Ahead of its Worldwide Developers Conference, rumors are swirling everywhere about what's next for Apple (AAPL). Improvements to Siri? Is she going to be available across all Apple products? Frankly, we don't actually know. However, we do think the next critical battle in the Apple/Microsoft (MSFT) war is about to take place with the release of Windows 8 and the combination of iOS 6 and "Mountain Lion."
We now think Apple has enough market share in the personal computing and mobile markets to make this refresh cycle the most compelling we've seen in a long time. We don't suspect the launch will represent a huge shift in enterprise spending in the near term, but we think Apple is poised to steal even more share with young consumers and businesses. A rigorous long-term view of a firm's competitive advantages and intrinsic value remain integral to our valuation process (click here for more info).
Reviews of Windows 8 Beta Are Mixed
Just five years ago, Microsoft had a brand-new, game-changing operating system by the name of Windows Vista. Vista was supposed become the new industry standard and replace XP across the enterprise space. However, both Vista and Office 2007 were clunky, resource-hogging programs that stalled productivity and required new training for IT and users alike. Corporate America hated it.
Vista was a huge disaster, and was quickly scrapped for Windows 7, which is a much sleeker, faster, and more efficient operating system with a more intuitive and similar feeling to Apple's Snow Leopard that has a "pinnable" task bar and smooth visual transitions. According to CNET, Windows 7 is poised to overtake XP as the most used operating system in the world.
Enter Windows 8. For the first time since Windows 95, the flagship operating system has gotten a major facelift. Users have the option to return to the traditional Windows layout, but mostly the program runs on Metro -- the new user interface. It works similarly on both desktops and mobile devices like tablets and smartphones. Some consumers seem to like the look, design, and feel of Metro, but others are frustrated about the actual compatibility of Metro with desktop tasks. Since the system diverts from the years of training on previous Microsoft operating systems, we think there's a large risk that corporations find new training for users and IT too expensive. Therefore, it is possible that enterprise customers stick with Windows 7 or wait for a new operating system.
The Flight to Apple Will Continue
All it takes to realize the power of Apple among younger consumers is to take a trip to a college campus. It doesn't matter if it's a state school or a private school, students are all using MacBooks, MacBook Pros, iPhones, and iPads. The business student with a Dell (DELL) or Hewlett-Packard (HPQ) computer is the rare exception, and if a student really needs to use Microsoft Excel, he or she will simply go to the school's computer lab. Some Apple users have iOS and Snow Leopard so ingrained in their minds that they can hardly even operate a Windows-based machine.
Although this generation doesn't quite have the decision-making or purchasing power to drive the enterprise market, that power will come in time. We think it's possible that the enterprise market could look completely different in the next 20 years. A combination of Apple users wielding the decision-making power in corporate America and the proliferation of virtual commuting may be an unexpected and highly profitable tailwind that the market is likely discounting for Apple.
When it comes to mobile, International Data Corporation estimates that iOS will end the year with over 20% of global smartphone market share. Although that's still smaller than Google's (GOOG) Android market share, we feel investors should remember that Apple earns significantly higher profits due to its phones' higher average selling prices and control over the entirety of the supply chain. Metro may steal some market share from both Android and iOS, but we think it's nearly impossible for Microsoft to be as profitable in the mobile market as Apple is.
Furthermore, as hardware power continues to increase at a rapid rate, tablets -- specifically the iPad -- may be able to become even more of a substitute for personal computers than it is now. Apple is extremely well positioned to capitalize on this trend because the company is the market leader in mobile computing and is in the process of building itself a powerful network of users and app developers.
Windows 8, Mountain Lion In a Battle for Today's Younger Consumers and Tomorrow's Enterprise Buyers
Ultimately, we're anxious to see whether or not Windows 8 will become popular with younger consumers, offering a push back to Apple's recent dominance. Apple knows that Windows 8 is a direct positioning for the dollars of the decision-makers of tomorrow, which is why we think the company will roll out new MacBook Airs to counter the Ultrabooks that will be released later this year. The combination of new Mac products and the "Mountain Lion" operating system might be too much to overcome for Microsoft. And, dare we say, a failure of Windows 8 could signal a long-term (yet slow) decline of Windows dominance.
Nevertheless, we think both stocks look attractive at current levels. Microsoft can conceivably not do very well in mobile, but can continue to be a highly profitable company if it maintains its dominance in the enterprise space and continually improves its Xbox product offerings. On the other hand, we think Apple will continue to win market share from frustrated Android users in the mobile space, and the firm will remain the market leader in innovative, popular product offerings. We hold Apple in our Best Ideas Newsletter portfolio and Microsoft in our Dividend Growth Newsletter portfolio (please see the links in the left sidebar for more information).