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The Interlopers

Google, Microsoft and Apple all had reasonably good second quarters. Microsoft’s revenues grew by 4%, Google’s by about 22% and Apple by 23%. Apple’s growth was disappointing but the other companies weren’t. The revenues for the three companies are shown in the following charts:

 

I also showed the performance of each company’s operating income in the bottom three charts.

Microsoft did declare a one-time write-off of $6.2 billion which it spent on aQuantive a few years ago. That was booked as contributing to a loss of $6.67 billion for its Online Services division. Without that one-time charge consolidate operating income would have grown at about 3.6%. Google’s operating income grew at a rate of 11% and Apple grew (again, disappointingly) at 23.4%.

Apple’s operating margin fell to 33.1% while Google’s fell to 29.2%. Microsoft’s margin evaporated due to the one-time charge. If we back that charge out, the margin would have slightly topped 35%.

Comparing the contribution (in operating income) for each division or product line (where possible) gives the following view:

I tried to remove some noise by isolating the iPhone and iPad and consolidating Microsoft overall and Google.

By also smoothing out seasonality with a four-period moving average we can observe the pattern of growth for the iPhone and iPad relative to the other companies’ overall performance.

The crucial question remains if and when the iPad will be a bigger business than Google and/or Microsoft. The iPhone climbed over both some time ago.

  • Walt French

    Magical and revolutionary as my wife finds her iPad (it is obviously tremendously more useful & fun than ANY other computer she’s used), from my perspective it is mostly just one really fine PC — a sustaining innovation, in our argot. People can easily see how one would fit into their life. Last night in the MSP G concourse, I saw workers setting up a new “Brasserie” restaurant with (apparently) an iPad at each seat. Menus, maybe even orders, refills & checkout, I’d guess. My thought had been that restaurants, often economically-challenged, would go for lower-cost tablets.

    In contrast, my early look at pocket computers, soon to be known as “smartphones,” led me to wonder how anybody could get any benefit from the tiny screens and slow connections. Not nearly so obvious; the explosive growth of the iPhone, in the middle of a severe recession, is an astonishing fact.

    While smartphones are becoming so ubiquitous that soon we’ll see them included in the UN list of human rights, tablets — and yes, that’s still mostly “iPads” — seem to have many multiples of growth yet.

    • pk de cville

      Irony:

      “Not nearly so obvious; the explosive growth of the iPhone, in the middle of a severe recession, is an astonishing fact.”

      How many iPhones would have been sold w/o Android validating Apple’s innovation?

      This was Google’s gift to Apple and now Apple has the opportunity to out-innovate, out-produce, out-support, and out-market the followers.

      I’m long Apple and I want them to win this contest.

      • vincent_rice

        This makes no sense. Had there not been Android there would have higher sales of iPhones. Android was a competitive reaction surely?

      • unhinged

        Had there not been Android there would have been a small difference – Apple was supply-constrained to a large degree prior to the iPhone 4S (which has still suffered from supply constraints, just not for as long a period) and iPad 3.

      • JohnDoey

        That is simply not true. Samsung could have made real iPhones for Apple instead of fake ones for their own mobile unit. Android enabled them to essentially rebrand iPhones with the Samsung brand. They did not make a way to make more iPhones.

        The original iPhone was the first iPhone, but it was like the 17th iPod. Apple is the best in the world at making huge quantities of iPods. That is true now but was also true in 2007. Samsung’s devices sell in much smaller quantities. So Apple on,y needed Samsung to make parts. Apple did not need Samsung or anybody else to make iPhones. Even if outside the US in 2007, there was iPod touch since September, 2007. Consumers have always had plenty of authentic ways to solve their iPhone demand. Selling them a fake iPhone for $400 that has at most 5% of the functionality of a $189 iPod touch with $49 flip phone is not doing them a favor.

      • Walt French

        Dang, I missed seeing those ads that said, “iPhones: you’d love to have one, but you won’t leave Verizon. Have we got a deal for you!”

        Apple’s ads were all about what you can do with the little critters. Droid ads were all about how they were faster, more macho, ran Flash. Not a single peep about why smartphoneS were valuable, in a way that reinforced Apple.

        What evidence do you have for this theory that seems so cockeyed to me?

      • JohnDoey

        Don’t forget that Verizon got the iPod touch 2 years before they got the iPhone. I was working on a team in 2008 that was at 2 locations, one inside AT&T 3G who all had iPhones, and the other that had no AT&T who all had iPod touches and Verizon flip phones. We all ran the same apps, did the same things. They were better off than people who bought counterfeit iPhones who can’t even run iMovie.

      • http://www.facebook.com/bob.arker.731 Bob Arker

        VALIDATION from Android? Are you kidding me? Apple did not need validation in order to sell their products.

      • orienteer

        I honestly thought it was a typo, and should read “How many iPhones would have been sold w/o Android VIOLATING Apple’s innovation?”

      • orienteer

        I honestly thought it was a typo, and should read “How many iPhones would have been sold w/o Android VIOLATING Apple’s innovation?”

      • addicted

        Lol…that’s what I read it as. The iPhone was validated well before Android came around.

        The real interesting hypothetical question would have been is how few Android devices would have sold if Apple had been openly available on all carriers before 2011 (and still isn’t available on all carriers).

        Or, how few Androids would have sold if Apple launched a price-competitive non-subsidized iPhone for the prepaid and non-developed markets. (Apple can easily do this at healthy margins of over 30-35%, but it would hurt the tremendous probably above 50-60% margins they currently get for the iPhone)

      • GuruFlower

        Apple needs Android to avoid the problems associated with a monopoly just as Microsoft needed Apple many years ago for the same reason.

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

        Apple needed no validation of their design. Like the iPad, Apple knew they had a hit and not because they asked people what they wanted. The designed a new and unique device using the available technology.

        Google gets credit for being the first major company to see immediately what a sea change the iPhone was and shift away from the BlackBerry clone mindset to the touch based candy bar phone.

      • JohnDoey

        Well, Google had knowledge of iPhone years before it shipped. That is part of why their copying was so egregious. Because of what Google did, the competitive response to iPhone from the market started before iPhone even shipped. Apple came into the market as a new player, and giant entrenched phone makers like Samsung were given a years-long head start in their competitive response, and then Samsung filled in the rest by copying Apple. That is why neither Google nor Samsung take responsibility for the blatant plagiarism that is the Galaxy phone — each copied only half.

        The sad thing is, Google missed a chance to create a unique Google interface, same as when Microsoft copied the Mac, they missed a chance to create a unique Microsoft experience. Sounds like no big deal, but if Microsoft had skinned DOS themselves by hiring industrial designers and making a real product, they could have essentially invented the iPad, 25 years early, with full screen apps because they had small screens and that is the DOS way also, and then they wouldn’t be just getting around to building their own interface in 2012, when they are losing what remains of the PC market to the Mac’s successors. Google’s white pages and mishmash of typefaces and blue links and anything better has to be copied from outside is a symptom of their lack of designers and artists, and it is like a gaping hole in their business that they don’t patch because of Nerd Dogma, but some of their customers want design, so Google steals it for them.

      • Walter Milliken

        The only “validation” I see was Android copying the iPhone’s UI style, which simply validated the fact that the iPhone was a market success.

        BTW, Twitter comment login isn’t working.

      • JohnDoey

        That is crazy talk. iPhone had already eaten the industry before Android got any mind of momentum. Once a phone maker started failing because of iPhone, they switched their software to Android to try and win those users back.

        iPhone was the best-selling phone on the market before the first Android phone was even pooped out. iPod validated the iPhone. The Mac validated the iPhone. Apple Retail validated the iPhone.nThe fact that the whole phone market was running 1990 graphics and baby Java apps when iPhone shipped with 2007 graphics and real native C/C++ apps validated the iPhone.

        What some nerds thought about Androidnor what some desperate, failing phone makers used as a lifeline had nothing to do with iPhone’s success. The fact that Google tried to ride Apple’s coat tails and gets lumped with Apple because they are down the street from each other also had nothing to do with it.

    • JohnDoey

      There are no lower-cost tablets than iPad. Restaurants do not have I-T staff. The most administration you can ask for their menus is iPod class administration — plug into iTunes to backup or restore. iPad is actually easier than that. Other tablets are like PC’s — you have to do it all yourself and there are viruses. So even if a restaurant bought “tablets” for 25% of the cost of iPads, it will be MORE EXPENSIVE.

      Hiding the full cost of TCO by leaving stuff out at purchase time is the most popular way that nerds con consumers out of their money and leave them high and dry. People understand this now. They don’t want a box of generic something that may or may not do what they need no matter what they do, and even to do simple things requires a lot of expense and configuration.

      Also, the wait staff and customers have to be able to pick up the menu and just use it, like people do with iPads, not struggle to turn it on like other tablets, and then it crashes.

      The whole generic tech thing is over. The iPod proved that by selling 3 iPods for every generic player sold. There is a list of practical things that iPad can do that is now in the consciousness of everyone who saw an iPad commercial or knows what an iPad is. They are not just “tablet” things, they are also Mac things, iPod things, iPhone things. There will not be a generic tablet that does those things.

      Finally, I have to remind you that Apple has the cost advantage from economies of scale. A bag of iPad parts costs more than an iPad — unless you are Apple and you are buying hundreds of millions of parts. So you cannot go to a non-Apple vendor for a cheaper iPad. Other 10-inch tablets cost more than iPad.

      • Walt French

        Maybe the setup will be complete when I fly back out tomorrow night, and I’ll get to look more closely. FYI, the iPads are tethered (chained), always on.

        The appropriate software maintenance for a device would be to install a fresh copy of the software each night and lock out any downloads; maybe remove control panel apps. I assume Apple does something like that to keep its retail stores’ floor units fresh and free from browsing histories to porn sites, etc. Not as complicated as fixing the wifi that goes bad at some chains I visit: it’d require one golden image at Corporate, pushed out to each location.

      • Flitcroft

        You may be referring to Taste of Shoyu, a noodle shop at MSP concourse G. I passed by last night and all the tables had their iPads up and running. Photos are on Yelp: http://bit.ly/OM4u5E

      • Walt French

        Seems that the “OTG Group” won ALL the concessions on the G Concourse and is upgrading their “Taste of…” places. Similar layout from the pics, to what I saw at Brasserie near G1. I hadn’t seen Shoyu. Maybe tonite when I return.

  • Superman

    Apple’s grow is disappointing because their performance for last quarter isn’t as good as moving average across previous.

    • http://openid.aol.com/steffenjobbs I. M. Wright

      Well, I have a problem with hearing the term disappointing when the whole economy has flatlined and Apple is expected to perform as before when other companies are performing much worse. There has to be some relative measurement to show that Apple is only performing in step with the economy and can’t possibly perform according to some absolute number. As long as Apple is performing better than most companies in that industry in a downturn, Apple’s performance should never be seen as disappointing because that makes no sense at all why investors would see it that way.

      • JohnDoey

        The main problem is that Apple beat their own guidance, therefore we have no right to be disappointed. People inside Apple with inside knowledge made a prediction and then beat that prediction. People outside cannot reasonably second guess that.

    • vincent_rice

      I think Horace was having a little joke at the expense of ‘Analysts’

  • Dada

    I think it is a mistake to always measure growth in relative terms. Horace, could you please provide us a comparison of how Apple performs against others in absolute terms ?

    • jawbroken

      Not sure what you mean. All the charts of revenue and operating income are in “absolute terms”.

      • Dada

        I meant an analysis of how much Apple grows compared to others, or itself. Of course the charts show the absolute values; but when Apple has a “disappointing” quarter such as the last one because the growth was smaller in relative terms, it would be interesting to know if the added business of this quarter is bigger or smaller as the one of the previous year.

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

        Yes, but everything is in relative terms (%). Seeing it in absolute terms might also be interesting. Maybe the maximum growth a company can achieve is a fixed amount ?

  • http://twitter.com/ChristianPeel Christian Peel

    A related question is how will the iPad grow with respect to the iPhone. In a more logical world, the iPad would have come first, and disrupt the PC, then the iPhone would have come along and disrupted the iPad. As it is now, I believe many will just skip right past the iPad; it may never pass the iPhone.

    • jamesthiele

      The world is logical. The cost of touchpad screens per square inch was much higher when the iPhone came out so they went with the product with the smaller screen.

      • JohnDoey

        That also required a smaller battery, and smaller storage (first iPhone was 4GB/8GB — 4GB on iPad would be absurd) and which had much smaller computing competition in the phone market where everything is baby software even today. (Windows Phone 7 is the Microsoft PDA system from 1996; Android has 2005-era Java applets and Windows XP -style viruses, BlackBerry is a pager.)

        The beauty of their strategy is that Apple started outside of their wheelhouse. iPhone is the unknown territory for them, with phone carriers, and a screen much smaller than OS X was designed for, and ARM was very limited in CPU/GPU power at the time. By the time they got to iPad is was much more comfortable territory. Now, iPad 3 is basically a Mac. ARM is getting PC class power and iOS is very mature and so are the 3rd party apps. So in a way, they climbed a mountain first and have been coming downhill ever since, picking up speed. They just have to keep stealing stuff from the Mac as they grow iPad and iPhone.

    • https://twitter.com/#!/azulum azulum

      The flaw here is that you think the iPad and the iPhone aren’t complementary. So let’s take a look: the iPhone comes along based on the technology that they put into the iPad. It’s a bit easier to do given the then-current limitations of technology. People buy it. People love it (and the iPod Touch, too). The iPad comes out and they already know how to use it. And they love it.

      Now reverse it. Do you think that an iPad would obviate the need for something more portable? The iPad and the iPhone have complemented each other. And the Mac is doing better because of them, even though Cook mentioned the iPad cannibalizing some Mac sales. The benefits of being integrated in Apple’s ecosystem have lead to the Mac growing despite being part of a market on the non-growth side of the S-curve.

      The iPad and the iPhone are like cars and tires, hot dogs and buns, summertime and baseball. They don’t replace each other, they augment each other.

      • https://twitter.com/#!/azulum azulum

        Also, look at the strategy they have employed:

        Start with the Mac, then introduce a…Big Thing: iMacSmall Thing: iPodSmaller Big Thing: PowerbookSmaller Small Thing: iPod Mini/NanoBigger Big Thing: 20+ inch iMacsEven Smaller Big Thing: Mac MiniEven Smaller Small Thing: iPod ShuffleBigger Small Thing: iPhone/iPod TouchEven Lighter Big Thing: MacBook AirEven Bigger Small Thing: iPadEven Smaller Bigger Small Thing: iPad Mini/Jr.Even Bigger Bigger Small Thing: iTube*

        That’s some portfolio

        *My name for the oft rumored Apple television set

      • barryotoole

        I like iTube, although it is more like a CRT monitor. How about iScreen?

      • https://twitter.com/#!/azulum azulum

        I like iTube better — it’s phonetically similar to the other iProducts, plus it’s got an implicit jab at certain Google product.

      • barryotoole

        Point well taken.

    • JohnDoey

      It amounts to the same thing, because the PC market is much smaller than the phone market.

      If iPad comes first and disrupts the 1 billion strong PC installed base, iPhone would still be a bigger deal later, disrupting the 5–6 billion mobile phones.

      A couple of years ago, I would have said we all go to at least an iPad because of the size of video or books on a phone is not really enough. But once I sat around an AppleTV with my iPhone and a couple of other iPhone users, sending AirPlay video to the TV in turn, I think the number 2 device after the iPhone is an AirPlay TV, and the bookish get an iPad also, and the developers and producers add a Mac to all that as a set of professional tools that most people don’t need. But you are still talking about the phone being way more, because it is a wallet, ID card, it announces your physical presence and your phone number is now part of your personal identity, not a fixture of a building. One day we might have to have phones, to where if you can’t afford one, your government gives you one so that you can shop for food and vote. But it is unlikely we would have to have iPads. That is a step down in priority.

      • dteleki

        “One day we might have to have phones, to where if you can’t afford one, your government gives you one so that you can shop for food and vote. ”

        …and job-hunt too. In the U.S., “One day” is today:
        http://www.safelink.com

  • http://www.facebook.com/alen.teplitsky Alen Teplitsky

    i’ve been thinking about dumping my iphone and getting a second ipad for the house. i have a work cell phone which i hate but is OK. wifi is everywhere and for a lot of things i really don’t care about having data every second of the day.

    i can break my family account and put my wife on prepaid for $40 a month and just use an ipad. out of our 4GB data we pay for we only use 1.5GB or so.

    • JohnDoey

      What is needed is an iPod touch 3G with iPad 3G -style $30 per month unlimited data. I’m not sure why my iPhone bill starts at 3x my iPad bill.

      • mark212

        Check out Virgin Mobile. No subsidy on the initial purchase of the phone, but the no contract unlimited data and text plan (with 450 minutes talk) is about $35 a month.

      • http://twitter.com/gadgetenvy Carrie Carlson

        Or go with T-Moble, $35 per month, 500 minutes of talk with zero data, I use WiFi for my data, bring your own unlocked iPhone.

  • JohnDoey

    If Apple ships the rumored iPad Air then I think it will be like the second coming of iPod nano, which became the most popular iPod immediately. I have a friend whose first Mac was the original 11-inch MacBook Air, and she has been able to resist the iPad so far, but I told her there may be an “iPad Air” and she goes “when can I buy?” She didn’t even have to hear more anything past “iPad Air.”

    Also, the 2013 iPad will be introduced about 5–6 months after Windows 8 ships, when everybody has figured out it is the same old same old as usual, and the choice will be a powerful, PC class 2013 iPad with Retina and tons of apps and free iOS 7 coming six months later, or the uncertain future, low number of apps, the even lower number of quality apps, and long, long, expensive upgrade cycles of Windows. iPad looked great last year against the future Windows 8 and will look even better next year against the current Windows 8.

    • Guest

      You had me until “out running” with a 7.5″ tablet.

      • NetMage

        You may want to read more carefully.

  • http://riskinit.com jriskin

    It’s interesting to look at Apple compares to MS and Google without the iPhone/iPad. If you eliminated those two products, you could argue while Steve Jobs (one of my personal heroes) did a good job of turning apple around, it wouldn’t be anything close to the runaway success that it has been. It’s fascinating just how critical the iPhone was to the makeover. If the wireless carriers hadn’t left such a gap in the market or didn’t allow Apple to get their products on their networks, things would have been VERY different. Sure iPods, Mac products, etc all are great, but don’t generate anywhere near the revenue needed to propel Apple in to the stratosphere

  • Watcher

    Has anybody told the story of aQuantive? How does one miss by 6 billion dollars?

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