many of the other products that Apple has engineered. This is all due to Apple simply “doing a good job,” as Steve so aptly put it back in 1997, and not simply trying to bury Microsoft.

  • Apple is predominantly a hardware company (most of their software is free). Selling new hardware to consumers is a lot more difficult than selling software to the enterprise!

  • AdamC

    @Joshua109

    Every company has to upgrade their products to stay to stay relevant and even MS has to do so.

    Your argument is also relevant to MS.

  • PVE67

    Actually, it was Apple’s sale of its shares in Arm that kept it going after Steve Jobs came back to Apple. Yes they do need a consistent stream of innovative products to maintain market position. However Apple appear to be in a rich innovate vein at the moment. I don’t think the same can be said for Microsoft. Apple is changing the way people use technology. Effectively they are changing the market’s behaviour and that is very powerful.

    The fact their equipment is nice and sparkly is is a marketing ploy. The way the equipment works and they way Apple are able to tie various strands together really well (supporting eco system) with their phenomenal attention to detail is why they are so strong at the moment.

    I feel Microsoft is somewhat “lost” at the moment.