Jan 282015
 
800px-Steve_Jobs_and_Bill_Gates_(522695099)

The stunning quarterly results of Apple announced yesterday compared to Microsoft’s indifferent performance illustrate how the fortunes of two different business cultures have changed.

Apple yesterday announced a spectacular result for its quarter finishing at the end of last year with  revenues up 30%, profits by 38% and Earnings Per Share just short of fifty percent.

The announcement was an emphatic vindication for Tim Cook and his management team who made some big bets on the larger form factor iPhone 6 which paid off spectacularly with shipments growing 46% to 74.5 million and revenue reaching $51.2 billion, over two thirds of the company’s total sales.

One notable aspect of Apple’s success is the difference with Microsoft’s and this shows how different business cultures come in and out of fashion.

The Triumph of the MBA

For two decades Microsoft’s licensing business model was dominant and this confirmed the MBA view that companies should do everything they can to move design, research, manufacturing and distribution out of their operations – the virtual corporation where there was no inventory, few costs and even fewer risks was the ultimate aim of the modern manager at the turn of the century.

Microsoft encapsulated this philosophy with its licensing model, while the company made massive sales with huge margins – as it still does – all the business risks in the computer market were carried by resellers and equipment manufacturers. For many years the markets loved this.

Apple tinkered with the licensing model under John Sculley in the mid 1990s during Steve Jobs’ exile but was never really serious about giving away its hardware capabilities and in 2001 moved into retail with the opening of the first Apple Store.

Coupled with the App Store, Apple have come to control the entire customer journey from marketing, design, purchase and ongoing revenue after the product is bought.

King of the new Millennium

While the 1980s and 90s were the time of triumph for the Microsoft model, the 2000s have been good to Apple as shown by the revenue and profit figures.

Apple and Microsoft Revenues 2000-2014

Apple and Microsoft Revenues 2000-2014

Apple and Microsoft Profits 2000-2014

Apple and Microsoft Profits 2000-2014

The key inflection point in these charts is, of course, the iPhone’s release in 2007. Apple caught the wave of change as computer use switched from personal computers to smartphones and is now the dominant vendor.

For Microsoft the success of Apple is bittersweet; the company had a smartphone operating system in Windows CE but it was too early to the market and the devices vendors went to market with were, at best, substandard.

Microsoft’s failure with the smartphone was also echoed with tablet computers and exposed the licensing model’s reliance on vendors to supply and support decent products, even today Microsoft’s hardware partners struggle to release decent tablet systems.

Cloudy on the web

Another problem that exposed Microsoft’s weaknesses was the rise of the web where hardware and operating systems really did matter so much any more. Along with pushing out personal computer lifecycles it also had the consequence of allowing other systems into the marketplace, notably Linux and Google Android.

With OS X, Android and Linux systems no longer hampered with the compatibility issues that irritated non-Windows users in the 1990s the market was open to adopting those systems. While the PC market has remained quite loyal to Windows, although the Apple Macs are showing serious growth as well, Microsoft’s system has barely any marketshare in other device segments except servers which are also declining as business increasingly move to cloud services.

Apple have shown in the computing and smartphone business that controlling the hardware products is as important as supplying the software, a lesson that Microsoft now acknowledges with its restructure into a ‘Devices and Services’ company under former CEO Steve Ballmer.

The problem for Microsoft is its margins for hardware are a fraction of its own licensing operations and weak compared to Apple’s returns. Microsoft makes 14% profit on its phone operations while the iPhone is estimated to deliver over 60%.

Under current CEO Satya Nadella Microsoft is focusing on cloud services which also aren’t as profitable as its legacy operations but see it competing with companies like Amazon and Google who don’t boast the profits from their online operations that Apple makes from its hardware.

Microsoft aside, the lesson Apple gives the technology is pertinent for its competitors in the smartphone space as well; companies like Samsung, LG and the army of Chinese handset vendors are going to find their markets tough unless they can take control of their software development and distribution channels – relying on Google for Android and telcos to get their phones to customers leaves them exposed in similar ways to Microsoft’s partners in the last decade.

In the battle between business models, Apple is the current winner and shows throwing all of your business operations over the fence to partners and licensees is a risky strategy. How those lessons are applied in other sectors will test the limits of both management philosophies.

Photo of Steve Jobs and Bill Gates by Joi Ito through Flickr

Jan 272015
 
Microsoft-HoloLens-PivotPoint-RGB

This morning Microsoft announced its quarterly results and, once again, they confirmed the company’s move into the cloud, a transition that means the company has to deal with reduced margins in once immensely profitable markets.

While Microsoft’s earnings beat analyst estimates, the stock still dropped on out of hours trading on the US markets. The reason being margins showed a slight decline and the impending release of Windows 10, which will be free for customers upgrading, portends a further fall in income.

The fading of Windows is best shown in the results for the company’s Devices and Consumer licensing division which covers licensing of the operating system and is the second biggest contributor to Microsoft’s revenues and profits. The segment’s takings are slowly declining although surprisingly the division’s margins are standing up.

Microsoft division performance 2014-15

Microsoft division performance 2014-15

Windows’ decline shows the post XP recovery Microsoft was hoping for the division has failed to materialise beyond a bump last quarter, as the company explained in its media release;

Windows OEM Pro revenue declined 13%; revenue was impacted by the business PC market and Pro mix returning to pre-Windows XP end of support levels and by new lower-priced licenses for devices sold to academic customers

With company making various versions of Windows 8 and 10 free, it’s hard to see the division doing anything but accelerating its decline as fewer people actually pay for the operating system.

Fading margins

Also illustrating Windows’ falling fortunes is how the Computer and Gaming Hardware division’s revenue threatens to overtake the Devices and Consumer Licensing group’s contribution. The problem for Microsoft with this that the manufacture of Xboxes and Surface tablets only boasts a profit margin of 12% against consumer licensing’s 93%.

Last week at its preview of Windows 10 Microsoft showcased its HoloLens virtual reality technology, while impressive it’s unlikely to boast margins any better than Xbox consoles or Surface tablets. At best it will be a trivial contribution to the company’s bottom line.

Microsoft Margins by operating segment

Percentage margins Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15
Devices and Consumer Licensing 87% 90% 87% 92% 93% 93%
Computing and Gaming Hardware 15% 9% 14% 1% 20% 12%
Phone Hardware n/a n/a n/a 3% 18% 14%
Devices and Consumer Other 21% 21% 21% 17% 17% 23%
Commercial Licensing 92% 92% 91% 92% 92% 93%
Commercial Other 17% 23% 25% 31% 33% 35%

Dwarfing both divisions in both revenue and profit is the Commercial Licensing segment which also boasts fat margins of 93% and accounts for nearly half the money coming into the organisation. Commercial Licensing remains static and provides the bedrock for the company’s cashflow.

The big growth area remains the cloud with the Other Commercial division, which includes most of the online and professional services growing steadily. While showing growth, this part of the business boasts a relatively low margin of 33% so any market moves from Enterprise licensing to the cloud will have a sharp effect on the company’s bottom line.

Mobile black holes

Of all Microsoft’s divisions, the problem remains the Phone Hardware segment with low margins, declining sales and a shrinking market share. Reports released overnight indicate that over a third of Lumia devices sold are not being activated which may indicate distribution channels are having to deal with unsold stock.

Compounding Microsoft’s poor position in the phone marketplace is the resurgence of Apple’s iPhone, particularly in the Chinese market where Microsoft is failing dismally. Global market share figures are indicating Apple may soon overtake Samsung as the world’s largest smartphone vendor while Android systems are coming to dominate the global marketplace.

Tomorrow Apple will announce their results and we’ll see how the two companies are travelling, the contrasts will almost certainly be striking. For Microsoft, even if they do manage a shift to mobility and the cloud, they are unlikely to repeat Apple’s success in reinventing themselves.

Nov 172014
 
apple-pay-screens

Has Apple Pay legitimised mobile payments? It appears so, reports the New York Times. Since the launch of Apple’s payments service, Google and other mobile payment providers are claiming usage has doubled with customers exploring the systems.

If this is true, it’s similar to how Apple legitimised the USB port in 1998 with the release of the iMac.

Prior to the iMac the USB port was a bit of an oddity, on most PCs the sockets sat unused and the few devices available on Windows computers worked reliably, as Bill Gates himself found out during a live demonstration at the 1998 Comdex show.

Unlike Apple Pay, the move to USB on Macs wasn’t welcome and it was a high stakes decision by Steve Jobs given that Apple’s existence was still precarious and its user base was still made up of largely of true believers who had been through years in the wilderness with the company.

Those users also had many thousands of dollars invested in Apple Device Bus (ADB) devices, all of which became redundant with the move to USB. Many customers at the time swore this was the last straw and they would move to Windows PCs.

Apple’s users didn’t carry out their threats and stayed with the company whose move to USB turned out to be a winner for the entire computer industry.

For Apple USB’s success meant their customers were no longer locked into a proprietary technology, for manufacturers they were able to start moving off archaic serial and parallel ports while for Microsoft the shift meant a better range of more reliable devices — although their operating systems struggled with USB until the release of the far more stable Windows XP.

It appears in this respect Apple Pay is repeating history in giving a boost to a technology that has been struggling to find traction in the market place.

The difference this time is that the payments industry is a far bigger market with far more implications for the broader economy than the computer peripherals segment.

If Apple raise the boat on payment systems, there are some incumbent businesses who are going to find themselves in a very different marketplace in five years time.

Oct 162014
 
using an iPad and the cloud for a point of sale cash register

Ahead of tomorrow’s announcements by Apple, the strategic leaks are happening fast on both the next version of the iPad and Google’s Nexus appearing in the media today.

The problem for tablet manufacturers is that sales have stagnated in recent times with the products no longer flying off the shelves.

Part of the reason for this is customers are happy with their existing products; a three year old tablet will do most of things a brand new one will do so there’s little reason for upgrading.

For vendors like Apple and Google it’s further proof that the PC industry model of three year upgrades is firmly dead, the sector will need something more than planned obsolescence to drive growth.

Sep 282014
 
windows-surface-at-microsoft-store

On Tuesday Microsoft are expected to announce their new Windows 9 operating system at a media event in San Francisco.

If the rumours are true, then the new system will be launched almost exactly two years after Windows 8 was released amid hopes that it would stem the PC industry’s decline.

Windows 8 didn’t deliver with most people being frustrated with the system’s inconsistent interface that tried to be unified desktop, laptop and tablet operating system which managed to be unsatisfactory on all of them.

As a consequence, users avoided Windows 8 like the plague with industry analysts Netmarketshare claiming most of Microsoft’s customers are buying systems kitted out with Windows 7 or just sticking with decade old Windows XP systems.

Courtesy of Netmarketshare http://www.netmarketshare.com

Courtesy of Netmarketshare http://www.netmarketshare.com

Making matters worse for Microsoft is the decline in personal computer sales in general with IDC estimating global shipments of both portable and desktop system will drop 3.8% in 2014.

These declines are already well established in the trends being seen in Microsoft’s business with the company’s Windows division showing an accelerating decline in profit margins.

Microsoft Windows division financial performance

Microsoft Windows division financial performance ($ million)

Should that decline continue with Windows 9, it may well be that Microsoft will have to consider the future of product.

As it is, the market may be deciding for them as users increasingly switch to tablets and smartphones. We may also see a wave of cheap Chinese made laptops running versions of Google Chrome or other Linux based systems also threatening the existing PC sales base.

Either way, a lot rides on what Microsoft announces in San Francisco this week. It could be the end of an era that defined the mass adoption of computers.

Sep 282014
 
lenovo-yoga-2-pro-in-laptop-mode

Can a laptop be a tablet computer? The Lenovo Yoga Pro 2 tries to balance the needs of both in a package designed for home and small business users.

The laptop computer market is in a difficult place at the moment as both consumers and businesses move to tablets and smartphones so it’s interesting to get hold of the Lenovo Yoga Pro 2 to see how one of the leading portable manufacturers is responding to the changing industry.

One of the best ways of testing a portable device is to take it on a long trip, so a couple of 14 hour transpacific flights and trips around San Francisco, the Napa Valley and Silicon Valley proved a good workout for the Yoga Pro.

As a laptop

From a hardware perspective the Yoga is an impressive device with 8Gb of RAM, 256Gb solid state hard drive and a 1.8GHz i7 chip. The screen is a very nice 13.3″ 3200 x 1800 high-resolution display.

Rounding out the hardware specs are two USB ports — one 3.0 and the other 2.0 — along with a Micro HDMI output, webcam, inbuilt mic, headphone jack and an SD Card reader. All the basics expected in a mid range ultrabook that weighs in at a respectable 1.4kg.

lenovo-yoga-2-pro-in-laptop-mode-on-desktop

In using the Yoga as a laptop, the device works well with the keys being crisp and responsive although the position of the glidepad and the backspace key being alongside the home key caused problems for this clumsy touch typist.

One of the problems with the larger form of ultrabooks is their usability when travelling economy on a plane; if the passenger in front of you reclines then it becomes difficult to use the device. This isn’t a problem specific to the Lenovo Yoga, but it is a drawback that the industry seems not to have considered in its move to the larger screens.

In the office

If you’re not travelling on planes, the weight and form factor works well and makes the Yoga 2 Pro a nice device to use while on the move. In an office environment it’s a standard mid to upper range laptop with good fast specifications.

For battery life, Lenovo claim “up to nine hours” for the Yoga Pro but in practice standard office use sees about five hours worth of juice with a full recharge taking under an hour. It’s lucky most transpacific flights now have power sockets.

Flipping to a tablet

While 1.4kg is good for a laptop it’s lousy for a tablet computer with the Yoga Pro 2 weighing in a kilo heavier than the iPad and 500g (one pound) heavier than the Microsoft Surface Pro. This makes it awkward to use over extended periods and the keyboard doesn’t feel right as the backing to a tablet.

lenovo-yoga-2-pro-in-tablet-mode

The Yoga’s weight problem illustrates the core conflict for a device that wants to be a laptop and a tablet as the different demands for each type of device make if difficult for designers to meet both markets.

In the Yoga 2 Pro’s design, it’s clear the engineers had to make a choice between compromising either on the tablet or laptop functionality. As it turns out the designers decided to go with releasing a good Ultrabook laptop with compromised tablet functions — this was the correct choice for the Yoga.

Windows 8 limitations

Probably the greatest problem though for the Yoga Pro 2 in tablet mode lies in software with Windows 8 being far from adequate as a tablet operating system with a confused interface, an inconsistent user experience and unpredictable responses to touch screen commands.

For companies like Lenovo who are persisting with Windows as their operating system, it’s becoming critical that they start demanding better design from Microsoft before they find their market being overwhelmed by Android and iOS devices offering a superior user interface.

lenovo-yoga-2-pro-closed-mode-on-desktop

While the Windows 8 irritations aren’t a deal breaker for the Yoga, it does limit the device as a tablet computer and its something anyone considering it instead of an iPad or Android tablet should keep in mind.

A good general duty small business laptop

Overall, the Lenovo Yoga Pro 2 is good Windows Ultrabook for home and small business use offering the benefits of an ultrabook with the flexibility of being able to flip into a tablet for specific uses.

The device isn’t cheap, but the range of features and good hardware specs make it a decent purchase for small businesses, sole proprietors or workers operating from home who need a versatile Windows computer.

Sep 102014
 
apple-play

As expected, Apple announced their new range of iPhones and a smart watch today with many digital trees being felled as the tech media falls over to describe all the shiny features of the new devices.

Buried in Apple’s announcements though are the company’s real long game in payments and the Internet of Things.

For the IoT, the various ‘kits’ Apple have announced in the last year — HomeKit, HealthKit and now CloudKit — are the serious plays in this space as they bundle together programs, devices and data streams across health and smarthome applications.

CloudKit moves Apple onto another level as it makes it easier for developers to build back end applications that tie into smart devices; even if someone isn’t using Apple equipment they still may find themselves firmly in the walled garden of Cuptertino.

The long awaiting release of Apple Pay leverages iTunes’ strength as a payment platform, bundling a secure chip into the new iPhone adds to the company’s pitch of being a trusted partner to merchants and payments processors.

What today’s announcements of new hardware, software and APIs indicate is Apple’s shoring up the perimeters of its walled garden.

For it’s competitors, this raises the ante; Google Wallet has nothing like the market penetration or customer acceptance that iTunes has and earlier this week Amazon effectively admitted the Fire smartphone has been a failure by slashing prices. Facebook has made promising noises about payments but still remains locked in an advertising driven business model.

While there’s no doubt the new iPhone will be a success, although the jury is out on the smart watch, Apple’s real game is in controlling a large part of the payments industry and the internet of things. Today’s announcements are a key step in that strategy.