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symbolset's Journal: MSFT is 90% of AAPL 2

Journal by symbolset

Less than a month ago Apple passed Microsoft in market capitalization. Market cap is a fairly artificial representation of the value of a company, easily swayed by sentiment and whatnot - however in capitalism a thing is worth what it will bring and on that day these two companies outstanding shares met parity. This was an astounding moment in history, because even ten years ago Apple was a thirtieth its size or less, and Microsoft was more than double its current size in market cap. To achieve this meeting it's of obvious necessity that the small one that grew did things most excellently well, and the big on that shrunk did things - let's be generous - somewhat less well. Less than a month later, today Apple's market cap reached 110% of Microsoft's.

It seems that in economics as well as physics, thing have mass. The larger a thing is and the more motion it has, the harder it is to stop. So it is with large companies that they seem to have a certain mass that makes them difficult to turn. When a company is clining toward much growth, like Apple is, it takes a major action to turn it from growth to decline. Microsoft took this turn once in January of 2000, about the time Steve Ballmer was made CEO. When a company is declining, it takes a major action to turn it toward growth, much as Apple did in 1996 when, coincidentally, Steve Jobs was acquired with NeXT. Absent a major action, companies tend to stay on their same course - within the scope of the economy at large.

Apple is in rapid ascent and Microsoft is level or declining slowly. This is true this past decade generally, and in relative terms between these two companies, literally. It's vector math. It should surprise nobody then that even though they met parity less than four weeks ago, today Apple's market capitalization exceeded Microsoft's by 10%. Yes, there were some fools claiming that Apple was in a bubble that would pop - at this point it's clear whose bubble popped, and it's not Apple's.

Most market analysts are re-raising their estimates for Apple for the third time this year on news that Apple - despite having enviable production ramp skills and capacity - can't make their products fast enough to meet an ever swelling demand for iPads and iPhones. Apple may be forced against their will (gasp!) to increase prices to slow down demand to meet production capacity growth before people start rioting at their stores. And the new products aren't stopping either - an "Apple TV" is on the way for fall release, each in-demand product has innovative enhanced products in the engineering pipeline. There are rumors - rumblings really - of something much, much more. Meanwhile their competition is standing around with their mouse in their hand wondering what happened - no real competitive products are announced that launch before the end of the year.

And then there's the applications. You see, these widgets are worthless to you unless they do what you want them to do. Apple has this covered with a rich suite of over 200,000 applications that are available in an application store that's embedded in each product. Just give them your credit card number once, and anything anyone ever thought of to make your widget do, it can do. You can even make it buy you more Apple products. You can buy nearly any song, movie or book you've ever heard of too. Someday maybe you'll buy a car with it. The competition? Flat-footed here as well.

Why is Apple growing while other PC vendors are stagnant? It's because Apple doesn't rely on Microsoft for permission for what to invent, and can extract margins through product differentiation. Mainstream PC vendors are dependant on pricing of Windows to maintain their profitability in a cutthroat market Microsoft invented, where the software is king and the platform is a generic low margin product - the manufacturing margin of which is completely less than the variability of the pricing of Windows. HP, Dell, ASUS, Acer, Lenovo and the rest could not risk being the most expensive product in that field and so had to sumbit to Microsoft's permission on what they could invent, or Microsoft would raise their licensing fees to where they could not compete. This is changing now - HP has bought Palm, Dell has Android slates of a kind. This isn't because Microsoft permits it, but only because these companies know now that to surrender to Apple without an answering product is the more certain course to death. For some of them, it's too late. The change is the important thing. Control once lost is difficult to regain. In driving it's easier to avoid a skid than to recover from one. Microsoft is clearly skidding.

The surprising thing is that analysts are re-iterating a "buy" recommendation for Microsoft, with lower estimates. Microsoft hasn't released an innovative new product that took the market by storm since, well, Windows XP in 2001. Every few years they move the buttons around in Office and produce a new skin for Windows, but except for total foul-ups like Vista there's been nothing new of note for a decade - certainly nothing newly profitable. They have however found numerous ways to dissipate their immense profits including their mobile phone efforts, gaming consoles, online services and search. Looking forward, there's nothing promising in the pipe. Nothing. Zip. Nada. Nil. W7 looks like another routine OS update that will continue to generate revenue. The new office? No. They released a forefunner to their new Windows Phone 7, the Kin. At last report that platform had moved a credible number of units over two months for a single girl scout selling cookies, not a global IT monstrosity partnered with the nation's largest wireless company. This doesn't bode well for their Windows Phone 7.

Microsoft, even as it's falling, continues to attempt to leverage every part of their once formidable dominance into every product. The Windows Phone must have Bing! It must have Silverlight apps and key into Office and Exchange. They don't get that the inevitable interconnectedness of every bit they makes is what's causing their products to be toxic. This is not a "buy", this is "do not want". The company hasn't given growth in over a decade, and it has no prospect to. It has no place in your retirement portfolio. Stuffing your cash in a mattress is a better deal.

I'm tired of this line. That this would happen has been obvious for years. If you can't be bothered check the weather you deserve to get wet. The climate changed. Get over it.

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MSFT is 90% of AAPL

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