Most investors have written off Microsoft (MSFT) as a creaky old has-been that can't move fast enough to go toe to toe with today's titans of technology such as Apple (AAPL) and Google (GOOG). But its stock has been showing signs of life recently, rallying more than 12% off its low in the middle of June versus 4% for the broader index. One reason for this change in sentiment is the early stage success of Microsoft's Mango operating system, which has received a number of favorable reviews from critics and raised investors' hopes that Microsoft may have what it takes to compete on the mobile front after all.
As someone who's long Apple, one may surmise that this news is disappointing to me, but it had the exact opposite effect - as an Apple investor, I actually hope Microsoft does well and achieves success in its attempt to remain relevant in the post-PC era, counterintuitive though it may seem.
To explain why, we've got to rewind to the 80s, back when Microsoft was Apple's worst nemesis and the two fought a long and bloody battle for dominance over the emerging PC market. We all know how that fight turned out for Apple. There are those who say that Apple vs. Google today is eerily reminiscent of Apple vs. Microsoft two decades ago, and they wonder if history is going to repeat itself. The statistics validate this concern: Research firm Gartner reported that smartphones running Google's Android operating system accounted for 36% of industry sales during first quarter 2011, versus just 16.8% for Apple's iOS. According to data released by Nielsen, 50% of Americans who recently purchased a smartphone chose an Android phone, which is double iOS's 25% market share of new converts.
These numbers are disconcerting for an Apple investor. The network effect inherent in the adoption of any new platform gives the current market leader a self-propagating advantage that, if left unchecked for too long, becomes impossible to defeat. The longevity of any new platform is directly tied to how effectively it can attract third party developers, and developers always consolidate around the most popular platform. The more successful your platform becomes, the more developers you attract, and the more developers you have adding value to your platform with their applications, the more successful your platform becomes.
It's this powerful virtuous cycle that allowed Microsoft to crush Apple in the PC wars, and it's this phenomenon that's the biggest threat to Apple today. Right now, Apple is benefitting from its head start in mobile and still commands the largest number of developers - according to Appsfire, its App Store at over 400,000 apps is still double the size of Google's Android Market at 200,000. However, its lead is rapidly shrinking - German firm research2guidance reported that for the month of April, the Android Market added 28,000 new apps, more than double the App Store's 11,000. The race is on, and most analysts believe that it's not a question of whether or not Android will overtake iOS, but when.
Apple vs. Everyone Else
So is Apple doomed to fall to Google as it did to Microsoft twenty years ago? Not quite, and there are many reasons why things are different this time around. Not the least of which is that Apple is a much stronger company today than when it took on Microsoft. A second reason is Microsoft itself. There were only two real players going head to head in the PC wars, and as expected, the stronger one took out the weaker one. The mobile wars are going to be different, because this time, there are three players: Apple, Google, and Microsoft. Three changes the dynamics of the game entirely.
The old adage "the enemy of the enemy is my friend" fits the situation perfectly here, because this fight is not really about Apple vs. Google. It's about Apple vs. Everyone Else. Apple is notorious for not playing well with others, preferring to create the entire product from top to bottom itself instead of contracting out to other companies. This strategy allows Apple to create best in class products, the most expensive ones with the highest margins, but it also puts a hard cap on how much market share Apple can control, because the whole point of a premium gadget is that most people aren't rich enough to own one.
Apple doesn't care, it just wants to make the best widget in town - it's a bold strategy, but it can also be a dangerous one depending on how the rest of the market, the non-premium, value-oriented part, is staked out. To illustrate, let's use a baseline of 20% for the premium market, and 80% for the value market. Assuming Apple has the premium market for smartphones all to itself, if the rest of the industry consolidates around Android, there will be four times the number of Android phones in circulation compared to the number of iPhones. As a developer, would you want to develop apps for 20% of the user base, or 80%?
In reality, there's no way Google will have the entire value market to itself, and there'll always be smaller players like Research in Motion (RIMM who'll get the bright idea to create their own operating systems and chip away at Android's market share. Assuming all of the little guys collectively gobble up 10% of the market, that still leaves Android with 70% versus Apple's 20%. Let's cut off a piece of Google's slice and give Apple another 10%, since some value consumers will be able to get an extremely cheap iPhone by signing an extra long-term contract with a carrier. At 30-60, that still gives developers a huge incentive to flock to Android instead of iOS, where they have access to a consumer base twice as large.
Enter Microsoft. Microsoft is a company that markets its products to the masses instead of the elite, which makes it a much deadlier threat to Google than to Apple. Its partnership with Nokia (NOK), which is still the largest handset manufacturer in the world, is a match that has enormous potential. And if the company can execute well and create a product worth buying, Microsoft can easily become a force to be reckoned with in the mobile business. Assuming it is successful enough to steal a third of the market away from Google and half that percentage from Apple, the mobile landscape will be end up breaking down like this: Apple with 25%, Google with 40%, Microsoft with 25%, and everyone else with 10%.
Google is still top dog, but the choice between Google and Apple is no longer as obvious with these revised numbers. Yeah, you get access to more raw users with Android, but the iPhone's premium-oriented customers are more willing to pay for quality apps, which means there's potentially more money to be made developing for iOS despite the smaller userbase. Back this up with Apple's superior brand image and its loyal cult following who'll stick with Apple no matter what, and you have yourself a sustainable community of developers large enough to keep Apple's products relevant for years to come. And it's all thanks to Microsoft.
A win for Microsoft will hurt Apple, no doubt, but it'll hurt Google a whole lot more. The mobile wars will be brutal, and as an Apple investor, I'm willing to take a cut on the arm if it means my biggest rival will get stabbed in the heart. The big picture is all about Apple vs Everyone Else. The more fragmented Everyone Else is, the better it is for Apple, and this is an edge worth surrendering some market share for. What this means is that I'll be watching Microsoft's progress with great interest and cheer for it on the sidelines.
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Don't give up, Mister Softee. Keep on swinging, keep on going. As an Apple investor, I hope you succeed and do well for yourself. Not too well, of course, but just enough be a huge thorn in Google's side and slow it down some so we can leave it in the dust. Good luck.
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