Apple, Microsoft Run for the Clouds in the New Client Software War

The writing is clearly on the wall. The iPhone will grow into a significant enterprise end-point role, and OS X Macs will quickly advance beyond the now 20 percent share (estimated) of the total non-enterprise fat client compute device market. This is all but done.

Problem is that Apple (AAPL) is winning in the old war -- the PC vs the Mac, and the smartphone vs. the mobile Internet device [MID] battles. The larger, more long-term opportunity has moved upward and outward into the realm of the services cloud. Becoming the funnel through which to acquire, access and pay for the cloud-spewing services is the new war. Client hardware isn't going to matter that much very soon, and will likely become free.

Just as Google (GOOG) Docs gains an offline capability, more of what will make people and workers productive will be what they get as pure services from cloud-based hosts. The next war is the cloud war, and the battles will be fought around software as a service, desktop as a service, integration as a service, infrastructure as a service, platform as a service, development as a service, content management as a service, and so on.

The new money will be made through a combination of access subscriptions, direct payments for digital and media objects downloads, advertising, revenue sharing from online retail transactions, and B2B lead generation motifs.

Apple is in a good position to grab a portion of these revenues, but only a portion. Google is in a better position. And the Microsoft (MSFT)-Yahoo (YHOO) conglomeration may be in the very best position, but nothing is set in stone.

That means we should expect quite a bit of news out of Apple soon that has nothing to do with client-side hardware, and much more to do with the iTunes funnel and the .mac services cloud.

Microsoft seems to gets this. Because it does not have a client hardware business (mice and keyboards not withstanding) it can race to the next big thing on software, better than, say, Dell (DELL). Microsoft has all but given up on the the fat PC business for its future growth. Fat PC clients are a maintenance business now for Redmond.

As long as the packets make it down to the end point and get rendered, Microsoft can find new ways to grow, which are all about the cloud, integrated services, single sign on, virtualized CALs, and advertising. They call it software plus services, but it's all about the services and the dollars.

Microsoft may lose the installed Office business cash cow, but it can gain far more variety of services ... with ultimately a larger addressable market. Microsoft has figured out, thanks to Google, that the Internet business is bigger than the PC business. And these services may well represent a 50-year business trend line, instead of the fat client 20-year business that is now topping out.

Apple surely gets this too, and it's already engaged accordingly. So let me make some predictions. Apple will only have a handful more of meaningful product generations on client-side hardware. Yep, that's right, the iPhone and the Air are the beginning of the end, just because there's not too much more innovation needed down there in the hardware space. Please just add more flash memory capacity and build in the multi-protocol broadband network connectivity to the chip, and we can wrap it all up.

There's only about two to three more years left in the client hardware innovation business before the end-points go pure commodity, even with Apple's intellectual property. The hardware becomes a basic catcher's mitt for the packets, a single chipset that grabs the several important signals and processes them into a basic Web UI and supports the runtime, virtualized most likely. I, for one, don't want to see native iPhone apps; just use the browser and great UI.

But the software layer on top of the hardware, now that's a different story. And it's not a Windows domination segue guarantee, no sir. Too much baggage to support. Microsoft needs a standalone lightweight client story, and neither Vista nor CE is it. Microsoft needs to practically start from scratch on the client software of the future.

And so Apple needs to exploit this "window" of opportunity, and to take iTunes to a much larger role: The new lightweight operating system for the modern cloud services and commerce end-point. This new layer can very quickly emerge from iTunes-as-cash register for music version -- and grow into the everything else under the sun as a service (and cash register) layer.

And that's why Safari on Windows is a massively important campaign for Apple. For Apple to be a player in the cloud-based future, it must parley its iTunes hegemony into a Safari critical mass -- and that has to come at the expense of Internet Explorer and (sorry to say) Firefox.

Next, Apple will then need to munge together Safari and iTunes into a uber client layer for cloud computing-generated services reception and payments -- on mobile, PC, MID, anything that can catch the packets and support an iTunes browser. This is the funnel play, and Apple probably can do it better than anyone.

And so then comes the big question. Will Apple use this new software client model to make the services tie-in closed, open, or how open? Will Apple try and do on the Safari/iTunes client model what Microsoft has so far failed to with Windows? Will Google keep Apple open enough on all of this?

Microsoft, with the massive Yahoo audience it may soon own, will try and hold on to the client software chokepoint -- even as Apple makes a mad dash for it. This is the new war, and it has little to do with the difference between a Mac and a PC. It's about both and how they access the clouds.

I suspect an Apple-Google partnership could outfox the Microsoft-Yahoo hairball, and that the Safari-iTunes-Android trifecta looks pretty interesting as the new client platform. What do you think?

Comments

[flatman]

I think the analysis is accurate for the consumer market. The inertia in the enterprise, however, can really extend the existing fat client MSFT franchise. If I took this to a logical conclusion, I'd be very pessimistic for TV networks and their advertising/revenue model. Today 80% of the content is almost worthless, and with enough bandwidth a 'pull' model with and enhanced Itunes/Tivo could really disintermediate them.

[Mike InSyracuse]

Wow. I so totally disagree with these statements

"Yep, that's right, the iPhone and the Air are the beginning of the end, just because there's not too much more innovation needed down there in the hardware space. "

and

"There's only about two to three more years left in the client hardware innovation business before the end-points go pure commodity, even with Apple's intellectual property. The hardware becomes a basic catcher's mitt for the packets, a single chipset that grabs the several important signals and processes them into a basic Web UI and supports the runtime, virtualized most likely."

This kind of thinking to me reflects such fundamental ignorance of engineering and perhaps computer technology in general that I didn't bother to read the rest.

Saying that all worthwhile innovation in hardware is done (so much so in fact that all hardware will be FREE! ha!) is like saying no one will ever need more than 640K of RAM, only less accurate.

[PK deC'ville]

Seems to me, most of what you say about the cloud having primacy is very much accurate.

I quibble w/ your comments burying Apple's substantial ability to create the future of physical devices. I believe Apple's market cap will be boosted significantly because they do creatIvely LEAD the future of fashion in technology and this is no small feat. They also will continue to LEAD in creating trustworthy security on desktops and in pockets. Again, not a small feat.

Since they are not asleep to the opportunity of the cloud: The explosive introduction of the iPhone along w/ accelerating strong growth of the Mac mkt and the importance of the iPhone SDK /w iTunes leads me to believe that Apple will be trading between $400 and $800 by Jan 2010.

[blog-griot]

Your thoughts about the cloud computing paradigm are very interesting. I feel compelled to refresh my knowledge on the subject. Thanks for sharing!

[taojones]

Apple has always been a software company that happens to make great hardware to run it on at one point they will realize this and allow the mac os to run on any hardware then the great GUI ( graphic user interface) will spread like wildfire the thing Redmond never gets is that instead of making us set things up for what we want to do from scratch they should have the os set to do what we most likely want to do and allow it to be changed from there. apple anticipates our needs so well and understands that there should be many paths to what you want to do with your machine that it will surely be the winner in the clouds or on the desktop someday soon. the corporate world is just starting to see that it is better to have someone creating a document than calling for the it department to figure out how to open one. productivity will eventually give apple the edge.

[Ed Grant]

Interesting perspective. If this perspective is accurate then there would be many other beneficiaries. Two companies come to mind to benefit Akamai and EMC. EMC would be a clear winner since the storage requiements globally would increase dramatically. The Akamai servers could act as storage for the applets loaded into the browsers. Egos today are blocking the logical unions of Apple-Google and Yahoo - Microsoft. I am going to adjust my portfolios with this article in mind. Thanks.

[the thai kid]

wow beam up to cuppertino california home of apple lets go south east asia warp speed steve jobs and see what technically what new apple products are being created....this author tries to take the reader into apples future and is a real technocrat.....sounds like he is brain washing the readers into believing apple has only 3 years left for client hardware bla bla and ....doesnt this writer realize apple is the most loved and creative corporation in the world....

[Steve inAustin]

I don't doubt that *some* amount of applications will become web-based, but client software physically installed on a computer is not going away anytime soon. Your own comment "As long as the packets make it down to the end point" says it all. How would you like it if you just needed to make a quick/simple change to some file, and you couldn't connect to the host where the application resides? Annoying!! (and I'm sure that the software and hardware vendors recognize that this is still an issue). My RoadRunner service goes out almost daily for a few minutes at a time. Personally, I don't want to be dependent upon *any* ISPs service for something that I can presently do directly on my computer. Until ISP service is 100% there, with no problems, web-based apps are not of much value to me, nor presumably others who depend upon immediate and dependable access to their apps.

[JohnMullinax]

Well, I think you've hit on some important things... especially, the growing importance of cloud services exchanging packets with many types of device end points... aka, the rise of the web platform.

BUT: just because the web has evolved into an additional legitimate platform does not mean other existing platforms are no longer valuable. It DOES mean greater choice in how providers and consumers of services make tradeoffs between network depencies, reach, deployment, user experiences, etc.

iTunes is indeed a great example of a rich user experience leveraging cloud services. Microsoft took a cue from iTunes, and in many respects outdid iTunes with the Zune PC software. We're a long way from a acceptable iTunes or Zune user experience that is browser-based.

In addition to Apple, Google clearly gets this -- that's why they're investing in an application platform to make offline experiences possible. Adobe gets this -- that's why they want to compete in the application platform market with Adobe AIR. Certainly, Microsoft gets this -- just look at what they are doing on both the services front (Windows Live Platform, Office Live, SharePoint Online, etc.) and the software front with Silverlight for browsers (cross-platform), Silverlight mobile (cross-platform), and WPF (Windows-only browser and smart client apps), etc.

So good job highlighting the importance of the cloud -- but rather than displacing everything else, much more likely that the cloud and all the platforms will keep getting better at working together.

More here: blogs.msdn.com/johnmul... .

Disclaimer: I work at Microsoft but my opinions are my own. :-)

[Tom B]

"The explosive introduction of the iPhone along w/ accelerating strong growth of the Mac mkt and the importance of the iPhone SDK /w iTunes leads me to believe that Apple will be trading between $400 and $800 by Jan 2010."

Apple could be $400 this year, if they had a P/E similar to AMZN, a one-trick pony company that sells low-margin products and is missing the mark in the digital space (witness UnBox).

"How would you like it if you just needed to make a quick/simple change to some file, and you couldn't connect to the host where the application resides?"

This is why Google and others are making sure you will be able to work "off-line"; they thought of this.

As for "the Cloud" in general. The Cloud is a huge threat to MSFT. The Cloud depends on DATA SECURITY and a superior browsing experience. MSFT has zero credibility on any aspect of computer security and has failed to create a create a viable web browser (IE is not only years behind Firefox and Safari, it is also inferior to also-ran Opera).

[flatman]

Interesting that several comments questioned security and availability of thin client applications. Seems counter to the rapid acceptance and adoption of online banking and brokerage applications.

[ND]

The MacBook "Air" - without an onboard hard drive or multiple ports - is really the MacBook "Cloud." Believe me, Apple already understands where this is all going.

[ND]

oops. Should have said "onboard Optical Drive"

[Tom B]

"oops. Should have said "onboard Optical Drive""

Onboard flash drive.

[Chris, GA]

Not sure how you could not mention Amazon at all through this article. They are the current market leader with their S3 offerings.

aws.amazon.com/ec2

[F. J. Taylor]

The author and many commentators have some interesting and valid points.

However, I agree with several of the comments re: the fact that web-based apps, while having great potential, will not likely dominate the market any time soon - especially since many (perhaps most) of us prefer the security and ease of use of device-based apps.

Apple is fully aware of and pushing the envelope of web-based computing, and is on the cutting edge of web-based computing as several comments correctly point out. Leopard, the iPhone, and Air were intended to inaugurate this, but Mr. Jobs soon learned that the public are not "there" yet.

An analogy might be Net-based sales vs. "bricks and mortar" - a few years back, the dot-com bust was littered with great and innovative on-line sales ventures that failed for only one reason - the Great Unwashed was unready for the concept. Now, Net sales are a large and growing segment of the economy.

I love iPhone and Air, and intend to get the former shortly. (I am waiting for Gen 2 and ( hopefully ) an eventual open provider system - or at least a fool-proof hack!) If I were still a Road Warrior, I'd have an Air in a heartbeat!

I differ strongly with the author's opinion that hardware innovation is finished - quite the opposite.

As some commentators correctly pointed out, this merely betrays a lack of knowledge about what is happening right now in computing - though retired, I have friends who are still deep in tech, and though they cannot speak in detail, there are developments afoot in the coming "Computer Revolution" that will make the first one pale by comparison.

Re: MS - they are far too slow, clumsy, and ungainly to ever come close to out-maneuvering Apple in products or in the web-based world.

Re: gentleman from MS's comments on Zune - with all due respect, I cannot think of a single aspect of any MS product that outdoes Apple - let alone Zune, which in my opinion is a singularly clumsy and unlovely attempt to knock off the iPod - much as Windows was a clumsy and unlovely attempt to knock off the Apple GUI. I would say Zune sales and usage vs. iPod sales and usage adequately reflect this.

MS's early success had much less to do with product superiority (none) than with the early decision to license, early teaming with Deep Blue, (and Apple, for that matter), etc.

(Disclosure: I DON'T work for Apple, though I am a user, and I previously used every MS system and product from DOS 3.0 through XP, as well as Unix and Linux. I have run LAN networks of both Apple and Windows, and I wouldn't return to Windows under pain of death, nor would I touch the extremely clumsy and ugly "Vista" with a fork.)

[orangekite]

Great discussion!!!

I would like to give you the point of view of a start-up that develops an application on iPhone, MS mobile and the Android (Google) platforms.

First, I would like to acknowledge Apple for developing the best phone in the world. It is pretty amazing how, in the first trial, they developed a platform that is 2 generations ahead of the competition … however … I have an hunch that Steve Jobes is going to make the same mistake that he did many years ago, when he missed the opportunity to be what Windows is today, by keeping everything inside apple.

You see, the Apple SDK is a joke. Apple did not really open the iPhone. They kept the capability to do serious applications only to themselves and are likely to get only niche products (some are very nice and look great on the iPhone, but you would not buy an iPhone just because of them) and game developers.

Window’s mobile is quite open, but I completely agree with the author of the article, the only way for WM to work is to throw away the code and start from scratch. Do not get me wrong, it works …if you have few minutes to wait between one instruction to the other…. (I exaggerate a bit …but just a bit). Then there are GUI and design issues. There is no way you can do sexy applications with WM compared to iPhone and Android.

My gamble is that Google will be the winner by far (Apple will continue to be the niche winner for highly sophisticated users, but again, in the 5% market share). I disagree with the author that Google and Apple are aligned together.
Google really does not need Apple…
…. they are kings of the web and as you all mentioned, the web is the huge market.

The result is that many of the cutting edge developers are looking now at Android, and Android is a dream platform for developers. All the applications can seamlessly integrate with the search capabilities, mapping and navigation applications, all file systems and Youtube. All Google asks from you as a developer is to develop legal applications. The GUI and design capabilities match those of the iPhone, I will bet very quickly there will be cooler applications on Android, as the best programmers and designers have a white canvas to draw whatever they want.

Apple might be missing the biggest opportunity they ever had to become a major player in the future of the web, which is going to be on mobile devices.
The Open source, or Open SDK is going to rule, Google’s free of charge operating system, with a first class SDK, is a no-brainer for cell phone manufacturers. True, it will be tough to show unique software, as any application would be able to reside on any Android phone …. But for Apple, the fight now is not against MS only…but against the rest of the world developers !!!

So, in few years, to my opinion, Android will rule without competition. As long as Google stick to its “No Evil” promise, this might be a good thing to the world, if not …neither MS nor Apple or God would be able to help us…

[orangekite]

p.s If Kleiner Perkins has set up the iPhone fund ...maybe Sequoia should set up the iJailBreak fund (for those who do not know, Jailbreak is the software that allows to develop applications on the iPhone without Apple's SDK), i will bet the Jailbreak companies, in the long run, will be more successful, and will end up working on Android.

[Zvi]

I very much agree that the end-point hardware becomes less relevant as services migrate to a service cloud. That why G.ho.st (the Global Hosted Operating SysTem) provides a desktop and computing environment that can run on any hardware so long as it's in the browser and it aggregates service cloud services such as Google Docs, Zoho, Zimbra and others. It will be interesting to see how Microsoft and Apple respond to this new concept.

Zvi