In my Money Week column this week, I've been looking at how Apple overtook Microsoft. Here's a taster....
For all the drama of BP’s attempts to cap the oil spill in the Gulf, and of the chaos within the euro area, by far the most significant business story of the last few months was something else completely: Apple overtaking Microsoft as the world’s largest technology company.
It is a remarkable feat, and a testament to the determination of Apple’s guiding spirit Steve Jobs. But it is something else as well – a lesson in some of the fundamental principles that govern business and the markets. Apple’s unlikely resurrection is a reminder that, in a free market, all monopolies are transient: that consumers are far better at breaking up dominant companies than any regulator; and that arrogance and hubris will always undo even the mightiest of industrial empires.
A decade ago, anyone suggesting Apple stood any chance of overtaking Microsoft would have been dismissed as a drivelling lunatic. You might as well suggest that the Socialist Worker Party would take control of Tunbridge Wells council, that ITV would decide to replace Coronation Street with a series of Greek dramas to educate its viewers, or that Manchester City would overtake United as the town’s leading football club (ah, well, maybe that one isn’t so crazy). It would be dismissed as completely ridiculous.
Apple might have been one of the founders of the personal computer industry when it launched the first in its range of low-cost, easy-to-operate home PC’s in the mid-1970s. But as it completed its first quarter-century, it had been boxed into a dead-end by Bill Gates’s Microsoft. It’s closed, exclusive systems were stuck in a niche, bought only by graphic designers and a few techie nerds. The mass market, and the business market in particular, bought Windows. True, the clunky software may well have driven everyone bonkers, but it was the industry standard, and that was all that counted.
Indeed, so powerful had Microsoft become that by the turn of the last decade, anti-trust regulators were laying into the company, trying to force it to stop bundling its products together. It appeared to many people a monopolist, the Standard Oil of the digital age – a company so powerful that it could extract huge profits from helpless consumers for decades to come unless broken apart by government.
That, of course, misses the point about a free market. The consumer is always the king. And, usually, the customer, is a long way ahead of the regulators. As Microsoft reached the zenith of its power, the information and computing market was fast moving on. Apple recaptured the high ground with the launch of the brilliantly designed iPod music player in 2001, followed by the iPhone in 2007, and, this year, the iPad. It sensed that the next wave of computing was about small, mobile devices, not big desk-top PCs, and captured that market with verve and aggression. Microsoft had some success with its Xbox games console, but apart from that it was stuck with its little-loved operating system, and the office software it sold with them. Expanding out of that market proved impossible. Ever heard of its Zune music player? Nope, me neither. It currently has a barely noticeable 2% market share.
No great surprise, then, that Apple stock has been climbing, whilst Microsoft’s has been falling. Last week, Apple’s market value tipped past $222 billion, nudging ahead of Microsoft’s for the first time. Apple is now the biggest technology company in the world, and, remarkably enough, the second-biggest company in the US, behind Exxon Mobil.
There are three lessons investors should draw from that remarkable transformation.
First, all monopolies are transient. They are a product of a particular time: there is something about the market, or the technology, or the state of the competition, that allows one company to become dominant. But those circumstances are usually very brief. Within a few years, the market will have changed, and the competition will have transformed itself. In reality, so long as the market is open to new players, we should worry about monopolies a lot less than we often do. More often than not, they will have fallen from dominance in a few years anyway.
Second, the consumer is a far more powerful regulator than any government agency. A decade ago, the regulators were getting ready to break-up Microsoft because they feared its dominance of the technology market was stifling new players. They wanted to smash it to pieces, the way John D. Rockefeller’s Standard Oil had been in 1911. But, as it turned out, customers did a far better job of that. They stopped automatically using Microsoft’s web browsers, they showed total indifference to its music players, and its search engines remain a well-kept secret outside of Seattle. The technology market of 2010 is far more diverse. Microsoft didn’t need to be broken up to achieve that.
Finally, arrogance and hubris will humble even the most mighty industrial empires. A decade ago, Microsoft might have looked the safest investment in the world: a virtual monopolist in the world’s fastest-growing industry. It controlled just about every desktop in the world. But it became lazy. It didn’t take much notice of the internet to start with, and it never got the hang of social networking. It didn’t catch onto the significance of music players, and for a long-time appeared to think mobile phones were a completely separate industry from computing. The lesson? Avoid companies at the zenith of their powers. Once you dominant an industry, usually the only way is down.
Apple no doubt will go the same way. The control it maintains over its software may well prove its undoing. Google and Facebook will be chipping away at its products. So too will dozens of newly-formed competitors. Its reign may prove even shorter-lived than Microsoft’s. Even so, its resurrection is a useful reminder that all monopolies are fleeting. And that investors should bear in mind that no company ever has a lock on any market, no matter how strong it might appear at one particular moment.