Categories

iOS vs. Microsoft: Comparing the bottom lines

I began comparing Microsoft and Apple’s financial performance with a review of “top line” or revenues by product lines over a four year period.

This post is about the “bottom line” for the same companies and products.

Before I jump in I would like to make sure there is no confusion about the terms. I will be comparing “operating income”[1] as a measure of “bottom line”. This is a common way to compare the profitability of companies because it excludes taxes and interest income. These non-operating expenses/income can distort a comparison of performance because they can be the result of investment activity or changes in tax law or where the company is domiciled. One should not make judgements of comparative performance on those non-operational bases.[2]

Another challenge is that some companies report operating income by division while others don’t. We can usually compare overall operating income but usually not on a division or product-level. This is the challenge I will try to overcome in this analysis between two very different operating models.

The first chart shows Microsoft’s Operating Income by Division as reported by the company.

Each area represents a business division. Note some are showing negative income (losses).I’ve added a line representing consolidated operating income which is the sum of all areas (including the negatives).

The same line from the chart above is super-imposed on the chart below and is comparable to the orange line that represents the operating income that Apple was able to obtain over the same time frame. Note that both axes are using the same scale.

The Blue and Orange lines are indisputable but the allocation of the areas under the orange line may be open to debate.

As Apple does not report a break-down of each product line or division, getting the areas in the Apple chart is a matter of analysis and estimation. The method I used was to estimate gross margins per product (the overall gross margin is known) and assigning a portion of OPEX (also known) in a ratio equal to the sales level of that product. [3][4]

To make the contrast sharper (though more cluttered), I took all operating incomes from all product lines and divisions of both companies and laid them out as time series line charts in the following chart. I allocated Corporate Level Activity as an expense proportionate to each business unit in a ratio proportional to its sales. This allows comparison of product lines individually.

 

Finally, I combined all the iOS product lines (iPhone, iPad and iPod touch est.) as one line and laid it alongside overall Microsoft Operating Income (consolidated).

The second chart in this post showed that Apple has reached higher operational profitability than Microsoft by the end of last year. This fourth chart shows that iOS products combined are more profitable than Microsoft as a whole.

Microsoft invented the software business and built it to become the world’s most valuable business by the year 2000. It’s still been growing since and after 35 years it is reaching a profit of $27 billion per year. It did this while maintaining enormous margins and a highly disruptive monopoly business model the likes of which the world had never seen before.

It is scarcely believable then that a device business has been created to overtake it in four years.

Notes:

  1. The operating income is almost the same as EBIT  which is explained here: Earnings before interest and taxes – Wikipedia, the free encyclopedia.
  2. On the other hand, one should not use Gross Margins alone. The crucial difference between Gross Margin (Sales Revenue – Cost of Goods Sold or COGS) and Operating Income is that fixed costs are also accounted for. These fixed costs are typically Selling, General and Administrative Expenses and Research and Development Expenses (commonly summarized as Operational Expenses or OPEX) which can be allocated to a particular business or division. For different business models, gross margins can be widely different. In the case of Microsoft for example, software has negligible direct variable costs. A CD or download is of tiny cost compared to the price of the license to use it. As a result software often has 80% gross margins. Hardware on the other hand can have very thin margins in single digits (e.g. PCs). Conversely, Microsoft will have very high fixed costs to pay for developers, product management and sales forces. A hardware vendor may have few engineers and sales could be handled through resellers. Thus Microsoft will have very high OPEX and a PC company will have very low OPEX.
  3. So, for example, In Q2 ’11 the iPad had an estimated gross margin of $2.06 billion (which assumed 34% margin on published revenues of $6.06bn). As it also was 21% of total revenues that quarter, I assigned 21% of OPEX to the iPad. That means 21% of $2.54bn or $540 million was the operational expense allocated to the iPad. This results in operational income estimate of $1.52bn for the iPad in Q2.
  4. To summarize, the assumptions this estimate depends on are gross margin estimates and the allocation of OPEX in proportion to sales. Gross margin analysis has been a matter of iteration and peer review for some time and I’m fairly confident in my estimates. The allocation of OPEX is more arbitrary. Chances are that these expenses vary greatly with each quarter where more work is done nearer to launch of a new product and less in late season. If there are better methods available to allocate expenses by product, I’m open to suggestion.
  • Roman

    Horace, your analysis keeps getting better and better, and charts ever more striking. I know there was a lot of work with data behind this post to produce the results, but the iOS-alone-vs-Microsoft-as-a-whole comparison is simply stunning. Well done. Looking forward to more company comparisons.

  • Tim Madsen

    Awesome.

  • Dick Applebaum

    Why is the line for MS Consolidated in the last chart different than the 1st 2 charts — am I missing something?

    Otherwise, very informative way to visualie what is happening!

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

      The vertical axis is stretched because I wanted to show more detail in comparing product lines as line charts.

  • http://www.jancifra.eu Jan Cifra

    I think Microsoft has done remarkably well and an analysis into why it has been able to maintain the level of profitability shown in these charts would be very interesting. One element of why Apple’s stock price may seem low (in P/E terms) is the question of whether Apple can maintain it’s trajectory or maintain the level of profitability in the long-term. iOS was the harbinger of disruption for the mobile space but whether Apple can maintain its dominance the way Microsoft did in it the PC space is an interesting question… And I presume Apple will not resort to the tactics Microsoft did.

    • Anonymous

      “…why it has been able to maintain the level of profitability shown in these charts would be very interesting.”

      There are three obvious reasons. (Others might have more.)
      1. First Entrant advantage, as Horace mentioned.
      2. Monopoly position, ditto.
      3. Smart, aggressive, focused leadership from Gates to most of the firm he assembled.

      The fourth reason that I think will matter is in the last Asymco post: look at the share of market cap and you’ll see that Microsoft held its ~ 50% position throughout the Age of The PC; it was not until the Internet Era and the Mobile PC Era that Google and Apple put the Jaws of Death to Microsoft’s market-cap share, crimping it to sub-market growth.

      I.e., Microsoft was not disrupted by asymmetric competition during a long period, and that disruption has not yet impacted its mainline businesses enough to whack profitability. But Gartner, IIRC, has predicted PC sales to the developed world will drop 7% in 2011, and MS can hardly expect its desktop software sales to grow in units or profitability in a world where businesses are not expanding their desktops. Hence Microsoft’s attempt to leverage its desktop business into mobiles with Win8.

      • Anonymous

        I think it is all about IBM. Microsoft is just the long tail of IBM’s business computing monopoly. They stole IBM’s fire and took on the role of keeper of the flame for CIO’s who want something they can just rubber stamp and not get fired for it. Now that the “IBM PC compatible” is dying out, Microsoft is dying out.

        The IBM PC compatible was replaced in the high-end market by the Intel Mac (not IBM PC compatible, that is why Boot Camp exists) over the past 5 years, and now iPad is replacing it in the low-end, and mobiles are like trees making oxygen for iPad to grow. IBM PC compatibles breathe carbon dioxide, they are stumbling towards the tar pit.

        So it has just been monopoly milking the whole time at Microsoft. One day Bill Gates is delivering a BASIC to Apple for Apple II; soon after, delivering DOS to IBM for IBM PC and the rest is history. They only did Mac apps so they could port them to their own system eventually. Once they got IBM’s fire, they fed everything into it.

        I would bet there is a good IBM/Microsoft chart to be made with a 50 year timeline of business computer purchases on it, peaking and fading. Had IBM not made “The Deal of the (20th) Century,” (from Microsoft’s point of view) for PC-DOS — if they had just bought or built their own PC OS — this article could be about how iOS is more profitable than a fading IBM, and we’d be talking about how the OS/2 market was shrinking form the first time ever. And Microsoft might be making bank in Apple App Store.

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

        Microsoft enabled the best example of low end disruption ever seen. Every product Microsoft succeeded with was a low end disruption. Bundling Office was a low end disruption vs. Lotus. Exchange was low-end vs. Notes and Groupware. NT was low-end vs. Novell. Windows was low-end vs. Mac. It just goes on and on.

        The only times Microsoft failed to disrupt is when they departed from the script. Xbox was not low-end vs. Playstation. Windows Mobile was not low-end vs. Nokia or RIM. Bing was not low-end vs. Google. Zune was not low-end vs. iPod.

        I give a lot of credit to Microsoft as a disruptor. It’s just that they have not done it in over a decade. Since then it’s been all about new markets being created and they cannot do new markets and it’s too early to go low-end on most of what’s been created. Microsoft’s strategy is basically to wait it out until they can sweep in with low-end on the new markets (devices, phones, tablets, search, cloud, etc.)

      • http://twitter.com/dr_stupid anna boros

        Do you really think it’s too early for search? Or did they fail because Google basically shut the low-end door, making its software services free?

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

        Free for users. Not free for advertisers. Google does not serve users, it sells them for a price. Microsoft could disrupt Google if they offered users at a much lower price or for nothing.

        When you treat users as a product then you need to think about what is a “good enough” product. How it will improve and how you can give it away cheaply. You need to think about what your competitor treats as valuable and avoid it. You then need to pursue those customers that your competitor finds unprofitable.

        That’s the discussion to be had and I’m not sure Microsoft is having it.

        (By the way, it also means being patient and not being obsessed with share. You also need to be profitable. Microsoft fails on all the above when it comes to search.)

      • Tatil

        Actually, it may be far better to find out what your competitor finds valuable and give that away for free. The competitor will not be able to respond effectively, unless it changes its business model.

      • Eduardo Pellegrino

        ‘Microsoft could disrupt Google if they offered users at a much lower price or for nothing.’

        Except their problem isn’t in selling to advertisers but in recruiting consumers to sell – and the only way that they could disrupt that would be by paying consumers to use Bing.

        Consumers may not be Google’s customers, but they are still the key group from a market share perspective.

        It’s a little like the oil majors. They don’t compete on product pricing, they compete on gaining access to reserves.

      • Anonymous

        Thanks for the further insights.

        I’ll quibble about the mechanism for Office being “low-end disruption.” I remember reading Information Week and its ilk pretty closely during the early 1990′s timeframe when MS trounced Lotus, WordPerfect, Borland, (WordStar still around?) and others.

        The reviewers all had their favorites (as did I) but concluded that Office apps would be safer buys because the MS developers had access to private APIs, technical support, financial support, etc. In my mind at the time, this was Microsoft leveraging its Windows monopoly into what was previously a very vibrant, competitive market for apps.

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

        Well, there was that, but ultimately I think Office was disruptive because it was a bundle that cost a lot less than the competition sold separately.

        As a side-note I read a book once called Breaking Windows in which Microsoft execs claimed that they got into the Office business because they could not wait around for Lotus to port their applications to Windows from DOS. They realized then that they needed to own the “killer apps” otherwise, as a platform vendor, they would never be able to iterate the OS fast enough. Office was not initially planned as a cash cow but as a way to avoid dependency on their ecosystem.

      • Anonymous

        As I recall I used WordStar and SuperCalc as my original “Office” apps on my CPM based Osborne. Then MSDOS / PC came along and I stayed with WordStar but switched to Multiplan for the spreadsheet. I never found either of the Microsoft products any better than the CPM based apps until….

        …the Macintosh.

        Suddenly Multiplan became Excel and Apple’s Write became Word and suddenly there was no comparison to anything else in the market. When Windows came out, Office morphed into clones of the Mac software.

        My point is that Office was not created out of frustration with Lotus–it was created because working on the Macintosh forced Microsoft to create a genre bending improvement in quality and productivity.

      • davel

        This is exactly right. Microsoft bundled their software driving down costs to business and the consumer.

        Office for WIndows had the benefit of years of crafting in the Apple world making Word a very fine word processor in a graphical environment.

    • Anonymous

      There is mammoth headroom for expansion without any dirty tricks. This is just the beginning of that growth curve, not the end as with Microsoft. iOS devices are only available in a fraction of the markets they could sell in. They just have to keep adding stores to keep growing.

      iOS going standalone is key to that for iPad. Buying an iPad in an iPod vending machine at the airport is coming soon. iPads at Bed, Bath, and Beyond (home and kitchen accessories store) and other non-traditional PC sales locations is coming soon. There is a VW that has an iPad cradle in the dashboard. Retina Display on iPad is a moment that ALL graphic artists — whether consciously or not — have been looking forward to since the early days of online publishing: a screen output device that can “print” a page with better quality than a print output device. We have a true replacement for print publishing in that case. The print masters become iPad masters.

      More phone models is key for iPhone. Apple as yet has only one high-end phone. There is a missing phone that is to iPhone as iPad was to the Mac: the first ever low-end model, a huge new market. Apple makes more money from iPad than from the Mac. There is a more-profitable-than-iPhone phone missing from Apple’s lineup.

      Plus iOS can go anywhere embedded systems are used. Apple is already doing point-of-sale for themselves and others. What about bank machines, ticket vending machines? When you look into them, the bulk of their cost is not the giant box or money/ticket dispensers, it’s the user interfaces. And not the hardware, but the programming. Banks merge with each other and end up with 20 different user interfaces on their bank machines (color screen or not, touch or not, buttons or not) and then they need to roll out a new feature to all at once and it’s spaghetti logic. And in spite of paying Microsoft a lot of money for software, they are always publicly BSOD. Should be iOS in there, running the same custome native app they can easily update and with near 100% uptime, utilizing a plain 10-inch touchscreen for all user interactions with the possible exception of authentication.

      So many growth opportunities for iOS.

      • Eduardo Pellegrino

        More phone models is key for iPhone. Apple as yet has only one high-end phone. There is a missing phone that is to iPhone as iPad was to the Mac:

        The margins on that single iPhone are immense, and they’re what has driven Apple’s profits to stratospheric levels. As a result Apple has to be extremely cautious when introducing a new model, that it gains more in new customers than it loses in margin on existing customers. Just look at the graphs, last quarter the iPhone sold only a little more than twice as many units as the iPad, but made four times the profits.

        On the other side however, Apple is constrained by a cultural aversion to shipping a product that feels cheap – and a cheaper iPhone would almost have to, because the reduced price would be coming primarily from lowered margins not lower build cost.

        Is there still room for iOS growth? Absolutely. But it is still far more plausible that Apple will come under margin pressure than MS will.

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

        Nobody is immune from margin pressure. However, consider that Microsoft’s cost base is almost entirely fixed. As their sales increase, headcount inexorably increases. If sales ever decline, Microsoft will need layoffs or aggressive culling just to stay in the margin range it has become accustomed to. The effect can be very unpredictable in a company where developer morale and culture and compensation are all tied to growth. A virtuous cycle can quickly turn to a vicious one.

      • Eduardo Pellegrino

        MS has essentially no margin pressure, though you’re correct that if the entire PC market suffers they will see some loss of revenues. But if they increase their prices consumers have very little choice but to pay. An increase of $10 on the lowest windows license would increase their profits about $3BN a year, while still only increasing the price of a netbook by 5%.

        There are anti-trust issues which constrain them, but in the face of sinking sales they could probably get away with it. It does seem reasonable to conclude that MS has less margin pressure than Apple.

      • Anonymous

        I’m guessing that Gartner is correct: PC sales to the developed world will drop 7% in 2011 vs 2010. While “emerging” market PC growth still looks good, there have NOT exactly been Microsoft’s best market for actual sales.

        And as to consumers having little choice? Actually, the very large Enterprise market does NOT need to roll to Win8, at least as long as they fail to see justification for converting to tablets. Increasing prices would not fail to catch the attention of users who might be encouraged to convert off Windows, too.

        Microeconomics says that monopoly providers logically price so that the marginal sale is optimal — a higher price would appear to increase profits but reduce units proportionately. (Competitive producers aim to sell all they can at the going price, until production costs ramp up from overtime, etc., killing their per-item profit.)

        I’d say your hypothetical about reduced profits is coming true. Microsoft certainly appears to have a strong technical foundation under Win8, but if the BYO model continues to spread in the Enterprise, Microsoft will find its years of neglect and poor offering in the consumer eco-space (can I say that?) will hit them hard.

      • Eduardo Pellegrino

        ‘And as to consumers having little choice? Actually, the very large Enterprise market does NOT need to roll to Win8,’

        That’s true, but MS already has large enterprises on a rolling subscription pricing plan. They pay just as much for an XP desk as a Windows 7 desk.

  • r.d

    Can you add a chart to show tax advantage that Microsoft enjoys.

    • chandra2

      Why? The topic of this thread is EBIT.

  • Canucker

    I’m very bullish on Apple but they sure have a lot riding specifically on the iPhone line. Hope Tuesday knocks it out of the park!!

  • Anonymous

    I don’t think there’s any dispute that Ms (illegally) built a cash printing machine but it should be noted that they have essentially WASTED it in the last 13 years with ZERO successes. Sure, they have made $35 BILLION with the Xbox BUT it’s still $15 BILLION in the hole AND you could argue that by giving away a processing power equivilient $5k PC for $249, you essentially killed their own high end market – add in MS ineptitude in killing the WINDOWS brand as the cheap, malware infected OS you get for free with acheap PC, WINDOWS is a posioned name (which MS insists on adding to their mobile phone) – shareholders have to ask WTF? Then add in MSN, Zune, WIN phones, webTV (or that Ms lost nearly $700 million on the internet), spening $6 BILLION on a free phone service. MS shareholders have to ask WTF? Why is an enterprise company still spending $10 BILLION a year chasing consumer targets they will NEVER MAKE ANY MONEY ON.

    • azulum

      sell your shares then. and stop spamming the comments with anti-MSFT drivel.

      • Anonymous

        You’re exactly the reason MS is in the state itsin – shareholders who don’t care that MS has generated $350 BILLION DOLLARS of cash but only has about 10% of that left with your shareholder value worth 30% from 10 years ago … At the rate they are going – they will be the next kodak … Not tomorrow but in 10 years?

    • davel

      Microsoft is a great company. They were smarter than all their competition IBM and Apple included. Their software was buggy certainly, but that did not stop corporate america from wedding their future to microsoft. Consumers demanded Wintel also. So you may not like the company but you cannot deny their phenomenal success.

  • Anonymous

    Is Microsoft the only large company that anyone knows of that has a business division or income center known as “Corporate-Level Activity”? Don’t most companies put this into SGA and allocate those costs to real income centers? Why can’t Microsoft? If I’m a shareholder, I’d want Microsoft to do that, because CLA as it is now, has the potential for being a slush account, where costs can be stashed to make the actual income centers look better. It gives a company a way to make sure it hits its income targets. Now, it’s far from me to say Microsoft does this, but it seems to have Enronian potential.

    And, if this is a business division whose costs cannot be allocated to real income centers, a CEO should look here for cost cuts.

    How can there be CLA of over $1B every quarter that cannot be allocated to actual income centers?

    • Sleepy

      The purpose of “corporate level activity” is to hide the fact that apart from the Windows and Office monopolies, none of Microsoft’s activities is sustainable as a standalone business. This is presumably abuse of monopoly power. (The server division also benefits structurally from the Windows OS monopoly).

      When Microsoft made the change to this (less details plus corporate slush fund) reporting style a few years back, it was apparent that the purpose was to conceal, not to clarify.

    • Eduardo Pellegrino

      ‘Don’t most companies put this into SGA and allocate thoses costs to real income centers?’

      In a word, No. Or at least they don’t report them externally. Look at Apple, it reports all such expenses as a single corporate level ‘Operating Expenses’ category,hence the point Horace made about some firms not giving operating income at a product line level – Apple doesn’t, they don’t even give gross margin at a business line level – they only give revenue.

      So no, there’s no requirement on MS to attempt to allocate every expense to a specific income center – and indeed it would be a bit daft to expect them to. Suppose you have a guy working on windows API code. Does his expense go to the consumer windows division or the enterprise windows division? What if he’s only writing the API to support office? Essentially developers just end up picking a cost center at random half the time, rather than spend half their working day debating exactly who should be paying for their time.

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

        If this is so then I should subtract CLA proportionately from Microsoft’s business lines in the third chart. I simply do not know how Microsoft accounts for this and I kept CLA as a bona fide division.

        This treatment does not affect the fourth chart (obvious perhaps but I should note it here).

      • Anonymous

        Well, I didn’t want to prejudice your approach, but if Microsoft can’t allocate those costs, then a proportional allocation seems to be the only reasonable solution.

      • Eduardo Pellegrino

        I’d agree with that. The Corporate Activity section doesn’t have revenues – so a fairer comparison would have it applied across the various business lines. After all this is what they say about it in the SEC filings.

        ‘Certain corporate-level activity is not allocated to our segments, including costs of: broad-based sales and marketing; product support services; human resources; legal; finance; information technology; corporate development and procurement activities; research and development; and legal settlements and contingencies.’

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

        That settles it then. I’ll re-do the third chart.

      • Anonymous

        Right, I should have clarified that. Internally, you’d want to know the true profitability of business divisions, even if only to determine compensation! However, I just find it amazing that Microsoft reports OpInc by business division, but then obfuscates it by keeping a CLA line.

        It’s not at all “daft” to allocate the expense of work done by a software engineer between in your example. It may be hard, but it’s done all the time by companies.

        If your work can’t be allocated to an income center, you should start to fear for your job!

  • Anonymous

    I love how at the iPad introduction, Steve Jobs showed the “Mac user setup” slide with iPhone, iPad, MacBook Pro going left to right, but left out the “PC user setup” slide which is iPhone, iPad, and a mangy old Windows XP desktop from 2005 that you share with your roommates. Sorry, Microsoft.

    Ever since Apple passed Microsoft in market cap, it has been one surreal event after another. Or maybe this is real and Wintel was surreal. There is a Thunderbolt accessory coming soon that is a PCI chassis. Yes, the MacBook Air now has the PCI slots. No, your Windows notebook does not. It is a closed system.

  • http://pulse.yahoo.com/_5BHLNE6HC75ETNMNDKEEKLMF3M Steve Pederson

    It really is staggering how much money the iPhone makes. Really TOO much for this stage of the market. But there’s a similarity with MS’s OS business… Apple’s price is just a fraction of the cost to the user (for MS the cost of a PC, for Apple the cost of the phone + contract), so cutting prices won’t produce that much more volume or competitive edge.

    But it’s a staggering amount of money. And coupled with Apple’s legendary R&D discipline, we’re going to see… well actually I have no idea. But I know business school cases will be written about it.

    • azulum

      but i know business school cases are already being written about it.

  • Ajay S

    If Apple has developed excellent Voice based interaction platform for iOS as rumors suggest, that’ll be a feature copy-cats will find very hard to copy. It could well seal Apple’s lead in smart phones for next few years

    • kevin

      The voice recognition piece can be copied, but the AI piece will likely be more difficult. But we’ll have to see how far that AI piece goes tomorrow.

      I say this because Apple is licensing the voice recognition piece from Nuance. If it’s not an exclusive (and I don’t think it is but we’ll find out tomorrow maybe), then other phones could get it too assuming their CPUs have the processing power needed (like Apple’s A5 chip). The other option is that Google might also be porting their voice recognition software from executing on their back-end servers to execute in a handset CPU.

    • Anonymous

      Of course, there already are fairly robust voice controls in the not-even-a-year-old Windows Phone platform. The “copy-cats” probably won’t have issues improving it further.

    • davel

      I would expect the voice interaction to be limited. I have never seen a robust, smooth voice application. The user ends up being trained on how to speak.

      Not exactly a pleasant experience.

    • deV

      The feature Apple copied was already a prominently placed feature in Android (right down there next to the spacebar, rather egregiously copied).

      But I’m sure you’ll come up with reasons to say that any improvements to Android’s existing speech recognition from here to the end of eternity are copied from Apple.

      The whole idea of introducing the public to speech recognition now is Google’s. It’s been in their search bar on Google.com for a while now, and on Android searches whatever you want it to: music, contacts, messages, the web, and several more areas. It also has voice interaction. “Navigate to 100 Main Street” pulls up a GPS map with turn-by-turn directions.

      I don’t see anything to credit to Apple there at all. Sorry. All of those features were copied from Google.

  • http://honkj.myopenid.com/ honkj

    the problem with your data and statements is it’s based on complete false works… MSFT didn’t invent the software industry, it DIDN”T EVEN HAVE AN OS, when IBM called it to ask it to build on for them to compete with the First Apple computers…. meaning Apple was the one who invented the software industry….

    and as far as the office suite of software, Apple asked MSFT to make some suites for the new at the time Macintosh computer…. otherwise you would not even know who MSFT was by then…

    and as far as your stats, you appear to be using the fake numbers that MSFT puts out as earnings… the stock market is not stupid, it has realized that MSFT has been faking their earnings for going on 15 years now… you appear to be the only one being fooled by them now adays..

    for instance if MSFT’s real profit were “27 billion” a year, then the money in the bank would go up by about that much right? (Plus dividends)…

    the money in the bank (shareholder equity) actually was falling for many years in a row…. meaning MSFT was actually losing money…

    why did this all happen? because MSFT used their stock instead of cash to pay stupidly high expenses, including paying employees about 10 times what it needed to…. MASSIVE amounts of employees, and MASSIVE amounts of waste….

    and now you have where MSFT came out after being so stupid in how they ran their business…
    (which is an after thought in the world)….

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

      The opinion that Microsoft invented the software industry came from Steve Jobs. To quote (May 2007):

      Steve: “Well, you know, Bill [Gates] built the first software company in the industry and I think he built the first software company before anybody really in our industry knew what a software company was, except for these guys. And that was huge. That was really huge. And the business model that they ended up pursuing turned out to be the one that worked really well, you know, for the industry. I think the biggest thing was, Bill was really focused on software before almost anybody else had a clue that it was really the software.”

      http://allthingsd.com/20070530/d5-gates-jobs-interview/

    • http://twitter.com/auspolitech auspolitech

      Microsoft did invent the software industry with a BASIC language interpreter for the Altair computer in 1975. Previous to this with minicomputers and mainframes software was included free.

      Microsoft have also payed dividends to stockholders since 2003:

      http://www.microsoft.com/investor/Stock/StockSplit/default.aspx

      Which is where a lot of the money has gone.

    • davel

      Microsoft is not putting out fake numbers. Windows and Office are extremely profitable and have been for a very long time.

  • Michael

    This wonderment at the profitability of Apple versus Microsoft may invite the invidious F word. (From your last radio show.) It is still good to have a graph that shows how mind boggling the numbers are, in favor of Apple.

    Steve Jobs said in 1997 that it is wrong to think that it is necessary for Microsoft to lose in order for Apple to win. That was so very very smart. These graphs don’t show Microsoft losing versus Apple winning. These are two independent companies.

    I enjoy how you dive down into the meaning of these numbers, Horace. Your emphasis is on disruption, or upon market strategies. It is nice to think about how Microsoft can learn to be even better from these analyses.

    You have said that Windows became “good enough” when it stopped crashing with Win2K or the consumer version, which was XP, I think. That was one metric, and a very important one, as all who’ve dealt with Windows crashes can attest.

    But Apple would never concede that this game is reliant upon that metric. It is utterly genius how Apple competes so obliquely with Microsoft, so that it is not head to head. Whatever Microsoft does well, Apple will grant them without dispute.

    Apple will let the Windows experience migrate to OS X. Such a subtle embrace and extend that is, for OS X to be dual bootable. What genius! Apple doesn’t undercut the sale of Windows licenses, because a Windows license is still necessary for Bootcamp (or Parallels or VMWare). But the platform with OS X on it is screaming that it is better, it is friendlier, it is more versatile and obviously worth the cost.

    That’s just on the PC side of things. There is no comparison in tablets and phone. Microsoft has no viable platforms in either category. They are such valuable categoreis, too – but Apple schooled the whole world on how consumers want devices in those form factors.

    It’s just mind boggling. It’s wonderful how engineers with vision can create devices that will seize the market. These are useful devices that have earned their place in sales . There is no reality distortion field at work here – it’s all a supply/demand story, and priced aggressively based on smart sourcing of materials. Incredible.

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

      I never meant to imply that Apple’s success is at the expense of Microsoft. In fact, the data shows otherwise. Microsoft has been successful while Apple created a new market.

      I also would never suggest that Apple disrupted Microsoft. That too would imply a transfer of wealth.

      Apple did disrupt the phone vendors. If there was profit evaporation it was from those incumbents. I’ve chronicled this for several quarters. The last set is here: http://www.asymco.com/2011/07/29/apple-captured-two-thirds-of-available-mobile-phone-profits-in-q2/

      You can observe the shift from one set of competitors to another.

      I claimed that Apple created a new business in four years whose value is larger than that which Microsoft admirably built in 35 years. By giving credit to Microsoft, it makes Apple’s achievement all that more remarkable.

    • deV

      “These are two independent companies.”

      Arguably, they are two different markets. Apple is still less than 1/8th the marketshrare of classic full size computers (laptops/desktops), with “desktop” operating systems.

      Markets Apple currently dominates:
      Portable media players
      Music (retail)
      Full-size tablets

      Markets they don’t:
      Smartphones (which will replace portable media players or make them very low margin)
      Computers
      Small (5.3″) to midsize (7-8″) tablets

      “Apple will let the Windows experience migrate to OS X. Such a subtle embrace and extend that is, for OS X to be dual bootable. What genius!”

      Extremely common, actually. In the tech industry, the winner (90% marketshare) is free to set the de facto standards (Windows-compatibility), and everyone who wants to compete has to do their best to remain compatible. Just like every vendor has to support FAT and NTFS filesystems if they want to be taken seriously. Linux has built a whole Windows compatibility layer. No matter which product you are examining, the low market share one always has a compatibility option with the dominating one. Just like the advertising, the winner doesn’t even mention their competitor’s name. They don’t have to.

      Note that compatibility through Boot Camp came after independent solutions for running Windows on Mac hardware already existed. It wasn’t even their idea. A little on the “obvious” side though, considering Apple had already joined the crowd in adopting Intel architecture (x86/x64).

      “But the platform with OS X on it is screaming that it is better, it is friendlier, it is more versatile and obviously worth the cost.”

      The platform is only “better” if you really love OS X enough to pay $300-500 for that feature alone. You are paying an extra $150 for the license plus you are overcharged for the hardware to make up the rest of that cost. All to still run Windows on it in the end. Like many Mac owners would ask: why?

      “That’s just on the PC side of things. There is no comparison in tablets and phone. Microsoft has no viable platforms in either category. They are such valuable categoreis, too – but Apple schooled the whole world on how consumers want devices in those form factors.”

      I agree with you that Apple has picked the right emerging markets (right place/right time). But not that they did the world any favors through any great ideas. They take existing ideas and make them look sleek. Hard-drive based mp3 players existed before iPod. Touchscreen devices existed before Apple’s. Lightweight laptops were a category before the Air. Tablets existed before the iPad (Wacom produced a whole line-up for designers years before the iPad was even considered).

      “It’s just mind boggling. It’s wonderful how engineers with vision can create devices that will seize the market. These are useful devices that have earned their place in sales . There is no reality distortion field at work here – it’s all a supply/demand story, and priced aggressively based on smart sourcing of materials. Incredible.”

      They sure do get a lot of credit for making the world aware of things that already existed though. They’re definitely a worthy topic for case studies in marketing schools. At this point, they’ve gotten so much of that credit that people expect new types of products that Apple selects to be something worthy of considering, even when their true inventors and previous promoters were unable to flip that switch in the public’s minds. It may be the right product, but you have to convince the public that they wanted it in the first place. Apple is good at convincing people that they’ve just produced what people didn’t even know they needed. But they do now. So Apple gets credit for being “first.” Fascinating, really.

      It’s not always a hit either. Many of their products have flopped over the years. Here’s a list put out a few hours ago (how convenient): http://powerwall.msnbc.msn.com/tech/apples-biggest-product-flops-10895.gallery

  • Chad

    The final point in this post identifies two nearly unbelievable realities, both of which are stunning. The longevity of the Microsoft profit stream and the pace of increase in the iOS profit stream both confound convention. The product lifecycle curve indicates that Microsoft should not have been able to hold on to profits for so long without innovating, and the adoption rate for iOS is unprecedented. Both achievements need to be recognized for their merits, while the question becomes, as always, where do they go from here, and how will each affect the other?

    • davel

      I think you underestimate Microsoft. Yes, the OS and Office are the two big drivers of revenue for the company for a very long time. During this time the OS ( including servers ) has grown to be embedded in the enterprise, similarly Office has grown and embraced the web.

      Microsoft has been disruptive ( with Intel ) in that they drove prices down. Players like Sun which was a very strong company were driven out by a combination of Windows and Linux.

  • Mage

    MS should be looked at from a margin contribution standpoint. The Corporate Level Activity would probably not decrease by much if you eliminate a product, but the revenue contribution from that product would be completely eliminated. This would disproportionately reduce corporate earnings.

    Margin contribution is an accounting approach that is usually used in retail and manufacturing.

  • Pingback: Monday links: a humongous gap | Abnormal Returns

  • Matt Gunson

    Truly amazing:

    “Microsoft invented the software business and built it to become the world’s most valuable business by the year 2000. It’s still been growing since and after 35 years it is reaching a profit of $27 billion per year. It did this while maintaining enormous margins and a highly disruptive monopoly business model the likes of which the world had never seen before.

    It is scarcely believable then that a device business has been created to overtake it in four years.”

  • Gerhard Miller

    Great analysis, as always.

    Easily overlooked: Within 6 quarters the iPad has taken the #4 spot relative to the operating income of the two companies’ combined product lines and looks like it is set to catch up with the mighty Windows franchise. Maybe a bit premature, but how long until the iPad generates more profits than the Windows franchise?

  • davel

    This is a great article contrasting Apple and Microsoft.

    I love the line chart.

    I find it interesting that Apple does not have one business division that is losing money.

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

      Yes, but we don’t know that for sure. The “Music” business line (iTunes) is said to break even and if we assume allocation of OpEx proportionally to sales, we get this view. However that’s not to say that “Software” which includes OS X does not eat proportionally more OpEx than the Mac BU. Overall however, this is the most reasonable allocation absent any other data.

  • Pingback: Steve Jobs har avlidit | Binero blogg

  • Sid ramia

    Apple Vs Google Vs Microsoft

    ———————————

    Profits: http://goo.gl/75iqp3

    Revenue: http://goo.gl/91Chm2

    Stock Performance: http://goo.gl/4DtdpG

    Research Expense: http://goo.gl/XcVCzg