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The world's biggest startup

Last year we began offering revenue and operating income comparisons between Apple and Microsoft. It was becoming evident that the iOS franchise was beginning to overtake both in revenue and profitability the Windows franchise. To offer more dimensions of comparison this time I am adding Google’s top and bottom lines for comparison (click image for detail):

Note that the graphs have the same scales when read horizontally. I’ve broken out the sub-divisions of revenues as the companies report them. Here are some observations:

  1. The time spanned is 4.5 years (September 2007 to December 2011)
  2. If we compare the fourth quarter 2007 to fourth quarter 2011 the ratio of Google : Microsoft : Apple went from 1: 3.39:2:16 to 1:1.97: 4.38. In other words, Microsoft was 3.4 times bigger than Google but today it’s only about twice. Apple was twice and is now about 4.4 times bigger.
  3. In terms of operating income (i.e. before R&D, SG&A and OI&E) the ratios were 1:4.48:1.53 and are now 1:2.28:4.82. Microsoft’s income gap to Google halved while Apple’s more than tripled.
  4. Google and Microsoft have grown but not by adding new sources of revenue. Apple grew its base but, more importantly, added new businesses for spectacularly more growth.
  5. Compared to Microsoft and Apple, Google’s revenue is distinctly single-source: advertising. Though divided between own sites and those of affiliates, advertising is today 96.1% of revenue and was 98.6% four years earlier.

If we compare the individual product/business operating incomes individually we see some interesting patterns:

  1. Google’s advertising profits have overtaken Windows as has the iPhone and the iPad may do so quite soon.
  2. Microsoft’s Business (Office) and Server businesses are growing more quickly than Windows
  3. The hardware oriented Apple’ operating margin is now 37% and exceeds Google’s 33% while being nearly equal to Microsoft’s 38% (see chart below)

I presented a subset of this material January 30th at a TechMeetups event titled “Apple – world’s biggest startup.” A presentation by Adam Lashinsky focused on the cultural and procedural aspects which highlight Apple’s “startup” nature. My presentation showed, using these graphs, Apple’s growth characterizes it as a “startup”. The growth did not come from a broadening of its core products markets. It came from the creation of new product categories. Google, a much younger company does not exhibit this non-secular growth any more than Microsoft which is about as old as Apple is.

The lesson is perhaps that rapid growth is not the right of small companies alone. Apple has used disruptive innovation to transform itself and offers a stunning contrast to two other companies which are also seen as innovative leaders.

  • Anonymous

    Which Microsoft Segment has Microsoft Office in it?  

    I’m surprised no one has cited Andrew Carnegie’s quote on costs: 
    “Watch the costs and the profits will take care of themselves.”  
    (Good set of Carnegie quotes here: http://www.strategicbusinessteam.com/famous-small-business-quotes/andrew-carnegies-quotes-famous-business-quotes-from-the-billionaire-founder-of-carnegie-steel/)

    • Anonymous

      Horace explains that in bullet # 2. “Microsoft’s Business (Office)”

      Horace, you may want to fix Adam Lashinsky’s name. You spelled it with an “i”.

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

        Thanks.

  • http://www.facebook.com/shawnpetriw Shawn Petriw

    The outrageous growth of iPhone is causing some visual distortion in the AAPL chart for “Apple Revenue by Product Line”.

    For relatively stable, modest growth, the area of the chart appears to be a nice proxy for total volume of revenue over the period.

    However, because iPad sits atop iPhone, the area is dramatically decreased due to the outrageous slope caused by the iPhone.

    • http://twitter.com/WaltFrench Walt French

      Horace, stacked bars would fix this. Your fine points would stand out better.

      • Anonymous

        I agree.  I know the stacked line chart is the Asymco signature look, but the right side of all of Horace’s graphics can be difficult to read – especially when the big movers aren’t stacked at the top.  It is difficult to rectify in the current format because the “big movers” can vary from quarter to quarter, and the desire is to keep a consistent image over time.  Stacked bars would seem the obvious choice.  The issue is also fairly pronounced on the market share charts, where the scale is 100%.The charts would still have a distinct visual style in a stacked bar format; I don’t know anyone else on the web putting out industry data in these colors and formatting.  

        Horace, your best visuals are easily worth 1,000 words.  Sometimes the stacked lines are more like 300 words, leaving you with the work of filling in the balance with, you know, actual words.

      • Anonymous

        I think the whole point was to show “the outrageous slope” of the iPhone revenue growth and the relative contributions of each line.  The charts are great and easy to read as is Horace. Stacked bars would be much less informative and no easier to read. Tufte would agree for sure.  

  • http://www.facebook.com/christian.peel Christian Peel

    I think Clayton Christensen talks about “sustaining innovation” and “disruptive innovation”.  The last sentence ascribes Apple’s success to disruptive innovation.  Is there anything in between “sustaining” and “disruptive”? 

    Maybe anything less than disruptive innovation is not so profitable and … boring  :-)

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

      Sustaining growth tends to be foreseeable and hence the value captured by the company (from competitive advantage) or from investors is limited.

    • http://twitter.com/studuncan Stu Duncan

      Disruptive innovation is very, very hard.  There’s a reason only one company in the world is very, very successful at it.  And it’s even harder to do it repeatedly, as a business model.

      • Adrian Constantin

        There is no denying that Apple’s disruptive products have been very successful for the last 11 years. However there have been companies with significantly longer streaks in the past, like 3M or Sony. 3M has even been criticized in the past for not being able to sustain their innovations and turn them into market dominance. IBM has also had a history of creating or riding disruptive waves, although they have been on the wrong side of the disruption few times as well.

        In terms of revenue and profits, iProducts are indeed exceptional, but in terms of longevity Apple’s case is not that special yet.

    • Tim F.

      Over time, many things which Clayton had called a “disruptive” innovation look more like “sustaining” innovations or “new market” disruptions look more like “disruptions from below” — in fact, Christensen theory does a very poor job of identifying true “innovations” and leans far too heavily towards disruptions from below that are merely sustaining innovations that could be implemented much cheaper by the competition but the incumbent neglected to take advantage of.

      Thus, he ultimately divides “sustaining” innovations into two categories: (1) discontinuous or transformational or revolutionary innovations and (2) continuous or evolutionary. The argument being that a discontinuous/revolutionary innovation can change an industry but all the competitors can take part in it, rather than a disruptive innovation which is usually only fully exploited by the primary innovator.

      • Anonymous

        Christensen is no genius.  Why do people keep citing him?  Because of one gimmicky and obvious book?  

        He said Apple’s business model was flawed and that they would fail. How much more wrong could he have been?http://www.businessweek.com/technology/content/jan2006/tc20060109_432937.htm

      • berult

        Apple fails miserably as modeled disruptors go. Serial disruptors through their core are an entirely new corporate specie. If this lone-member specie survives the onslaught of economic anti-bodies, we might witness a shift from the ‘Dark Ages’ to a ‘Renaissance’ in corporate practices and strategies. As well as in cognition-centric technology.

        Christensen couldn’t have predicted from the iPod success any other outcome than the lifespan of a standard-model, ‘Schumpeter’ disruptor, …certainly not a ‘specie-fied’, ‘mutatis mutandis’ innovator. For the latter to have happened, he would have had to trade his purple hindsight genius for the crimson foresight of Jobs…

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

        You misjudge the value of being wrong. Theory building depends on it.

      • Ronin48

        I totally agree.  But with respect to Christensen, the value is realizing that he was very wrong about big things on multiple occasions regarding Apple. 

        His theories, as he himself cited and interpreted them, led him to fail utterly in predicting Apple success.  He is too often cited as some sort of visionary when he really was just restating the obvious.  And he still missed the very point of what he was attempting to describe as it relates to Apple.But I like when people are wrong about Apple: Christensen, Dell, Ballmer, Gates, almost every pro analyst, etc.  Christensen couldn’t polish your shoes Horace.

  • http://twitter.com/punirajah Puni Rajah

    Horace – Thanks again for your amazing work. Looking at the last chart, I wonder if we can quantify the impact of services. Apple has been offering fee based warranty extensions for a while now, and more recently, One to Ones and Business Support. As far as I can see, the costs have been sunk into the retail operations – Genius Bar, logistics et al. Until services revenues reach 10%, GAAP rules do not require separate disclosure in accounts. Even at 3 to 5% of total revenue, this could boost margin by almost the same % – no?

  • http://twitter.com/punirajah Puni Rajah

    Horace – Thanks again for your amazing work. Looking at the last chart, I wonder if we can quantify the impact of services. Apple has been offering fee based warranty extensions for a while now, and more recently, One to Ones and Business Support. As far as I can see, the costs have been sunk into the retail operations – Genius Bar, logistics et al. Until services revenues reach 10%, GAAP rules do not require separate disclosure in accounts. Even at 3 to 5% of total revenue, this could boost margin by almost the same % – no?

  • Anonymous

    A mistake a lot of people are making is they think Apple is *like* a startup, but it actually *is* a startup.

    The reason it is so large is it was built to address a giant global market for personal computing devices that replace typewriters, phones, entertainment systems, clipboards, books, cameras, and many, many other devices. That is why they make so few products. They are built to deliver billions of devices per year at some point soon. Retina Display replaces paper.

    I think they are going to get monstrously big. Microsoft and HP and other partners should be merging to create a competitor before it is too late. There is no time to do Windows 8 in a 1990′s workflow where everything is in silos at dozens of separate companies. Only one (1) iPad competitor is needed, not hundreds of crappy non-competitors.

    • http://search.websonar.com:8080/ Duane Bemister

      It’s already too late to compete with the iPad. When Apple releases the next iteration I expect they will price the current version to take market share in education and then eventually their new iBooks format will become as ubiquitous as pdf. Home run!

      See .

  • ayresdl

    Horace, isn’t characterizing Apple as a startup an argument against it sustaining its current growth rate? Is it not the same argument that someone who undervalues AAPL might use?

    • Anonymous

      It’s a reference to an interview with Steve Jobs at the D conference a few years ago. He described Apple as being structured like a startup despite its huge size: The largest startup in the world.

      I’m sure it does sound scary to investors looking for a stable, reliable stock, but it’s that startup structure which allows Apple to repeatedly disrupt like a startup and grow like a startup. It doesn’t get lethargic under its own bulk like a big old blue chip does.

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

      Depends, I suppose on the definition of a startup. I think it signals rapid growth.

    • http://wmilliken.livejournal.com/ Walter Milliken

      Startups normally either die quickly or grow quickly (or get assimilated, which usually happens to any one that grows fast).

      The other thing that makes Apple look like a startup is the very small product line — most startups have a *single* product (with possibly some configuration variants); they have to focus to keep R&D costs down until they prove themselves in the market.

      Apple now has, arguably, only 3 products in computers (assuming the Macbook Pro/Air and Mac Pro ending rumors): Mac Mini, Macbook Air , and iMac, three phone products (but only one current one, the 4S), and a handful of iPods, of which the most important is actually a variant of the phone product. And there’s only one iPad currently.

      Basically Apple looks like three startups with three different businesses with a shared software base, plus some shared infrastructure like the production chain, stores, iTunes store, and iCloud.

      To me, it looks like Apple is a startup factory with its own massive internal funding source and logistics system.

  • http://twitter.com/WaltFrench Walt French

    Horace, I hadn’t previously seen the breakout of Google ad revenues between its own, and “network” ad revenues. (Thanks, and a link reminding us how to get to your charts’ data would be great!)

    To the extent that Google is a relevant competitor (which you seem to think), I wonder about the split. By my eyeball approximations, Google’s own sites have gone from 2/3 of their ad revenues to about 3/4. This means that Google is less and less about the “open web” that its proponents claim — at least, revenue-wise — and increasingly about its being a portal that keeps ad exposure on the reservation. (Ergo, Google+ etc.)

    Own-site revenues can grow nicely, but it won’t enjoy the synergies of others’ involvement. Likewise, further investment in Android isn’t likely to drive those revenues; Google made a great leap with Android in preventing Microsoft from potentially cutting it out of mobile search, but that victory has long been relegated to the history books.

    Maybe Google can use Moto to see some returns on Android, but that sure hasn’t been the story you’ve presented over the last few quarters. I sure wonder what disruption they think they’ll be rolling out next, to reinvigorate their business.

    • http://wmilliken.livejournal.com/ Walter Milliken

      Google becomes a telco/cableco, I think — it lets them own customers more certainly. Look at the recent news about their Kansas City fiber buildout and the TV ground station. Google’s competition is really the other major distribution channels for advertising, which are TV, radio, and (ahem) magazines and newspapers. Their major goal should be capturing more eyeballs for longer periods of time.

      The other obvious move for them would be to set up a free “Google Games” site to suck the air out of Facebook+Zynga. Lots of eyeball dwell time there….

      • http://twitter.com/WaltFrench Walt French

        Well, let’s agree that “it’d be interesting if they went that way.”

        With the increasing emphasis on Google sites, and services such as GMusic, GTravel, GWallet and etc., Google is putting itself up as a direct competitor to Amazon, Expedia, PayPal, etc.

        Nothing wrong with that, but sooner or later your synergies become negative ones.

        I think that people would LOVE for there to be stronger search and ad relevancy, but their favorite sites will stay away from it. Last year I came up with “Peak Ad.” As the cost of access falls relative to the value of our attention spans, ads that pay for access become increasingly a bad proposition for users, and Google gets put more & more into a box.

        That’s why I say it’ll be interesting to see what disruptions they can cook up next. It’s going to have to be over SOMEBODY’S dead body; they better be sure they’re ready for the kill before they become a major threat.

  • esoteric

    The graphs are beautiful, but would be easier to read if, on corresponding charts, the items were in the same order, and hence the same color . For example, the two Apple charts plot the same seven product lines, but in a different order/color.

    • Ivan

       I agree.  Great graphs but hard to read. The first graph above neatly ties a name to a line.  Good.

      The second one makes me match some color to a name.  Light blue, or aqua, or green is. . . what?  Which one is Microsoft operating margin again?

      Direct labels are easier for us. (Although probably a bitch in the software.)

  • Anonymous

    If the visual of the operating income graph is not enough for Microsoft or Google to change strategies, then I do not know what will.

    A PC business model in a post-pc world, is not good enough. 

    I would love to see Google shift strategy with Motorola, and better compete with the iPhone.  If Google can produce a premium android phone, and forever remove fragmentation (with at least one manufacturer).  Although I doubt they will ever see the level of subsidies the iphone gets.

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  • http://www.noisetech-software.com/Home.html Steven Noyes

    This tells me that Office everywhere is more important than Windows everywhere.

    Nice write up as always.

  • rudzuna

     http://www.bloomberg.com/news/2012-02-17/apple-s-stock-may-not-be-as-cheap-as-it-looks-jonathan-weil.html

  • rudzuna

     http://www.bloomberg.com/news/2012-02-17/apple-s-stock-may-not-be-as-cheap-as-it-looks-jonathan-weil.html

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

      Earnings are a matter of opinion. Cash flow is a fact.

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