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Comparing top lines: Apple vs. Microsoft

I’ve been providing analysis of Apple’s operating and financial performance for some time. Recently we’ve begun to look at comparisons of financial performance for comparable companies. Now it’s time to dig deeper and do comparisons of operating performance as well.

To start, Microsoft.

Whereas Apple has product lines (iPhone, iPad, iPod, Mac, iTunes, Peripherals and Software), Microsoft has business divisions (Windows & Windows Live, Server and Tools, Online Services, Business (Office), Entertainment and Devices). The charts show revenues for both Apple and Microsoft according to these defined segments.

 

The second chart should be a familiar one:

Note that the horizontal and vertical axes are the same. The period of coverage is from mid-2007 to the end of June 2011 which corresponds to the life of the iPhone. The vertical axis ranges up to $30 billion/quarter in both charts.

When shown this way, the exceptional growth for Apple becomes easier to understand (and perhaps Apple’s valuation premium of 15.7 P/E vs. Microsoft’s 9.5). Microsoft has been growing these past four years but not nearly at the rate of Apple. Microsoft grew quarterly revenues from the ~$15b range to ~$17b range.

Additional points of interest:

  • The Mac business generates more Revenue than Windows
  • iOS powered devices generate more revenue than all of Microsoft’s products put together
  • Apple’s revenues grew 413% since Q2 2007 while Microsoft’s grew 26%
  • The release of Windows 7 had a marked effect on revenues in the launch quarter but the sales did not seem to grow above the previous version’s run rate ($4.2b/quarter vs. $4.7b/q on average).

But most importantly, whereas Apple’s growth has come from new businesses (iPhone and iPad), Microsoft has organically grown existing businesses. The condemnation of leadership at Microsoft should hinge on the absence of significant top line growth. Note that neither the Online Services nor the Entertainment and Devices divisions had appreciable net growth.

 

  • RobDK

    If we assume the iPad sales growth will be similar or greater than iPhone (a reasonable assumption!), then we can expect revenues of $45bn within the next 2-3 quarters. That would be 3 times greater than Microsoft. And that is what I will call Amazing!

    • http://twitter.com/cbrendel Christian Brendel

      @RobDK: I tend to disagree re your thoughts on iPad sales growth. The iPad is clearly a strong product and – for now – owns the largest part of the market. However, in my opinion it will clearly stay behind the iPhone in terms of sales due to the following reasons:

      Replacement cycles:
      – The iPhone replacement cycle is clearly driven by the 2 year carrier contracts
      – There is no reason to replace your iPad every 2 years
      – Also, given current carrier subsidies, iPhone replacement is less expensive / painful for consumers than spending USD 499 – 829 on a new iPad every other year

      Need / job it is hired for:
      – The iPhone was originally hired to make phone calls and access emails, calendar, etc. Clearly, everybody wants a mobile phone and by now most people do have phones. iPhone (just as Android) mostly grows by convincing users of dumb phones to switch to smartphones. It is hired to make phone calls, to use email and calendar, to play games, and to use context / location relevant apps (among others). It is small, light, and mobile
      – It will be much more difficult for the iPad to convince a broader audience to buy a third device (besides laptop and phone). In fact, many people simply might not need a tablet. In addition to that, the iPad is not mobile (its portable) and it is outperformed by dedicated devices (e.g. reading a book on a Kindle is a far superior experience)

      As said: the iPad is a great device, I just don’t see it selling anywhere close as many units as the iPhone does.

      Any thoughts form your side? I love being wrong and learning form others.

      • James

        Regarding replacement cycles, there’s no reason to replace your iPhone every two years either. Sure, you can get the subsidized price, but that’s still a lot of money to spend every other year to replace a perfectly good device (assuming you hadn’t severely damaged it or anything).

      • http://twitter.com/cbrendel Christian Brendel

        Agree, but not replacing your phone with a subsidized one for USD / EUR 19 – 99 and selling the old one on eBay for USD / EUR 300 is not exactly rational behavior. Most people on contracts are just used to switching phones every two years and I’m pretty sure the majority does so.

      • Anonymous

        I understand what you’re saying and you’re right that the iPhone will always sell more than the iPad, but in developing countries the iPad will sell a lot once Apple officially sell them there.

        Take Nigeria for example. Laptops are still pretty expensive there because they are all imported and sold for more than double the price.

        Most people in Nigeria will go for an iPad if Apple can sell the cheapest version for around $500 – $700.

        An iPad is more than enough for most people in Nigeria, plus it looks way cooler.

        I’m sure Apple has seen all that and that’s why iOS 5 will be PC free.

        Other PC manufacturers are about to get hit hard.

        I also think that in western countries, close to 50% of those that buy the iPads will upgrade each year, because the resale value is good, and pretty easy to find buyers.

      • http://twitter.com/cbrendel Christian Brendel

        Kriskk,
        Thanks for your reply.
        Following your logic: wouldn’t a less expensive Android-(based) tablet like the Kindle Fire or any Samsung or Motorola tablet be even more attractive for people in low-income countries such as Nigeria? Why would they be willing to pay twice as much to get an iPad if they are just interested in email, web, etc.?

        Totally agree on your point re Apply “cutting the cord” and making iOS 5 independent from PCs.

      • Anonymous

        Those other products will sell too, but even those buying them will know they are not getting the best.

        Apple is in a class of it’s own. People already pay $900+ for the same laptops you will get at walmart for $399.

        When the iPad first came out, an old web design client of mine, wired money into my bank account and paid all the fees plus the shipping for me to buy and send him 4 of the most expensive iPads with 4 cases by Apple.

        He was able to pay all that because he sold each for 3 times the price.

        He stopped asking me for more iPads once Apple started selling them in China, so he started getting them from there.

        Many people in Nigeria are used to paying between $400 – $800 for a nice phone. Remember there’s no such thing as carrier subsidy there. It’s all cash and carry.

        It’s a society where people respect you if you have the best and latest, and currently Apple is perceived to be the best.

      • http://twitter.com/cbrendel Christian Brendel

        I agree that “Apple is in a class of it’s own.” And I’m sure most people that can actually afford it will opt for Apple products (just as you and I do), but we shouldn’t underestimate the size of the low-end market: people that cannot afford Apple, people that don’t know much about specs and product life cycles, people that don’t actually care about the Apple brand and simply life outside the reality distortion field (just a joke)…

        Strong disagree on your statement that “People already pay $900+ for the same laptops you will get at walmart for $399.” Those are NOT the same laptops. They might have a similar CPU or amounts of RAM, but the product, its user experience and the satisfaction is totally different. So while those laptops might contain similar tech specs, they are totally different products!

      • Anonymous

        You can disagree on people paying $900+ for the same laptops that go for $399 at Walmart, but I know I’m right because it happens every time in my presence.

        When friends visit from Nigeria, I take them to Walmart, they buy two or 3 laptops they’ve been paid for to take back to Nigeria. Actually those laptops sells for more than those they take to Nigeria directly from China or other countries, because this one is straight from “America”. Yup! Once they know it’s from America, then it’s better than the rest. That’s how things go down in Nigeria. The US is still number one to almost everyone in Nigeria.

        Whatever you take from the US, you can sell it in Nigeria fast for 3 times the price you paid here. Which is why I say the iPad will sell like crazy if Apple opens shop there, meaning it will not have to be sold for 3 times as much.

        Like I said other products will sell. For example Blackberries are big there now, but when I talk to my mom, she says that iPhone owners are still considered superior to those with Blackberries. But when the iPhone becomes official there, Apple will sell a few millions. Nigeria got it’s own App Store few months ago, so that might be a sign of things to come.

        So if what you’re saying is that the Walmart $399 laptop might have better user experience and satisfaction than what they pay $900+ for in Nigeria, then you might be right, because products imported to the US from China have better quality compared to those sent to Nigeria.

      • Mstefa

        iPhone addresses only minority of the population on the carrier contracts. While in the western countries, this may be majority, in the developing nations this is very small percentage. ( I think they said on aapl conf. call that china is in single digits for contracts) Seeing how much bigger ” no contract” market is , and considering that iPad does not require one makes it very very appealing.
        Further, ( even for me ) it was easier to justify 700$ for an iPad , small personal computer of sorts than 700$ for a phone . Remember Balmer? 500$ for a phone ??!!!

      • http://twitter.com/cbrendel Christian Brendel

        Mstefa,
        Thanks for your reply. I was clearly arguing from a developed / western country point of view and missed the emerging market perspective. My point was that the 2 year replacement cycle is driven by the renewal of carrier contracts. Your point implies that iPhones will probably see a replacement cycle longer then 2 years in emerging markets. Right? This does not contract my point above re iPad replacement.

        Let me recap my revised assumption / hypothesis:
        1. Replacement cycle for subsidizes products is close to 2 years (i.e. most iPhones in developed countries) in developed and developing countries
        2. Replacement cycle for un-subsidized products is significantly longer then 2 years in all countries
        3. Replacement cycle for un-subsidized products is longer in developing countries compared to developed countries

      • Anonymous

        You are arguing against PC replacement cycles. The mistake you made was not recognizing that iPad is a PC.

        I will replace my iPad after exactly 2 years because that is when AppleCare ends. I don’t want my iPad to fail one day and I can’t just swap it, I don’t want to be forced into a purchase, I want to buy every 2 years. I can sell my originally-$829 iPad after 2 years for about $400 and buy a new top-of-the-line iPad 3 for an additional $429 investment over my original iPad. I already know my iPad paid for itself within 3 months, so that is easy. The only reason I did not upgrade to iPad 2 was upgrade fatigue. I don’t want to switch iPads yearly.

        But for many people, there is a reason to replace your iPad every year: a new one that is double the speed just came out, and it can do new thongs, run new apps, in addition to what the current one can do. For example, the original iPad cannot run iMovie and struggles a bit with GarageBand.

        As for beating iPhone sales? iPhone has the advantage of being in a larger market of phone users, but iPad has the advantage of being a low-end product (it is a low-end $500 PC and sells in that market) while iPhone is a high-end phone. Ultimately, when Apple has a broad range of phones, I think all Apple phones will outsell all Apple PC’s, but I wouldn’t be surprised if Apple’s low-end PC outsells their high-end phone. The iPhone is quite a bit more expensive.

      • http://twitter.com/cbrendel Christian Brendel

        JohnDoey,
        Couple of thoughts on your points:

        1. Replacement cycles:
        – Would you agree that both of us are early adopters?
        – We should not assume all consumers / the majority of consumers behaves the way we early adopters do!
        – I’m pretty sure my mum and grandma don’t think about eBay resale prices and ending warranties when using their tablets. They will simply replace it once it stopped working

        2. Low-end vs high-end:
        – I don’t think the iPad is a low-end device
        – In fact, following the recent price reductions of competitors (and retailers) and the introduction of the Kindle Fire, I would rather consider the iPad as a high-end device

        3. Third device:
        – I don’t think you can compare printers to laptops, phones and tablets
        – Printer are not hired to do the same or similar jobs
        – Based on anecdotal evidence, people (i.e. regular consumers, not early adopters / tech geeks) seem to struggle with spending money for an additional device. I get asked a lot whether they will be able to replace their laptops with a tablet and / or whether they really need such a third device.

        4. Usage:
        – I just assume /expect that many people will notice they use the iPad less often than they assumed once the initial excitement is gone
        – Thats also what I see and hear when talking to people owning an iPad and thats what I see in my usage pattern (I know, its only anecdotal evidence)
        – Am I satisfied with the iPad? Absolutely! Do I use it enough to spend a couple of hundred bucks every other year? Probably not
        – I’m also not sure about iPads replacing PCs. PC sales data might as well decline as people simply defer buying a new laptop and buy an iPad first. They might still buy a new laptop later on (again, based on anecdotal evidence) if they notice that the iPad cannot fully replace their PC

        Views?

      • Kizedek

        “I’m pretty sure my mum and grandma don’t think about eBay resale prices and ending warranties when using their tablets. They will simply replace it once it stopped working”

        Maybe, but my mum (who is also a grandma) just got an iPad early this year. She is afraid of computers and this is the first device she has used with any enthusiasm at all. She did not use my dad’s Macs, nor the MacBook bought for her…

        So, fast forward six months… she starts plotting which of the kids or grandkids gets her current iPad so she can upgrade. Go figure.

      • Kizedek

        @Christian Brendel
        I think you are making some assumptions that won’t bear out in the future. Maybe JohnDoey is a little ahead of the curve, but I think he sees it pretty accurately…

        If we combine your thoughts on hi or lo end, third device and usage (2,3,4):

        He is not by any means comparing iPads to printers. He is talking about the nature of personal computing and our responses to it.

        In the past, printers were very important. I have a print media background, and I can tell you, I was pretty picky about printers and how they were used. Apple introduced post-script laserwriters to the world etc. You could measure resolution, color quality, speed, ink coverage, etc. and printing could be an important office function. For color inkjets I always went for higher end Epson or Canon printers. Until relatively recently, you could easily spend 400 – 700 or more on a printer, and it went with the territory.

        Now, you can get a printer for 50 bucks (of course you can still spend 500 on ink in just the first year). But I don’t care about printers any more. I consider them commodity items. Everyone has a printer. It’s like having a USB stick. I just picked up a decent all-in-one second-hand Canon printer/scanner with 4-colors for 10 pounds sterling, and I buy generic ink cartridges and refill the cartridges. If its empty, its empty; I stick it in the shed. I just don’t print anymore. It’s not important. I started going paperless without thinking about it, and I am “post pc” if you like.

        Same with external harddrives. Used to use about 7 harddrives. Now I use the web.

        So my home office went from this:
        2 PowerMacs (with six harddrives between them), four external harddrives, two printers, Bondi iMac, four screens, 6 USB sticks, iPod…

        To:
        1 2011 iMac, 1 iPod Touch, 1 iPad.

        [Actually we now have 2 iPads in the house (and the second-hand printer is in the shed for emergencies -- like printing QR train tickets). But I just use my one iMac and my one iPad and nothing else, every day -- for work, media production, finances, communication, everything.]

        I made a conscious choice to buy a mid 2011 iMac instead of a MacBook. My iMac is a fantastic machine and great value. Sure, those who want a MacBook for their heavy work are probably not going to get an iPad as well. But JohnDoey is right in principle — its about number of devices and the options you now have, and how iPads cover a lot of modern needs.

        iPads can cover your mobility needs if you are desktop based, and they can definitely replace a cheap PC notebook or netbook (if only because the software on those is not intuitive), or replace any second computer you might have around or think you need (like our Bondi iMac we still used for movies until we got the iPad). This is low end PC territory. The web-based services you get for many functions these days (BaseCamp, CRM, MailChimp, Invoicing, Project Management, etc.) make an iPad a breeze to use productively.

      • http://twitter.com/cbrendel Christian Brendel

        Kizedek,
        Thanks for clarifying things. I see your point, but let’s also be aware that your home office (and mine for that matter) with 2 Macs, six HDDs, printers, etc is not the typical setup of a consumer. I can just repeat that I see people around me having a smartphone and a laptop and they keep wondering whether they really need a third device.

  • http://www.intomobile.com/ Stefan Constantinescu

    Apple generates more revenue from hardware than Microsoft does from software isn’t too surprising, but what about profit? Each Mac/iPhone/iPod/iPad costs X amount to produce, whereas Windows and Office are made once, per every version of course, and then stamped on millions of cheap plastic discs.

    • http://www.asymco.com Horace Dediu

      Profit is coming up in the next post.

      • Anonymous

        I assume you are going to allocate Microsoft’s CLA, Corporate-Level Activity, proportionally to their actual 5 income centers. I’m not sure how Microsoft gets away with unallocating these cost centers. They could easily slush costs there, to make their 5 income centers look better.

    • Anonymous

      I’m pretty sure Microsoft’s profit margin is 65% and Apple’s is 40%, but I think with the greater revenues, Apple just passed Microsoft in total profits recently.

      • Kizedek

        And not just due to the greater revenues that Apple has: don’t those huge profits on Windows and Office have to cover huge losses, inefficiencies and gaffs in all the other areas? (is XBox a net gain, yet? Kin?, Zune? Bing?…)

  • Anonymous

    Creating a completely new enormous business like the iPhone, let alone two of them in three years isn’t exactly commonplace, even for Apple, so it seems a bit harsh to condemn MS for failing to grow new business in the same way.

    In fact arguably MS would have been better off abandoning its new businesses like XBox and Bing and just accepting that it had become a near monopoly supplier of operating systems and office software. The returns to shareholders would have been far higher.

    It’s unfortunate that Apple doesn’t break out operating profit by business line, because I think the same graphs showing profit would be a far better comparison, given the vastly different margins on the different businesses.

    • http://www.asymco.com Horace Dediu

      But I do hold management to higher standards. Especially technology management. Microsoft management is also held to this standard by their employees and shareholders. Lastly, management has made promises of growth through new businesses for many years so they hold themselves to that standard.

    • Anonymous

      Microsoft desperately needs to move to services – Office and Windows are not likely to remain the cash cows they are now. I am pondering at which point Google will decide that instead of waging an expensive patent war with MS they can simply throw $20-30 Mil to make Open Office fully compatible and competitive with MS Office. They can bring MS to their knees in just an year…

    • Kizedek

      True, they may have been better off abandoning their new businesses — they should still probably cut off a couple of things like they did the Kin.

      However, you seem to be characterizing the creation of new business as something that is better left to risk-taking innovators — as though Apple lucked out with two back-to-back flukes and will likely never do it again; and, since the odds must always be against new business, it understandably didn’t work out for MS despite their best efforts.

      But, can we really say this is “unusual” for Apple? Sure, they have a limited lineup of hardware, and they likely aren’t going to double it again anytime soon (as they just have doubled it from 2 to 4, adding iPhones and iPads to iPods and Macs)…

      With Apple, new businesses all tie up together and complement each other, adding strength to each other. So, there are other new businesses already — AppStore, iCloud, Retail Stores, etc. While some of these are not designed solely for profit but to support the other businesses, they are not loss-making.

      I tend to think Apple really does treat it new businesses as businesses, not random products to add to a portfolio. I think that is partly where MS (and everyone else) goes wrong. The businesses for iPhone and iPad were conceived as such, and Apple bided their time until all the pieces were in place. Hence, Steve says the iPad was developed first, before the iPhone. If this forward-thinking, strategic planning is indicative of Apple, which by all accounts and many posts on this blog it is, then why would it be “unusual” for Apple? This could be business as usual for Apple.

      • Anonymous

        ‘However, you seem to be characterizing the creation of new business as something that is better left to risk-taking innovators — as though Apple lucked out with two back-to-back flukes and will likely never do it again’

        That’s not my intention. Instead my point is that MS is singularly unsuited to trailblazing new products because as a it will always have a first instinct to protect its valuable monopolies in Office and in Windows. Bill Gates did an amazingly Machiavellian job of cementing the Windows monopoly — but the cost is that the firm perceives itself as Windows-soft and really can’t move past it anymore.

        ‘But, can we really say this is “unusual” for Apple? Sure, they have a limited lineup of hardware, and they likely aren’t going to double it again anytime soon’

        Apple has certainly made a habit of creating new markets, and has also made a practice of extracting superior profits from markets that other firms play in as commodities – but still, iPhone&iPad are an extreme case. In the past, even Apple would be pretty happy if it managed to create one completely new product line as successful as the iPod in a decade. Maybe going forward this pace of product creation will be usual for Apple, but it isn’t usual going back.

        In fact there’s a serious risk that the immense profits from iPhone & iPad will actually constrain Apple in future, in the way that the immense windows & office products constrain MS. Apple may resist the cost of success, but it’s way too early to assume that they will.

      • Anonymous

        You are grading on a curve. Like Microsoft was dropped on its head as a baby. No. They choose to bash their own head into a wall.

        Microsoft made phones for years before Apple made phones. Microsoft made handheld computers for years before Apple did iPod. Windows Phone 7 runs on the Windows CE core from 1996!

        Another way Microsoft is graded on a curve is the excuse, well, they have to be slow because they don’t make their own hardware. They make an Xbox, which is PC hardware running Windows. They are millionaire adults, they are capable of making the tough choices you have to make to compete. The fact that they prioritize anti-competitiveness over competitiveness is the main reason they cannot compete. They spend all of the time before the big race figuring out how they can hobble some other runner instead of running sprints and training themselves to be the best. When they lose, it is even MORE their fault than when somebody who trains hard simply falls to a better runner.

        The next major Intel operating system release after Windows XP was Mac OS X Tiger (Intel) 4 years later, and it took Microsoft 2 years to answer that! Total failure. The next significant built-in browser release after IE6 is Apple Safari in 2003, which Microsoft will answer in 2013 with IE10 on Windows 8. The next significant tablet PC release after Windows for TabletPC in 2002 is iPad in 2010. Total failure. The first release of an office software suite for tablet PC’s was iWork for iOS, which shipped in 2011, a year after iPad! There has still not been a Microsoft Office release for any tablet PC!

        No excuses in business.

        And no, Microsoft cannot just retreat to servicing their installed base. People under 25 don’t know how to use Windows. Half the home PC’s in the US are Apple-branded. Almost all of Silicon Valley is Macs. iPhones and iPads don’t get viruses and require almost no training, the exact opposite of Windows. The last job I had that had an I-T department issued me a Dell running XP and I used the MacBook Air I had in my bag instead. It was faster and had much better software tools on it. I also got to watch iPads tear through that place while I-T tried to ban them until the CEO (iPad user) responded to one of their “iPads are banned” memos with some very sharp words about how much it costs to run your own I-T department, and how the sole reason to do that today is so they can serve the core business needs better than an outside consultant. Everybody got the message. These were lawyers … the tool of their trade is a stack of documents higher than a man’s head, all of which can fit into an iPad. iPad is the first computer designed for them.

      • deViant 14

        3 likes and it’s rubbish.

        “Half the home PC’s in the US are Apple-branded. Almost all of Silicon Valley is Macs.”

        Big fat [citation needed]

  • http://twitter.com/lemonsanver Jamie Lemon

    Great analysis – do you keep your data in a raw format? I would love to try my hand at some animated data vis stuff on it.

    • http://www.asymco.com Horace Dediu

      I will post this to Google Docs as soon as complete the analysis and clean it up.

      • http://twitter.com/cbrendel Christian Brendel

        Great, thanks!

  • Jon T

    So MSFT is on dull, rather flat trajectory. Any new product has a short term boost, then settles back to the norms. And it is easy to believe that that will continue ad infinitum.

    Malcolm Gladwell’s concepts of the Tipping Point should be required reading for MSFT managers, as Apple may at some point in the future reach such a point, and so make Windows an historical quirk, or at best relegate it to rear end, (or small orrifice?) activities…

    • Anonymous

      Windows *is* a historical quirk. They leveraged the IBM monopoly on business computing sales into a Microsoft monopoly on business computing sales. This was called “The Deal Of The (20th) Century.” Of course it is all downhill from there. Microsoft has always known that, which is why they have historically been anti-competitive instead of competitive. They made their bones with anti-competitiveness. But computing is too big to dominate that way forever.

  • Anonymous

    You aren’t comparing apples to apples (pun intended). You are comparing software to hardware. Why don’t you add up all of the totals of Dell, HP, IBM, Acer, Asus, and every other vendor that sells Windows hardware and see where these numbers lie. Then it would be on par.

    I love how people try to make Apple sound bigger than they really are. 450,000,000 Windows 7 PCs have been sold. How many Macs with Lion on them were sold? Nothing to see here, move on.

    • http://www.asymco.com Horace Dediu

      I am comparing two companies’ revenues. They are sourced from company financial reports. They are comparable as much as accounting standards are observed by both companies. I could compare Apple with Wal-Mart or Exxon using the same method. This is called financial analysis (in particular, operations).

      I believe you are looking for a comparison of ecosystems or platform reach. That would be a part of market analysis and there has been plenty of that here and elsewhere.

    • RobDK

      Asymco have compared Apple to all their peers; Microsoft, Dull, HP, Lenovo. See:

      http://www.asymco.com/2011/09/28/visualizing-the-steve-jobs-era/

    • http://kaizenity.blogspot.com/ FalKirk

      @keitheider: your post leads me to believe that you are advancing an agenda rather seeking to gain insight from the data.

      First, you complain that Apple’s hardware business should not be compared to Microsoft’s software business. Then you compare Microsoft’s software sales to Apple’s hardware sales – and only to the Mac hardware sales at that. Not only is your argument hypocritical but it is purposely disingenuous as well.

      Take a look at the quality of the content of the blog and it’s associated comments. What you’ll see is a forum that values intelligent debate. Any reasonable inquiry will be welcomed. Any posturing will be scorned.

    • http://twitter.com/Awax Awax

      The points in this comparison are :
      – diversity of revenue sources
      – absolute and relative evolution of those sources

      Analysis:
      Microsoft revenues are steady, both in total volume and relative importance of source. Win7 introduction made a punctual increase in Windows department but it is only an offset of lower revenues in the preceding quarters. You can also spot seasonality (Xmas quarter) in the Entertainment/Device division. On YoY growth, you can see that nothing is moving except for the recent in Entertainment/Device division. Its relative size is however small and the growth went from almost 60% to 30% lately. The Windows division is heavily impacted by the release of Win7.

      Apple saw a sane steady growth in its base Mac business unit. iPod and iPhone have a strong seasonality. iPod are slowly phasing out. However, the obvious part is the creation of 2 new enormous revenue sources : iPhone and iPad and the fact that we didn’t saw a reduction in revenue for iPhones after the Xmas quarter but a very important increase.

      • CptKirk

        Are these numbers profits If not we must subtract the cost of development and productions. Apple is mostly hardware based while MS is mostly software based so MS will probably have a higher profit

      • http://profiles.google.com/marcosmalo Mark Mayer

        You might thinks so, but Apple has higher profits than Microsoft. Apple’s net income: 23.61 Billion vs MS net income: 23.15 Billion. Apple is a very lean running machine, from R&D to the supply chain/manufacturing.

    • Dsq 3 VHS

      Everybody: Don’t feed the trolls, please…

    • Anonymous

      We are comparing CE/PC companies here, and the metric is MONEY, not sales volume. Ford ships more cars than Ferrari, that does not tell us anything about the financials of either company. Until we look, we do not know who made more money in a particular year. You can ship the most units but lose money.

      There is a quarter where Apple shipped 20 million phones and took the majority of the profits in the phone market, while LG shipped 100 million phones but lost $100 million. Units mean nothing by themselves.

      Also, Mac OS X PC’s ($999 and up) do not typically compete against Windows PC’s anymore, which almost all sell around $500. Less than 10% of over-$1000 PC’s run Windows, and they are usually purchased for some special hardware or software that Apple does not offer, like a stylus tablet, so the users never really even consider a Mac. The high-end users who can go to Mac are all there. Google and Facebook is made on Macs. Today, the competition for Windows is iPad, another $500 PC. That is why iPad has done much, much more damage to the overall financials of the Windows PC market in 18 months than the Mac ever did, even through the years of the “I’m a PC, I’m a Mac” commercials. The Mac never knocked HP out of the #1 volume spot, but iPad did. The Mac never handed Acer a quarterly loss, but iPad did.

      You are also wrong about software and hardware being different. Software and hardware are both bits, just like water and ice is H2O. They are the same. All hardware starts out as software, then it is burned into a chip just like burning a MP3 to a CD. Things that are done with software today are done with hardware tomorrow and vice versa. An iPad has hardly any hardware in it, that is one of the key innovations compared to other PC’s. Things that happen in hardware on a Mac are happening in software on iPads. Windows can run on HP hardware, or it can run on VMWare software (“virtual hardware”) and Windows itself cannot even tell, that is actually a thing that security people think about. Hardware and software is just bits.

      > 450,000,000,000 Windows 7 PC’s have been sold

      But what have you done for me lately? That does not help Acer pay its employees. In fact, the PC’s they have already sold are a liability, a support cost. Acer users do not come to Acer to buy accessories and make Acer money, they come to Acer to get service that costs Acer money. Apple is the only PC maker who has an ecosystem where installed base makes them money. That’s part of why Apple can offer such great service, they know each of their users can be invested in and they will see a return on investment. Something like 90% of their installed base buys an Apple product the next time.

      If not for the fact that Microsoft illegally obtained a monopoly position in computing and then cost the world trillions of dollars in lost productivity due to their lack of quality (botnets, viruses, lack of usability) I would almost feel sorry for you panicking as the markets are correcting themselves. But then I think of all the innocent, regular, everyday people who have been abused by Windows and then I feel great about it. Panic away!

  • http://deviceconvergence.wordpress.com Nalini Kumar Muppala

    In a period that saw loads of investment in infrastructure (cloud, streaming, social networks), Server and Tools division seems to be some consolation. Could the not so spectacular growth be attributed to dominance of Linux servers?

    • http://profiles.google.com/marcosmalo Mark Mayer

      If you define market share as sales of servers and software, then, MS dominates the market, which is no small consolation to MS share holders. By usage stats, *nix servers do indeed dominate. I’m sure this latter is a concern to MS, but they are winning with the paying customers, which I’m sure matters more. I don’t know if anyone knows how many potentially paying customers are in the F/OSS server camp that MS would consider an addressable market.

      • deV

        Just plain wrong. Never heard of Red Hat Enterprise Linux? You actually pay for linux (gasp!) and the hardware. How about HP-UX (HP sells it on their expensive big-boy servers)?

        The web server hosting the page you’re looking at now is running linux. As are somewhere in the 80% range of web servers, plus all the database servers. MS would love to pick up that market. All those web hosting companies raking in cash. MS servers are typically only used for internal stuff like Exchange servers and Active Directory instructure.

    • Anonymous

      Microsoft can easily make their own Unix if they want more volumes.

      Their growth is constrained by their lack of imagination.

  • http://twitter.com/cbrendel Christian Brendel

    Horace,
    would you mind adding a graph showing the revenue contribution of the product lines / business devisions (i.e. vertical axis always = 100%). I guess this would be insightful as well.
    Regards
    Christian

  • http://www.facebook.com/f.stephen.ackroyd Stephen Ackroyd

    Horace:

    Comparing a hardware company (Apple) to a software company (MSFT) has issues.

    I think that taking out COGS from AAPL would make for a more useful side by side comparison. If there is not a COGS number, then figure an estimated hardware cost of 50%.

    After an estimated 50% hardware cost, Apple’s revenues ( 50% of $30B) are on par with MSFT’s $15B.

    When you look at profits, all of MSFTs recent wins, XBOX, Bing, Kinect, WP7 should all be a drag on earnings. MSFT is a big cash cow running on Office and Windows. Innovation adds a net drag to MSFT, but is the opposite for AAPL.

    • http://twitter.com/cf_torchie Kyle Reynolds

      Apple is not a hardware company.

      • Devon

        They’re a hardware and software company.
        Microsoft is a software company.

    • Anonymous

      Ugh. Please stop perpetrating this myth.

      Hardware and software are the same. It’s all bits. It is water and ice. All H2O.

      Features move from hardware to software freely. All the time. A PowerBook G3 decoded DVD video in a hardware chip, but a PowerBook G4 decoded DVD video in software because its CPU was fast enough for that. Macs and iPads run the same xnu kernel, but the x64 CPU in the Mac has exponentially more bits in it than an ARM CPU — that means those bits had to move into software on the iPad. The missing hardware routines from the missing Intel chip have to be put into the software to make it run on ARM.

      Further, Microsoft *is* a hardware company. They are as much a hardware company as Apple. The only difference? Microsoft uses an OEM manufacturing system, while Apple uses an ODM manufacturing system. Ultimately, it results in the user choosing either an Apple/Foxconn PC or a Microsoft/Foxconn PC. The middle man is irrelevant. Microsoft has more design input into HP PC’s than HP does. HP management is unnecessary. The workers could all trade in their HP badges for Microsoft badges and nothing would change.

      Apple is also a software company: Final Cut Pro, Logic Pro, iMovie, GarageBand, iTunes and WebKit are all the #1 by volume in their respective categories. iTunes might be the most popular Windows app of all time, even more than Office. The highest volume Unix since about 2002 is OS X. Apple also authored the Cocoa API (upon which the World Wide Web was created, and from which Java was copied) and co-authored the HTML5 API. QuickTime is as central to audio video multimedia production as Unix is to the Web (not “QuickTime Player,” but “QuickTime.”) The ISO MPEG4 file format that is universally playable on all consumer devices is a QuickTime file.

      So Apple is one of the biggest software makers ever by volume and there is a serious argument to be made that they are the best. Even if you have never used an Apple product, your world would be dramatically different without Mac OS, QuickTime, Mac OS X, iOS, WebKit. They have touched everybody who uses software from any vendor, because everybody uses either the real thing or a clone of them.

      I mean, Apple DOS shipped in 1977 and MS-DOS in 1981. Come on.

      Finally, none of this matters anyway, because Microsoft and Apple are in the same investor categories. There is no separate software and hardware market that investors can choose to invest in. There is Consumer Electronics, there is PC’s and peripherals … you will find Apple and Microsoft in both. Sales slowdowns in CE will affect both financial statements.

      • Anonymous

        You’re missing the point. Software has essentially no variable cost, unlike hardware, so margins are far far higher. This means that comparing revenue between a software and a hardware firm is always going to make the hardware firm look better.

        If we did the same comparison of HP and MSFT by revenues, HP would look like it was doing well – and we all know that this isn’t the case.

        Anyway, Horace has already said that next he’ll do the same comparison for operating profits.

      • Kizedek

        Or maybe, the point is…. *new businesses*.
        In the last article, “Visualizing the Steve Jobs era”, Apple didn’t even appear on the market cap chart in 1997.

        Is Apple suddenly “winning” the “PC Wars” and selling loads of Macs to PC users (well yes, but not that many). No, MS has not lost any significant business in its cash cow areas.

        In fact, MS has an advantage: regardless of any point Joe Wilcox was trying to make about deferred revenue, what that actually says is that MS has guaranteed income over an extended period — with “subscription” based services, MS knows it has the same income from the same customers for what, 4 quarters, 8, 12, in perpetuity? Its contracts are worth something going forward. It has an income base it can count on, and upon which it can build…. but how well is it building on that base? Ahhhh?

        Now, Apple, its limited foray into subscription based accounting was only serving to hide value that was not being taken into account by most analysts. But everyone here knew that value was there all along. And yet, analysts are questioning Apple’s ongoing value. But what about Apple’s ongoing value?

        Analysts, perhaps rightly, are not looking at Apple as having much assured repeat revenue in the way that perhaps they do with MS. There is vendor lock-in value with MS, Enterprise customers have long-term contracts with MS for billions, they aren’t going to chuck in their Windows systems overnight.

        What can we say about Apple? The “halo effect” is doing pretty well; they may or may not make the odd Mac convert here and there. It’s a growing base, but we are still only talking about 4 million Macs…

        So, where did this explosion of revenue come from? New businesses. Who are the customers? PC users. Is there potential for repeat business? Well, surveys and anecdotal evidence suggests 89% iPhone users and 40-odd percent Android users will buy an iPhone 5. I think the iPad is pretty popular, too.

      • deV

        “Well, surveys and anecdotal evidence suggests 89% iPhone users and 40-odd percent Android users will buy an iPhone 5.”

        Keep dreaming. They liked the device/OS/etc the first time they bought it (twice as many bought Android going by the real numbers). There are absolutely no leaks to suggest either the OS or the hardware of the iPhone 5 are significantly better than the iPhone 4. The major leaked feature is a direct copy of the speech recognition of the Android phones (even the microphone button placement next to the spacebar is identical). It’s actually quite likely that one of the Android phones that has already been released has better specs. The current best looking displays in the world, going by side-by-side tests all over the web (look for yourself) are Super AMOLED Plus, made by Samsung, and only by Samsung (97% marketshare–I assume it’s patented). Super AMOLED HD for 4-5″ phones has been demo’d and is just around the corner.

      • http://www.facebook.com/nick.lockwood Nick Lockwood

        Sure, they’re exactly the same. In fact I think I’ll go on Bittorrent now and download a pirate copy of the new iPad. Oh, wait…

        The economics of software and hardware focussed businesses are completely different. That’s why Mac OS costs $30 and has no copy protection whereas Windows costs $120 and is DRM’d up to the eyeballs.

    • http://www.asymco.com Horace Dediu

      Profitability analysis will follow (as well as much more.)

  • Pingback: Thursday links: copper malpractice | Abnormal Returns

  • Westechm

    Looking at the two companies through BCG’s Market-Share matrix, all of Microsoft’s businesses (except Entertainment and Devices) are Cash Cows, high market share in slow growth markets. E & D are probably a dog.

    Apple’s Mac and iPod businesses are probably cash cows. The iPhone and the iPad are clearly Stars, high market share in high growth markets. What is unusual about these products is that they generate high profits and large cash flows. Stars usually consume cash when they growing. There is a bit of genius here, IMO.

    If all your businesses are cash cows there are two alternatives: Milk the cow, reinvesting only to refresh the businesses and maintain market share and cash generation (wasting asset approach), or use the cash to develop new businesses and generate growth. Microsoft professes the latter but the results have been negligible, so they probably would be better off if they cut expenses and maximized cash generation. It would clearly take a major change in leadership to change the situation.

    As an aside, Bill Gates probably really wants maximum cash generation to supply funds for his charitable activities.

    Apple has been concentrating on growth. The Mac business, though growing faster than its peers, is still operating in a low growth market. The iPod was a star but has been outmoded by new Apple products. It will eventually level off as two product areas: a small, dedicated mp3 player for joggers and a small mobil computer without a phone (a small iPad).

    The major impact of music, peripherals and software is to support the ecosystem and generate hardware sales. They may grow and even possibly become growth businesses but should not be judged on their individual business performances.

    • http://profiles.google.com/marcosmalo Mark Mayer

      You implied or glossed over this, which is worth emphasizing: Apple kills its cash cows by developing better ones. The indications are that this is done eagerly, without reservations. Microsoft (and MS is only a high profile example) does the opposite: new products are more than likely to support the existing franchise, or at least not threaten it.

      Both Apple and MS try to create synergies (I hate that word, btw) between their products. Apple is much more successful at this (but I wouldn’t call MS a failure), but I am not completely clear on what the difference is. Maybe it’s that Apple’s products are more successful in other ways (yeah, I wanted to say better) which juices the synergy.

      And the thing is, MS’s online component of its ecosystem is better implemented or at least broader than Apple’s.

      • Westechm

        Right on. Cash cows concentrate on maintaining their position so they are afraid to bring out new products which might cannibalize the old.

        A big difference: Apple really believes that they make insanely great products, and they put this at the top of the priorities. They believe the money will follow automatically.

        Microsoft is fixated on making money, so they select an approach which they believe will be the most profitable. Their attitude is that they want to do the best for Microsoft. As a result they often take an approach which their customers don’t like. Example: subscription music, if successful, should generate the most cash in an ongoing way. Customers really want to own their music. I believe that this was a major factor in why they failed in mp3 players. This is also reflected in their pricing strategies for Windows and Office. Here their customers are captive. It won’t work for tablets.

      • Anonymous

        Apple will almost certainly kill iPod next week.

        Microsoft tries to find synergies in order to apply vendor lock-in, that limit your ability to choose a non-Microsoft product. That only helps them, so they work alone. Apple tries to find synergies that make their products more useful, which benefits everyone, so 3rd party developers and users often help them achieve that. I think that is why they are more successful at it.

      • deV

        Yeah, that’s why the iTunes Store started with all Apple-DRM music. So they could be all open and stuff.

        Then Steve Jobs wrote a letter about removing DRM, but didn’t actually do anything to remove it until a year later, just after Amazon MP3 came out, and Napster and Rhapsody were also selling DRM-free MP3s. It was really Apple’s only option to avoid losing some portion of the sales to their competitors.

        And removing competitors from the App Store on a regular basis is great for third parties.

      • http://www.facebook.com/nick.lockwood Nick Lockwood

        Sigh… Apple isn’t the IP owner for Music. It wasn’t up to them to choose to release it DRM free. iTunes dropping DRM was as a result of pressure applied to the music labels by Jobs once he had established market dominance. If it weren’t for Apple you’d still be buying music with WMA “Plays For Sure” encryption (or rather, you wouldn’t – you’d be pirating it).

      • deV

        Please explain how Amazon MP3 did it first.

        Did you even read anything I said. Because your reply didn’t counter anything.

      • Kizedek

        The Jobs Open Letter pushed the issue. Yes, Amazon “did it” first — but pretty sure they did it just after the letter.

        Only, Amazon et al weren’t the shakers and movers, getting the labels to recapitualte on behalf of the common man or something. Rather, the labels ran an experiment with Amazon, anything to avoid looking like Jobs was right or had any clout over them. They came crawling back.

        Jobs was always for no DRM, and had to deliver a certain amount to get the labels to digital at a reasonable price per song in the first place. The kind of DRM that the labels really wanted, and which MS was all too happy to provide, was an order of magnitude greater and more onerous on the end user.

      • deV

        “Rather, the labels ran an experiment with Amazon, anything to avoid looking like Jobs was right or had any clout over them. They came crawling back.”

        Not buying it. Neither the labels nor Jobs had any incentive to remove DRM. Until Apple started dominating music retail over such competitors as Walmart. That gave Apple too much control.

        So the record labels were happy to diversify distribution and work with Amazon. But the only way to sell music online at that point that was compatible with iPods was to sell DRM-free music. If you do that, it might as well be MP3s. And so history was written.

        Sound a little more likely, ya think?

      • Kizedek

        “Not buying it.”
        Hey, that’s what people said about the Zune. :)

        Seriously, you just answered your own question. The incentive is in your paragraph about Walmart.

        Once labels saw the reality, that digital downloads were here to stay and would beat CD sales, and that singles would trump albums because users didn’t want to buy filler, oh, and once they figured out no-one wanted to RENT music… then the labels did indeed have every reason to go along with the inevitable and listen to Jobs by making digital music downloads as simple and painless for the consumer as possible.

        1) Jobs had spent time making digital downloads as simple as possible, with a business model and price point that worked for impulse buying and discouraged piracy for most people. He put in his dues, part of which included going along with some DRM.

        2) Jobs argued that DRM doesn’t stop the piracy, it just makes it a pain for consumers to buy and use music easily. But there is a fine balance to be walked between consumer convenience and complete disregard for labels’ DR until it could be proven.

        3) the experiment showed, as Steve predicted, that people still bought just as many song downloads without DRM as before — in other words, there wasn’t suddenly a rampant problem with one legitimate download getting re-distributed and harming sales.

        “But the only way to sell music online at that point that was compatible with iPods was to sell DRM-free music. If you do that, it might as well be MP3s. And so history was written.”

        Yeah, I’m sure Amazon just couldn’t wait to sell songs to iPod users. Oh, wait, Apple barely breaks even at 99c because most goes to the labels and running the store. Already, the App Stores are better business than music ever was. But, yeah, you’re right, if you don’t sell music that you can use on an iPod, why bother — no other players out there, are there?

        But, really, it was exactly Steve’s contention that the labels were better off dropping DRM because one DRM scheme couldn’t be used in common between several hardware makers and work effectively (one company would have to dictate, and abuses by or against one would affect all). DRM wouldn’t do what it was supposed to do if it was “opened” up — hence the failure of Plays for Sure (Windows had to control the whole thing and keep everyone in line, or go its own direction — Zune). So, the only option was indeed to drop DRM altogether.

        No, Apple is fine with iPod users sourcing music elsewhere. In fact, most of our music comes from ripping our CDs. No, the only thing that Apple worries about is having the best hardware product (check) which includes the best experience (check) and the best value added ecosystem (check). Voila, more iPod sales (check).

        No, the only thing Apple did NOT like was other hardware makers piggybacking on that UX by trying to get their products working with iTunes, which Apple went to great effort and expense to develop over the years. The seamless, simple shopping experience through iTunes and App Stores is for the users of Apple products alone, period. But, hey, users of Apple products are most welcome to go and get media elsewhere, have at it.

        BTW: AAC (part of the MPEG2 and 4 standards) is as equally open as MP3, and superior to it; but hey, get some MP3s and knock yourself out.

      • deV

        Most of my music is FLAC from CDs, thank you very much. For my Samsung Infuse, soon to be upgraded to Galaxy S II, I auto-sync to AAC with Nero’s encoder. It’s far superior to Apple’s encoder in ABX listening tests. Oh yeah, and I do it over WiFi, without any effort. No, literally, I don’t press any buttons or think “I should sync now.” I just walk into my house.

        You could do something similar with Google Music or CloudPlayer.

        But no, most people don’t buy CDs anymore.

        “No, the only thing Apple did NOT like was other hardware makers piggybacking on that UX by trying to get their products working with iTunes, which Apple went to great effort and expense to develop over the years.”

        Big apps that were denied access on the App Store: Google Voice, Sony’s e-reader.

        Also any app that mentions the word “Android” anywhere in the description, including one developer mentioning winning an award related to Android in his app description.

        “Yeah, I’m sure Amazon just couldn’t wait to sell songs to iPod users. Oh, wait, Apple barely breaks even at 99c because most goes to the labels and running the store.”

        Apple and Amazon each take about a 36% cut of all music download revenue. Bandwidth charges are pennies at that scale (look at YouTube for example, then divide that by 10). They likely pay more for credit card processing than for all other expenses combined.

        http://www.informationisbeautiful.net/2010/how-much-do-music-artists-earn-online/
        http://thecynicalmusician.com/2010/01/the-paradise-that-should-have-been/

      • Anonymous

        Just a note, iCloud is about to bring that effortless wifi music syncing to a lot more people.

      • http://twitter.com/cbrendel Christian Brendel

        I cannot imagine them killing the iPod. There is certainly a market for small iPods (e.g. for running, etc.) and its the ideal product to get new users and the kids addicted to Apple products.

  • Ahartman

    I think that the iPad will definitely see a 2 year replacement cycle. While being a perfect solution to a previously unaddressed market, it currently underserves that same market. It loads web pages too slowly, it is not a credible content creation platform (word/excel/powerpoint equivalent). You can’t dump your PCs yet. This is in large part due to the capability of today’s silicon. But that is changing very rapidly. Every 2 years there will be enough of an improvement that owners will seek to upgrade, much like they did earlier with PCs: 286-386-486-pentium. At some point when they become capable enough and have met the customer expectations like today’s laptops, the upgrades will slow.

    Same story with iPhone whose real usages are just now being explored. In time, that formfactor will be figured out and the silicon good enough to provide the functions being hired for.

    • Anonymous

      I’m sure I’m not alone in moving quickly from the original iPad to the iPad 2, and now very ready for next year’s improved model. I’ve been using iWork apps since day one, and music/video production with some success with the second generation iPad. A retina display, improved camera, software enabled video stabilization, voice controls, all convince me of the need for an upgrade. Online private party sales make the transition quite painless, to boot!

      • Anonymous

        I’m the same way. I can’t imagine not trading up to each new iPad for some time to come. It feels like the “old days” in computing, when each new generation was so much better that it was worth buying again.

      • Arved

        I think you are quite correct Sharon_Sharalike !!!

        It is weird.

        The older I get, the faster time moves.

        But Sharon is so on this with APPLE which she confirms makes its own time.

        You walk into the revolving door of the AppleStore, buy the latest incarnation of the iPAD, walk out, and while your new purchase screams at you “I am insanely GREAT”, it almost immediately seems that the next incarnation is already in the store you just walked out of.

        APPLE on its own is making TIME itself SCREAM: “Slow Me Down!”

    • http://profiles.google.com/marcosmalo Mark Mayer

      Regarding under serving the market of PC users, it really depends on who the user is. Sure there’s room for improvement, and new features will entice many to upgrade on 1 or 2 year cycles, but there are millions of moms and dads, grandmas and grandpas and just plain ordinary folks who don’t really need a PC for content creation or other work production. I think a >2 purchase cycle is far more likely for these folks. I suspect that they’re in the majority (but I could be wrong).

    • Anonymous

      No, you are way behind. This is all already happening. PC’s are already being dropped by 10-20% of iPad users, and they do not even have the standalone iOS 5 yet. iPad is already fast enough for most users. I have never, ever heard any iPad user complain about the speed of anything, let alone the speed of loading Web pages, which iPad does faster than most consumer PC’s. iPad is much more responsive than other computers. When you also add in downtime of Windows PC’s, work gets done faster on iPads.

      A marker and a pad of paper is a credible content creation platform. In fact, even digital interface designers who make purely digital things typically sketch on paper with a marker for a long time before they fire up Photoshop or Illustrator. iPad has an app called Penultimate that turns iPad into a marker and essentially infinite pad of paper, with the significant advantage that you can immediately share any paper over the network. It is IMMENSELY popular with creative people. You have already used app interfaces and many other things that were designed on iPads.

      Here are some other credible content creation platforms that an iPad can morph into:

      • portable multitrack audio recorder, which is the device upon which almost all of the songs you have ever heard were written; I have written about 100 songs on an iPad, and over 500 on iPhone, which is an even more popular songwriting tool because it is so handy and runs a perfect songwriting 4-track called FourTrack; you have heard many, many songs that were written on iOS without even knowing it, it is outrageously popular with songwriters

      • Logic Control (a music studio controller), upon which a recording engineer performs a mix of a song, sending MIDI performance data over a wireless network to a Mac running Logic or Pro Tools or any other music and audio production system

      • art tools of all kinds such as oils and pastels, and virtual art tools that could never exist in the real world

      • musical instruments of all kinds that send MIDI performance data over a wireless network to a Mac at the heart of a music studio so they are “real” musical instruments, you have heard music already with parts played on iPads without knowing it; there are pianos, guitars, drums, and one I really like which is like air hockey but music streams out wirelessly to any of the dozens of sound sources in any music studio

      • all kinds of mind mapping, sketching, designing, organizing tools for enhancing creative thought and ideas

      • photography tools that are less powerful than Photoshop ($599) if you are a Photoshop pro ($100 an hour) but which are immensely more powerful than Photoshop if you are not a Photoshop pro which most people are not

      As for office work: that is the single least creative thing a person can do, but iPad is great at it. You know why? Microsoft Office is a Mac app from 1985. (The name “Microsoft Office” starts in 1989, when the apps were 4 years old.) They ran on a 9-10 inch screen, and they enabled almost anyone to sit down with almost no training and produce documents and spreadsheets. iPad has much more power than that original Mac, and it is even easier and more self-explanatory to use. That is what business is hungering for, not Microsoft Office’s 747 dashboard -like complexity and training costs and the productivity hit that comes with any new version of Office.

      Not to mention software upgrade and I-T costs! To upgrade an Office user to a newer version can cost more than just buying them an iPad, which also gives them mobility, they have their “desk” with them at a meeting, on a business trip, whatever. Pages, Keynote, Numbers, and Air Sharing (Finder/Explorer) are all $10 each! Salesforce, WebEx and so many of their friends are free. Exchange support is built in and easier to use than Outlook. Anti-virus is not needed.

      Anyway, iPad is tearing through business. That alone shows you are wrong. iPad will outsell all of HP this quarter. HP was the highest-volume PC maker only a quarter ago.

      > 2 year replacement cycle

      That is what it is designed for, same as iPhone. You get one year warranty which can be extended for $99 to 2 years but cannot be extended to 3. Same as a Mac can be extended to 3 years, that is the Mac replacement cycle, every 3 years. The resell value at the end of those periods is 40-50% of the original retail, so these products are all really half-price to lease for their warranty cycles.

      • Anonymous

        Paraphrasing a talk I heard at MWSF this year, previous revolutions (DTP, WWW) have taken about four years for people to settle on standard practices, accepted styles, tools, file formats and such. The iPad is moving at a blistering pace by comparison. We are just a year and a half into this and the creative applications are exploding.

        In my group we are just on the edge of being able to travel with just the iPad, leaving the laptop at home. It is a great tool for selling scientific instruments. The double resolution of the iPad 3 display will make it really spectacular. Everyone in microscopy, mapping, geology and many other science and engineering disciplines will eat it up.

        Personally I’m studying to learn how to develop iPad apps so I can start generating tools specific to our tiny branch of science.

      • Skislider

        I am sure that you are aware, but in case your mot, then have a look at http://redpark.com/c2db9.html
        The company does a serial cable and sdk for connecting over the 30 pin connector.

      • Anonymous

        Very cool. Thanks. I did not know about that.

      • TechBoy

        Sorry John you are wrong too. Until the iPad supports USB, Mac or PC peripherals, file systems that can be accessed easily it remains a very fun, fast but essentially a content consumption toy. I use one every day and I still use my PC every day. I certainly cannot see a day when I trade in the power and flexibility of a PC (or Mac) for iPad or any tablet completely. In fact I am currently upgrading my PC with bigger screen and more storage, at the same time as planning to upgrade my iPad 1 to iPad 2. So i think they will run together for many years yet – or at least until apple provides the same level of power and peripheral support that PCs or Macs have today.

        I agree you can be creative on an iPad and you outlined many novel scenarios, but I have many graphic designers and friends in advertising/web dev etc and not one of them is considering to go 100% to the tablet space. Its a companion and it expands our lives, but it does not replace all technical day to day tasks!

      • http://twitter.com/pipequanta Dafydd Williams

        I would agree that professionals that use advanced computing features will have a hard time using an iPad for all (even most) of them.

        However, the majority of computers would be owned by private individuals who would use them for the tasks which iPad inherently does well.

        I’d argue that it’s these people who are buying iPad and not a PC of some form. Your usage pattern will remain for many years, but theirs might be easily translated to full-time iPad-only use.

      • http://twitter.com/marcedwards Marc Edwards

        “Until the iPad supports USB, Mac or PC peripherals, file systems that can be accessed easily it remains a very fun, fast but essentially a content consumption toy.”

        I keep reading that from those comfortable with desktops and laptops, yet the iPad marches on. USB already exists on the iPad in the form of a dock connector. I assume you’re talking about USB file access, which may be handy for some, but will or is being superseded by cloud storage and other network-driven alternatives.

        Most users don’t cares about accessing their file system—they just want to get on with their work or play. This is true even for most professionals.

        Many wireless PC peripherals work with the iPad, and even more will in the future. I don’t think that will hamper the iPad’s success. If anything, it’s an opportunity for peripheral makers, not a deterrent for consumers.

        “I have many graphic designers and friends in advertising/web dev etc and not one of them is considering to go 100% to the tablet space.”

        As someone in that space, I think there’s two reasons why the iPad fails, and both can be addressed by Apple and third party developers:

        1. Creation software. There’s no technical reason why an iPad can’t create. The creation software just needs to exist. It’s a new platform, so give it time. (Please note: I use procreate, Wacom Bamboo and other apps on my iPad for tasks that my Mac Pro isn’t good at.)

        2. Screen size. Designers, developers and creative professionals have always demanded large screens, due to the nature of their work. The iPad uses its screen well, but it’s still a 9.7″ display. However, it’s great for some tasks. It’s possible Apple may use iOS for larger devices in the future.

        But even if the iPad doesn’t suit certain creation tasks, that doesn’t mean it won’t continue to dominate the mainstream market and erode the low end PC market, as it has been doing.

  • Anonymous

    You wrote, “The release of Windows 7 had a marked effect on revenues in the launch quarter but the sales did not seem to grow above the previous version’s run rate ($4.2b/quarter vs. $4.7b/q on average).”

    Microsoft had $1.9B in deferred Win7 revenues that they accounted for in the launch quarter, thus the bump. Look at the prior quarters as Win revenue was declining. If you drew a best fit line, you’d probably get a better view of what happened.

    • http://www.asymco.com Horace Dediu

      Good point. Thanks.

  • James

    Something interesting I noticed with Apple – starting in 2010, revenue in Q1 (the low point of the year) is higher than revenue in Q4 (the high point of the year) two years prior. In other words, Q110 is higher than Q408, Q111 is WAY higher than Q409, etc. The growth is absolutely crazy.

  • http://www.joewilcox.com Joe Wilcox

    Q: Do you factor unearned revenue into the analysis? About the time iPhone revenues dramatically jumped, Apple started realizing the majority of revenue generated by iPhone; before it carried a portion forward over 24 months, under subscription accounting rules that changed.

    Microsoft still carries a tremendous amount of revenue forward because of Enterprise licensing agreements and Open and Select plans with Software Assurance attached; they’re booked like subscriptions. Microsoft realizes this revenue over time, and doesn’t get the benefit when taking in the cash. During second calendar quarter, Microsoft unearned revenue topped $17.1 billion and its “contracted but not billed” balance was $18.5 billion.

    Microsoft deferred $31.23 billion in revenue during fiscal 2011 (ended June 30) and recognized $28.9 billion.

    • http://twitter.com/pipequanta Dafydd Williams

      I’m operating on the assumption that Microsoft is using older U.S. GAAP rules? Apple made the switch away from these some time ago — does Microsoft have an option to do so…?

    • Anonymous

      Good god, Joe Wilcox is trying to educate people on deferred revenues. I vaguely recall reading an article you wrote, where you got Apple’s deferred revenues completely wrong.

      As for your question, shouldn’t you be able to answer your own question by looking at the chart? If you had the foggiest notion about what you were talking about, you’d know without asking that Horace’s data has been adjusted reflecting Apple’s restated figures.

      As for Microsoft’s deferred revenue, it hardly matters that Microsoft is deferring revenue. It’s only when the amount is growing rapidly, like Apple’s iPhone, that the non-GAAP lags the GAAP significantly, and distorts the true picture of a company’s business. Microsoft’s Enterprise licensing and Software Assurance has been in place long enough that the Non-GAAP and GAAP do not differ significantly. Apple’s situation was rather unique, only because of the rapid growth of the deferred revenues.

    • http://www.asymco.com Horace Dediu

      Apple’s revenues are as declared in restated reports. In other words these are figures that do not reflect subscription accounting for the iPhone (though there is still some minor deferral going on.)

      Microsoft is much more dependent on deferrals however I believe it’s smoothed out by now. There is usually a big disconnect between booked revenues and cash flow when new products are added.

      • http://www.joewilcox.com Joe Wilcox

        Thanks, Horace. From the figures I stated in my earlier comment, I agree that for Microsoft the difference between the two revenue streams is mostly smoothed out. I raised the question mostly for context, as the realization of current revenue, rather than deferring some, had such a dramatic and quick impact on iPhone revenue and overall for Apple.

        Also, there’s fairness. Steve Jobs waved around non-GAAP revenue to show how well Apple was doing when some iPhone revenue was deferred. He had quite a number of defenders doing so. GAAP to GAAP comparison technically is correct. Jobs claimed the accounting didn’t reflect Apple’s true performance. If that’s true, then one could argue that Microsoft’s non-GAAP revenue warrants similar treatment compared to Apple.

        I think you’ve made a fair comparison GAAP to GAAP.

      • Kizedek

        I am struggling to understand how the comparisons in Horace’s chart may be “unfair” or off the mark.

        “Also, there’s fairness. Steve Jobs waved around non-GAAP revenue to show how well Apple was doing when some iPhone revenue was deferred. He had quite a number of defenders doing so. GAAP to GAAP comparison technically is correct. Jobs claimed the accounting didn’t reflect Apple’s true performance. If that’s true, then one could argue that Microsoft’s non-GAAP revenue warrants similar treatment compared to Apple.”

        Oh, is MS also changing methods of accounting from an unusual type of model for a particular product back to the normal model for that type of product? This just corrects the picture for Apple, and puts it back to what it should have been all along. Perhaps analysts failed to take it into account at the time.

        Sure, one could argue that my landlord’s income for this quarter would look better if I paid him a whole year’s rent in advance — afterall, I signed a year contract. Not gonna happen.

        “Enterprise licensing agreements and Open and Select plans with Software Assurance attached” lend themselves to subscription-based, deferred revenue accounting, right? That’s only natural. You have a contract, that contract is fulfilled over a certain period of time, you renew the contract. MS (and analysts) have the advantage of knowing that x-number of contracts equals x-number of dollars, over x-number of months. MS has a certain amount of assured income in the future on the basis of a license or service contract.

        On the other hand, the iPhone is a retail product. It is a concrete object, someone pays the price, it gets counted as a sale, they walk away with a phone. Every phone on the market is like this. Only, Apple, being Apple, wanted to add value to their product. But, it wasn’t so simple: Apple weren’t allowed to give away certain types of software update (those “unlocking” ‘new’ features) without accounting for them somehow. So, in order to possibly give me a new feature at some time in the 2-year expected life of the product free of charge, they shot themselves in the foot and started this deferred revenue accounting.

        Everyone and his brother knows an iPhone costs about 630 bucks… everyone, that is, except analysts (thanks for being one of the few exceptions Horace). So when Apple sticks one eighth of the sale on its books, we get this whole hoopla about the iPhone under performing and Apple not meeting expectations. Now we have a course correction.

        Anyway, this was all back at the beginning when iPhone was doing 4, 7, 9 million units per quarter; now its doing 20.

      • Anonymous

        Dear me, Joe are you sure you’re from Maine, since you seem to have lost your commonsense. In the first paragraph you correctly note that Microsoft’s deferred revenues has “mostly smoothed out”, and then you argue that Microsoft’s non-GAAP revenue “warrants similar treatment”. You already stated it is “mostly smoothed out”, and in fact, it has. There is no practical information to be gleaned from using Microsoft’s Non-GAAP as opposed to GAAP. I’m sure Horace wouldn’t mind if you want to recast the data, which he has promised to upload, using Microsoft’s Non-GAAP numbers. It won’t change the fundamental story or picture. Knock yourself out.

        As Horace notes, there’s a disconnect between GAAP and Non-GAAP, “when new products are added”, and growing exceptionally fast. What the iPhone did was incredibly unusual, that’s why so many people didn’t understand it, and why Steve had to pipe up, and why the FASB eventually modified their stance, and allowed Apple to adjust their deferred revenue to more accurately reflect the business. Microsoft’s numbers between Non-GAAP and GAAP do not show a big disconnect. There’s no practical value in futzing around with the Non-GAAP figs.

      • http://www.joewilcox.com Joe Wilcox

        How condescending of you.

        I asked a question about unearned revenue, which Horace reasonably answered. I didn’t ask him to go “futzing around with the Non-GAAP figs”, because I’m of the opinion the measure should be GAAP-to-GAAP comparisons. I asked for the benefit others. One reason: since the change in accounting affected Apple revenue (quite positively).

        Your response makes it seem like the Financial Accounting Standards Board made some special exception for Apple: “Steve had to pipe up, and why the FASB eventually modified their stance, and allowed Apple to adjust their deferred revenue to more accurately reflect the business”. Surely you don’t believe that? That FASB changed the rules just to accommodate Steve Jobs?

        The change in GAAP accounting rules is unilateral and applies to everyone recognizing subscription revenue of this kind. Apple isn’t getting special treatment, nor were the changes made simply because of Apple.

        By the way, Microsoft announced Software Assurance in May 2001 and gave business customers until July 2002 to adopt it. Microsoft accordingly adjusted its accounting, deferring revenue that created a disconnect in the beginning time that smoothed out years later. Because, initially, Microsoft got a big cash boost collecting up front for software that customers previously paid for when they planned to use it.

        In Maine it’s commonsense to respectfully ask questions, like I posed to Horace.

      • Anonymous

        I’ve read enough of your writing to know that condescension is your specialty. BTW, I’m from Maine.

      • http://www.joewilcox.com Joe Wilcox

        I save my attitude for companies.

        I try not to offend regular folks.

        From Maine, eh? Outstanding.

        Whereabouts? Downeast? Central Maine? The County?

      • Anonymous

        Lake Cobbossee, Kennebec County. My gravavatar shows the addition I’m currently building, lakeside. I chuckle as I point out it’s a 34′ cube! Of course, I designed it in high school, in the late 70s, and due to DEP, environmental protection, setback rules from any watershed, it’s grandfathered on its original footprint. So no, it has nothing to do with any Apple-like cubes.

    • http://www.facebook.com/people/Dwane-Wilson/100003216435933 Dwane Wilson

      Biased and broken analysis, you should be a politician. I am a software developer, and I don’t care how much money Apple makes!!!! I wish to make a living writing software and not having to pay ridiculous licensing fees after I delvelop and application. PLEASE help me out here?….Who has really made money outside of apple? I am sure there are companies out there who have made some money developing apple apps, but they are tightly bound to a strict agreement. Apple is the anti-christ and it will at some point and time be the down-fall of the company. Enjoy the wave Joe Apple.

      • Steve

        funny for how many years have we heard that Micorsoft was the Anti-Christ?
        MIcrosoft has rehashed the same ole crap built on a bad platform for many years. I make my money fixing Windows issues all day long. but live at home in a very simple and much less problematic mac world

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