Why Apple Passed Microsoft in Market Capitalization

Rob Enderle explains how Microsoft was passed by Apple in market capitalization and wonders if this will be the wake-up Microsoft needs to get back on the right track.

Today, Apple passed Microsoft in market capitalization. This is huge for Apple. Now before someone else points this out, these market cap numbers are based on outstanding stock and typically don’t include founder shares and thus tend to leave out employee owned stock including the 55 or so billion dollars of stock Steve and Bill own. Apple has never been that generous, even with Steve. Still, even putting that aside, this is an impressive milestone for a company that was going out of business a little over a decade ago and needed a $150M cash infusion from Microsoft to keep it going. Apple actually started out much larger than Microsoft but was passed in 1989 and until now, people generally assumed when the two companies bumped heads Microsoft would win. After today, everything has changed.

Some people are now saying that Microsoft is done and that the Windows Era is over. I agree with some of this but the Internet age is hardly a new thing and Microsoft still has the highest browser market share and solid positions in virtualization, web servers, and tools all of which are still behind much of the web. Microsoft is also changing having recently eliminated their mobile and entertainment division heads (AKA the Vampire divisions) and finally started to really focus on areas that are driving Apple’s stock price and could again help drive Microsoft’s.

There were a number of things that caused this to happen. Apple’s near total focus on the high-end of the consumer market and on building a Lexus like product, and Microsoft’s excessive focus on large business which didn’t drive valuation and had been on a decreasing spending trend. Let’s explore this in more depth.

Why Apple Succeeded

If anyone remembers when Palm made their initial public offering while still part of 3Com, they will also remember that Palm’s valuation not only exceeded 3com’s it exceeded GE’s. People get excited about products they love and will invest and bid up companies that make those products. Steve Jobs, having recently taken over a failing Apple in the 90s was likely struck with how much of a feeding frenzy surrounded initial offerings like Palm and Netscape and and rebuilt Apple around that.

As a result he built products that were more unique than anyone else, more complete than anyone else, and generally more expensive than anyone else – and sold a ton of them doing it. His stated goal was to build a better Sony, but he actually used Porsche as a template for quality and I doubt anyone can argue that Apple is currently more successful than either of those firms. While he clearly didn’t favor freedom, his tight control of everything that surrounded his offerings coupled with better marketing (funding and execution) and natural ability to understand how to entice people resulted in a level of success few would have thought possible ten years ago and it will go down in history as one of the greatest corporate achievements in this industry.

Why Microsoft Slipped

The specialization model that Microsoft used to initially dominate the technology market with has solid roots in the Industrial Revolution and, once they reached dominance, Microsoft should have been uncatchable. There clearly is a big difference between “should-of and is”. Microsoft made three critical mistakes.

Losing Track of the Customer: While Apple focuses like a laser beam on the end user who buys their technology, Microsoft was increasingly split between OEMs (those that built PCs), retailers, IT buyers, and users who all often have conflicting needs. While Apple was vertically integrated and provided customer focused solutions, Microsoft provided parts of solutions and it was often unclear who actually owned the end user experience (and this got far worse with Smartphones). While this has improved under Kathleen Hall recently, this lack of customer focus also meant that Microsoft has also historically sucked at marketing and, as a result, people tended to remember more of the problems associated with Microsoft’s products than the benefits. Their biggest commercial success was the Windows 95 launch which was well focused on users, but this success was never repeated.

Excessive Focus on the Enterprise Buyer: Like most companies, including early internet darling Netscape, Microsoft got excessively focused on the big business, otherwise known as “the enterprise”. This often caused them to underfund and understaff efforts like “plays-for-sure”, Media Center, Origami, and other consumer focused offerings. It also caused them to cripple products like the Home Media server to make sure they didn’t compete with business offerings from their partners. Currently large companies like Cisco and British Petroleum (granted not as good an example this month) are actually shifting to Apple’s model, for BP they are actually doing it with Windows PCs, suggesting Apple may have had it right on the desktop all along by staying focused on the user and largely ignoring the enterprise.

Forgetting Embrace Extend: Microsoft initially started out by looking at who was successful in a particular market they wanted to target. Then taking what they learned to create a better alternative which, in turn, was used to win in the given market. They used this strategy named “embrace, extend and extinguish” against both Lotus and IBM successfully but once they became dominant seemed to think that this successful practice was no longer needed. So instead of learning from and emulating Apple or Palm’s successes they did things their own way and were often surprised that this strategy didn’t work any better for them than it did for firms targeting Microsoft.

I think this was the first time I’ve seen a firm develop the market leading strategy and then, in an act of corporate Alzheimer’s disease, completely forget about it. Even with Google it seemed to take Microsoft forever to even figure out that Google wasn’t about search, they were about ad revenue. Microsoft eventually created Bing, but for a firm that literally wrote the book on how to compete, they certainly underwhelmed.

Wrapping Up: Microsoft’s Three Wake-up Calls

This year Microsoft has received three strong wake -up calls. The first was Dell and Lenovo selecting Android for their new high profile products rather than a Microsoft product. The second was HP buying Palm rather than using Windows for their new Tablets and Smartphones, and the third was this news putting Apple ahead of Microsoft in the minds of many. These wake-up calls likely go to the core of why Steve Ballmer recently put a stake in their Entertainment and Devices division and started focusing like a laser on the consumer again. Steve, when focused, can be rather impressive and he was instrumental in making sure Windows 7 corrected the Windows Vista problems.

There are some good lessons there that include the critical value of knowing who your customers are and focusing on keeping them happy, and in making sure you don’t forget what made you successful in the first place. Microsoft is far from going out of business, but it is well off their best game as well. As the firm initially showcased, there is no crime in learning from someone better than you and then doing better than them. Apple did it with both Sony and Palm; Microsoft now needs to do it with Apple. Any bets on whether they can step up to this challenge this time?