Microsoft vs. Apple: Monopolist vs. Innovator

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Includes: AAPL, MSFT
by: Jack Wx

Both Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) belong to the Most Innovative Companies category; however, we rarely see anything original from MSFT. Rather, Microsoft is widely accused of copying ideas from Apple. I guess the reason MSFT is in this category is because the Windows OS has an innovative meaning to the entire human being. This type of innovation doesn't necessarily indicate creativity, which, on the other hand, is the exact characteristic that differentiates Apple from the rest.

On the other hand, Microsoft is the indisputable monopolist in the Operating System world, owning around 88% of the market, and Mac OS owns around 10%. However, according to many users with Mac experience, the OS from Apple is so much cooler than Vista, and for years, there have been voices arguing that Apple should license the OS to the OEMs, the same way that Microsoft sells its flagship product.

Here are some thoughts on the rivalry.

1) Why is Microsoft less creative?

With such a dominating market share, you might think that the business operation environment for MSFT won't be that tough. But it is the opposite - MSFT is constantly under immense internal/external pressure, which exhausts its power to stay innovative.

First, internally, the Windows OS, if not the most complex software system in human history, is well qualified to be one of the most complex ones. Virtually it is like a platform of your daily life, somewhat matching the unlimited possibilities in real life. To develop and support such a system is a daunting task for any single company. Think about it: billions of dollars in budget, thousands of developers, hundreds of modules, dozens of versions, iterations, releases, integrations, testings, code bases, documents ... there is an endless task list. If you have the experience managing a one million dollar project, you know it only takes a few mistakes to see your process spin out of control. Then try to imagine this monster at MSFT's hand. I have no clue how MSFT manages the life-cycle of Windows, but for sure it is a process demanding rigor, consistency, cautious planning and solid implementation. I won't say these values prohibit creativity, but for sure, they won't encourage creativity.

Second, Windows is an OS independent of the hardware, and MSFT only specifies the minimum hardware requirements. We understand that this is required for MSFT to maximize its market share. The result is, MSFT has to deal with the compatibility issue with hundreds of hardware variations. On the other hand, the OS is a platform, i.e., it opens its interface for thousands of other software companies to build upon, which creates another compatibility issue. Then adding the challenges created by rapid evolving technologies and backward compatibility, these could easily turn into a disaster that devours the company. Again this is the daily task of MSFT.

Third, Windows is estimated to have more than 1 billion users worldwide, which means it is open to unlimited possibilities/challenges/risks created by the immense brain power of a vast crowd, where exist countless usage patterns/habits, unbelievable stupidity and unimaginable brilliance, geeks, hackers, pirates, virus writers, Windows lovers, Microsoft haters..... As an indicator, MSFT never escaped from the criticism about the security flaws of Windows, even after spending billions of dollars year after year attempting to fix it. Here, code quality actually is only one side of the story, the other side, the enormous user base.

In summary, all these demanding tasks that fill the daily life of MSFT ultimately defined the overall operation atmosphere and corporate culture. Here, the top priority is about being solid, thorough, proactive and making less mistakes. Then how about creativity - stay original and novel? Sure it is nice to have creativity, but it is fine to live without it. It is a shame to copy ideas invented by others. But business-wise, what is the big deal? As long as it is legal, it simply means less cost.

2) Why is Apple more innovative?

At first glance, it looks like in the CPU market we have a similar competition pattern with Intel (NASDAQ:INTC) controlling the market and AMD as a challenger. Here, the dominating market share gives Intel extra power over AMD, because it may directly squeeze the margin of AMD by reducing the price of its own chips. You may think that in the OS world,MSFT would have the same leverage over Apple, but not really.

The secret lies in Apple's bundling strategy, i.e., it doesn't allow the Mac OS to be installed on any non-Apple branded hardware. In other words, Apple refuses to open its software to the open public. What does Apple gain from this? It avoids the full-blown competition, as well as the big headaches that MSFT has to deal with (listed above). Furthermore, from the space that the monopolist's power can't reach, Apple created itself a very stable niche market with a group of very loyal users.

First, through bundling, Apple has full control over the hardware platform its software runs on, virtually eliminating all hardware compatibility issues that MSFT has, and rendering the backward compatibility into a minor problem. This translates directly into a lean product management process and less cost.

Second, Apple has full control over the look and feel of its product, thus retaining the leverage to consistently maintain the luxury and sleek style of its product, which caters well to its target customer.

Third, fat margins. A Mac normally costs twice as much as a PC with similar processing power.

And fourth, Apple has a small but friendly user base, characterized by higher income and education, which frees the company from dealing with all sorts of malicious behaviors that are very common in the Windows world. As an example, the user doesn't even need an anti-virus software on his or her Mac.

In summary, with MSFT taking on all the hatred and accusation, Apple operates under an environment with much less internal and external pressure, thus gaining the luxury to be internally focused, thus more innovative.

Disclosure: Long AAPL, no positions in MSFT.