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Analysis: Apple Beating Microsoft in Profits is Triumph of Something Bigger than Hardware Over Software

Analysis: Apple Beating Microsoft in Profits is Triumph of Something Bigger than Hardware Over Software

Summary: In the most recent quarter, Apple hit $5.9 billion in profits, bigger than Microsoft's $5.2 billion. That's remarkable, but for more than the rare financial triumph of hardware over software.

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The conventional wisdom in high-tech is that making hardware is a grubby, low-margin business and that software is as close to printing money as you can legally get.

In the past year, Apple had already surpassed Microsoft on benchmarks such as market cap and quarterly revenue, but topping them profit-wise is the most significant yet. With all of the pent-up demand for the iPad 2 due to Japanese disaster-related delays, Apple's near-term profits will only increase.

As we all know, Apple makes all most of its money selling hardware. Microsoft makes about 85% of its revenue selling software (about 10% comes from selling Xbox and Kinect hardware, the rest comes from the money-burning online division).

That a hardware vendor could be more profitable than a software vendor, especially one with multiple franchises with steady revenue streams from corporations (Windows, Office, Exchange, SQL Server, SharePoint, among others), is incredible.*

Still, I don't consider Apple bigger profits ($5.9 billion versus Microsoft's $5.2 billion) a triumph of hardware over software. Hardware remains a dog-eat-dog business. That's why HP and Dell are moving away from PCs towards software and services, while IBM totally got out of them. Software, provided it is not open-source, remains much easier.

What I think this shows is a triumph of a third factor: good design. By design, I don't just mean trendy materials or beautiful hardware shells or cute icons. The artsy stuff that employs graphic designers. That's key to the Apple magic, but it's only the top level stuff.

What I mean is intuitive user interfaces, tight integration between hardware and software and OS, and a control freak attitude towards your partners' quality control (i.e. developers in Apple's App Store).

That's the deep stuff that most tech vendors, due to their reliance on not-always dependable partners, can't duplicate.

The conventional wisdom about why Jobs almost killed Apple's decline and Microsoft's rise1995 timeframe was that hiJobs' hardware fetish blinded him to the potential value of licensing the Mac OS to other PC manufacturers in the early 1980s, which would've allowed Apple to gain some/all of the profits that Windows got instead. When Jobs returned to Apple in 1997, he killed the Mac OS licensing program that had only been started two years earlier under CEO Michael Spindler.

I have an alternative explanation. Jobs actually overvalued the Mac OS, in the sense that he believed that controlling both hardware and software was the only way he could control the third factor, design, and turn out the best products he could.

As Apple's success today shows, Jobs' attitude is perfect for today's mature hardware market, where differentiating what have essentailly become commodity products through good design/usability is the way to huge profits. It would also carry over well to mature consumer electronics markets like TVs or stereos, which is why Apple is so often rumored to be moving into those markets (Bose has employed this formula so well).

Unfortunately, Jobs' attitude was woefully out of step with the market 20 years ago, when PCs were new and expensive. Consumers weren't yet jaded and looking for the radically-designed, beautiful thing - they were just trying to get their hands on a PC for a decent price. Perfectionism doesn't scale.

Also, Jobs' attitude clashed with IT buyers. To a CIO, a computer that was too attractive or cute radiated a lack of seriousness of purpose. Mainframes are about as opposite from cute as you can get.

Today's enterprise IT market is far different. Cloud computing empowered the line of business manager to go around the command-and-control CIO.

That, and the recession's curb on capital budgets, has forced many CIOs to adopt 'Bring Your Own Device' policies and open the door to employee-owned smartphones, laptops and now tablets. It means that consumer preferences will soon start to rule many aspects of enterprise IT. And that can only mean more good news for Apple and Jobs, as well as companies like Sybase and our parent SAP, who are putting an emphasis on usability and design (see this blog post by Timothy Clark on the 'gamification of business apps.')

In other words, vendors need to think of themselves as being in the user experience/design business rather than either the hardware or software business. After all, what is providing a good user experience but another way of saying that you want to provide good customer service?

*To be pedantic, Microsoft still has a higher net profit margin than Apple: 32% vs. Apple's 24%. But as SAI's Matt Rosoff pointed out, 24% is "unbelievable and spectacular for a hardware company." Microsoft's 32% is good but not so unexpected because "software has a much lower cost of goods - once you've recovered your R&D investment, every sale is pure profit."  And expect Apple's quarterly profits to continue to beat Microsoft's.

Topics: UberMobile, Apple, CXO, Enterprise Software, Hardware, iPad, Microsoft, Mobility

Eric Lai

About Eric Lai

I have tracked technology for more than 15 years, as an award-winning journalist and now as in-house thought leader on the mobile enterprise for SAP. Follow me here at ÜberMobile as well as my even less-filtered musings on Twitter @ericylai

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14 comments
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  • Well written...

    Eric I think you have a prophetic eye for the future of technology. Like a good war movie Apple has returned to its original goals with the once exiled leader poised to conquer. Jobs has been wounded, his health shows the signs of long fought "mental" battles, but his is the victory with a strong tech army in place to rule for years to come. I wouldn't be surprised if one day we see a white flag coming from Redmond asking Apple for help in their many failed markets.
    Mosblest
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  • i disagree

    I think this is a win for for Apple's software on a NEW hardware form-factor. They are able to get their software to market faster and with higher quality because 1, it is easier building for specific hardware than all hardware and 2, they have many years of experience keeping their focus on specific hardware and not getting sucked in to support commoditized hardware.

    The problem for them however, is that the rest of the software that can run on commodotized hardware will eventually get "good enough" and they will bleed marketshare because they can no longer compete on price.

    At this point they start focusing on the next big thing instead of trying fight a losing battle.
    mcauthon
    • @mcauthon

      The problem is when everything becomes "good enough" is when there is barely any profit in the industry. Just look at the PC market; manufacturers many very low margins.
      anono
  • apple shows its colors/ though sheep still cant see

    It is apple to rape the most profit off consumers yet sell the least amount of computers to gain this. Thus the highest markeup.

    It is almost non existent in the business world aside as a VERY expansive client to remote into work, where work is done on an MS platform.

    Apple will further mean nothing as it will not allow its consumer OSX to be vitualized. Virtualization allows consumers to have choice. While other OSes are freely being virtualized and being used in business, it shows whats to come for the consumer market. Many things like shadow copy/recovery came from the business side first only for features to filter down to the consumer market. Virtualization is a feature that is the next step for flexability and choice to the consumer market. Apple has no vision of this and has sealed its future as a very expensive toy maker.
    JABBER_WOLF
    • @JABBER_WOLF

      High end computers have higher markup. I though it was common knowledge, but apparently the sheep can't see. Furthermore, by reducing the number of models and producing in high volumes, they can further decrease costs and increase profits and that's why they make money. I read somewhere a while ago that Apple had something like 90% of the laptop market over $1000 and again the money is in higher end products. As for virtualization, being first doesn't mean much. Just look at the tablet market; there were tablets for a decade but they were poorly implemented. It's not going to be the first one out of the gate who will win, but the first one with a well implemented products. So far I have not been able to use virtualization much to my benefit.
      anono
  • You are wrong about Steve Jobs.

    "Jobs almost killed Apple in the 1985-1995 timeframe"<br><br>Steve Jobs was fired (or left, depending on who you talk to) from Apple in May 1995. He founded two companies called NeXT Computer and Pixar before returning to Apple in 1996, Apple having bought NeXT. Bringing Apple out of its near-bankruptcy state, Steve Jobs led the company into an era of prosperity, where it released the iMac, Mac OS X, the iPod, the iTunes Store, the MacBook and MacBook Pro, the Mac Pro, the iPhone, the MacBook Air, and the iPad. Today, Apple is the second most valuable company in the world.<br><br>Moral of this comment? Know your Apple history before you bash Steve Jobs.
    fumoboy007
    • RE: Analysis: Apple Beating Microsoft in Profits is Triumph of Something Bigger than Hardware Over Software

      @fumoboy007
      Moral is OK but I think you meant Jobs left Apple in *1985* etc., thereby rendering this article to a dog's breakfast.
      enzos2
      • RE: Analysis: Apple Beating Microsoft in Profits is Triumph of Something Bigger than Hardware Over Software

        @enzos2 @fumoboy007 Thanks for reminding me on the dumb mistake above on the timeframe. I've corrected above.
        ericylai@...
  • RE: Analysis: Apple Beating Microsoft in Profits is Triumph of Something Bigger than Hardware Over Software

    No hardware maker is executing on Apples level, but Apple's biggest reason for it's success is the Apple store, without it Apple would still be trying to peddle it's expensive products to what was then largely indifferent. Retail outfits like comp USA and Best Buy, You can't take away from Steve Jobs sense of hardware style, but initial presentation is everything, something Dell has yet to figure out. Take away the Apple store and their sales would be a fraction of what it is today.
    JAlva05
  • Apples with Oranges

    65% of Microsoft's income comes from Businesses while Apple is mainly a consumer company. Apple and Microsoft don't even have two products that compete with each head to head. So why the comparison?
    tamer@...
    • @tamer@...

      They share two different business models (ie software only for MSFT and hardware only for Apple) and they dominate different markets. However to say they aren't really competing is a huge understatement. If Apple continues to crush MS in the consumer segment, it will inevitably then put their efforts in the business segment and MS is already trying beat Apple in the consumer segment so they definitely are competing.
      anono
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