Grasping the tech giants business models

20 07 2012

It’s rare that I bother to post about business models, economics or company balance sheets, and that’s simply because I don’t find them half as interesting as what’s going on with technology or methodologies. However, for the past 12 years these sorts of things have taken up almost 50% of my working time, and can be interesting from time to time, especially when you look at the tech giants, Apple, Microsoft and Google…

In an earlier post I blogged about the worrying trend for “free” services from the web, and how that business models that were built purely on advertising can be fraught with danger, and essentially only work well for the very few (for Google it works massively well).  However, today I want to look at Apple, Microsoft and Google in terms of their business models, how they differ, where they are similar and their financials to understand the companies better and to understand where we could be heading…

 

Business model

Each one of the big three has their own unique business models when you look at them in broader terms. Apples business is about delivering premium luxury devices mainly, running them with its own software and being tied into its own ecosystem (pretty much exclusively). Apple doesn’t really provide any software services, or software that we buy and run on any old device, rather everything is focused on its own platforms and own devices. One of the big benefits here is if your brand is strong (and Apples is very strong at the moment) then you can command premium rates and rake in larger profits because you control everything, the software, the hardware, the ecosystem even to an extent the distribution channels. This model is a massive earner potentially, but relies purely on your brand being un-equalled in the eyes of the consumer.

Microsoft on the other hand is purely software and software services (well almost purely). Microsoft delivers is software to consumers and businesses alike, it charges licenses for these and subscription fees for its services. Anyone can purchase Microsoft software and services, and most of them will run on any platform, including Apples MAC and iOS. This business model relies on your software and services delivering to the customer’s requirements, but does open up the enterprise as well as the consumer. It also allows Microsoft to enter so many different software market areas, and there pretty much isn’t an area where Microsoft isn’t present. Though each individual sale is nowhere near as profitable as an Apple sale (as Apple sells the hardware too) it is none the less highly profitable and due to its diversitiy, allows Microsoft to support other areas of its business with ones that are doing well. These types of services, aren’t quite brand dependent, rather are feature and function dependent.

Then we come to Google, Google is all about marketing, selling you a marketing services via its search. Everything else Google does is related to gaining more information to increase the value of those marketing services that it sells to SMEs and large corporations. This is again a very profitable business model, but depends 100% on people using your search services, in order to show value for your marketing services. If Google’s search is seen to be not as good as a competitor, or looses market share, then the value of its marketing business also drops away – which puts pressures on every other aspect of the business.

So do we see any cross over? Well the companies do share common grounds, and that is in the entertainment and content consumption area. At the moment, Apple is a little more mature here than the others, but essentially both Microsoft and Google are playing catch up in delivering content through their ecosystems down to their customers. Microsoft has marketplace (which is still branded Zune in some areas), Google has Play and we all know Apple as iTunes.

In addition, both Google and Microsoft appear to be now dabbling in the hardware arena a lot more too. You could argue Microsoft has always dabbled, especially when the company produced the modern mouse as we know it, keyboards etc in the early days. They also deliver the XBOX and now, perhaps, Surface tablets too. So is Microsoft trying to increase its revenues by controlling hardware too? Probably not, though XBOX is now a profitable business for them, this exercise is about showing Microsoft products can be related to high end devices. Google though has got into this more seriously, delivering their own tablets and purchasing Motorola. I personally think this is more about ensuring its OS is running on devices that tie back to its search than about actually competing in the hardware arena or with Microsoft directly for OEMs love…

 

Experiences and current position

The Apple business model relies on belief that their brand delivers a better experience. This is the situation currently for the masses; hence they are the biggest player here in many ways in mobile and tablet. However, this wasn’t always the case. The Apple experience was poor back in the 90’s, I’m sorry it really was, not matter what anyone says. I remember using them at Uni and I will be honest, the UNIX machines delivered an experience I, and pretty much everyone else, agreed with was better than the Apple. Don’t be fooled that people flocked to MS just because, we all used Windows 3.11, 95, 98 etc because it was a far superior end user and business user experience (even with the blue screen of death).  You could also do so much more with the Windows based PCs, networking, support more peripheral devices etc etc.

Apple didn’t die though; instead it reinvented itself with a great experience on a tiny device, the iPod. That experience was and still is, far better than its competition, and it was that experience that led to us consumers looking at just what else Apple delivered. Apple really seized the day here, and improved everything they do 100%. Their devices always looked funky, but now they looked really top of the range, sleek, fast and designer. Throw in their improved operating systems (and a change at the core) and things started to look up. The iPhone moved this on from the iPod, and in many ways Apple defined what we see as a smart phone today (though they weren’t the first, even Nokia had prototype devices that looked like and behaved like the iPhone, they just were stuck on Symbian and never got them to market – shows poor forethought that). The iPhone experience was second to none (even though it lacked in features at first), and that experience is what drove customers to Apple. At the same time, people were getting fed up with the blue screen of death, and the viruses that now plagued Windows machines (and you can’t blame them). In many ways the Apple experience was now superior to that of Microsoft’s. With that experience and belief in place, the Apple business model really did and does flourish…

But are things starting to change again? Well maybe not just yet, but there is a real perception that they could, with many pundits and market watchers believing that Windows 8 across all devices could start to show a better experience to that of Apples on all those devices. Who knows, if that does happen then the pendulum will no doubt swing back to Microsoft away from Apple. The difference between the two companies though is their ability to thrive through poor consumer sales or customer perception…

Microsoft’s brand with Vista hit a real low. Yet the company still managed to rake in big profits, and that’s because of the numerous other businesses Microsoft runs. Microsoft has a highly successful business and server division, and that income keeps them strong even at a time of Vista. Essentially Microsoft can weather storms better than anyone, due to their business model and the diversity of their software and services. If indeed the masses of consumers start opting for devices running Windows 8 over Apples own devices, then Apple will be hit far harder than anything Apple has done to Microsoft in the past 10 years. It’s interesting that both Bill Gates and Steve Jobs see/saw Apple as a premium product and the masses opting for Windows devices, if this again becomes the case in mobile and tablet, then the quarterly incomes that we see posting from Apple will be slashed, none the less they will still operate at a very handy profit on every device they sell (something Google must learn at some point you would think).

 

Financials

By far and away Apple rules here. Though Q2 figures aren’t out for 2012, Q1 figures for Apple have the company posting record revenues of $46b, these up from $26b in the same quarter a year ago. That shows that Apple is moving from strength to strength and quickly. 58% of those revenues come directly from device sales, keep that in mind, such as iPhones, iPods, iPads and Macs. Almost all devices Apple produce have defined the market and command massive market share, with the exception of the Mac, which in desktop market share is a tiny player.  What’s interesting is that Apple doesn’t have any areas where the company loses money, and that’s why it’s such a strong company.

In second place we have Microsoft with its own record $18b for Q2 2012. Though the company had to write off a $6b investment in an advertising company (which meant Microsoft’s first ever loss), the company looks to make around the $6b each quarter, almost none of which comes from device sales. Microsoft is sitting on assets of excess of $121b up from $108b just 12 months ago so it’s a rich company that is growing in every area – though some are running at a loss. Microsoft makes money from a number of software and services divisions, but these also end up supporting many other software and service divisions that run at a loss. Bing for example has never managed to get close to profit, yet Microsoft plug away at it, and even Bing is heading in the right direction. Microsoft does play a very long game with these divisions, and it has the cash reserves and the income to be able to do that…

Finally we have Google, who also posted record quarter revenue, this time of around $12b. Interestingly enough Google makes no money from so many ventures, but its core business model allows them to still operate at a nice profit and command such sales. Almost everything Google makes comes from marketing…

 

Long term projects

Microsoft has always led the way in R&D investment, and it seems to be ramping this up. Many could argue the company has been stagnant for many years, which could be true. However, Apples re-emergence has meant Microsoft needs to up its game if it wishes to remain a big player in the home, and that’s exactly what they appear to be doing. Microsoft plays a very long game, and is prepared to give its businesses a very long time to move into profit, think XBOX and the entertainment divisions which now operate at very healthy profits, that wasn’t always the case. Bing may be losing Microsoft money each quarter, but it is losing less money than it was each quarter. The whole thing here is that Microsoft is involved in so many different areas which many of which aren’t profitable…Yet…

Apple on the other hand has been very fortunate. Not only were they fortunate to survive (with some cash from Microsoft there too) they stumbled along for many years offering not much innovation and poor experiences. However, that all has changed dramatically. Since the iPod and the additional revenues that brought in, Apple has invested and innovated, carving out not 1 but 3 market places for itself to dominate.

Google has always been the golden company of search, however mobile is a real challenge for them, delivering their marketing services down to devices. Here Google search isn’t as strong as it is on the desktop or as effective at delivering adds, so Google has to have a strong mobile presence with Motorola and Android to safeguard its core business.

 

Conclusion

All the tech companies are growing, and that’s due to us consumers demanding more from the internet and from our devices and software. The mobile and tablet marketplace is quite new, and it’s where the tech companies need to do battle, and will do for the coming years.

Mobile for Apple is the linchpin of their business, the iPhone and the iPad command massive market share and is charged at a premium. Any dent into the perception of the user experience or brand itself will hurt the company massively since it depends so much on device sales.  Likewise new competitors in this market place who gain market share from Apple will have a big impact on Apples financials (though Apple is simple so strong at the moment it’s hard to see).

For Microsoft, it must grab more market share in mobile and tablets to ensure it remains relevant in the consumer marketplace. Though Microsoft is strong in so many business areas, such as business and server, it is aware that for the consumer marketplace, it needs to get a good hold in mobile and tablet, hence the big push with Windows 8.

Finally, Google needs to retain a large market share in mobile to ensure it grabs enough user data and can deliver its own core marketing services to users. If it cannot do that well for mobile, then Googles business model becomes very fragile indeed.

I personally think that the next few years will be interesting. I’m excited by Windows 8 and the one OS for all devices – to me it makes sense and as a consumer that one experience across everything, that seamless usage between all those devices while not compromising on the things I want to do with them makes a compelling case and delivery of a better experience. If Microsoft gets it right, and its marketplace store continues to grow and deliver the content we as consumers want, then Microsoft will no doubt be delivering a superior experience and will start to grab market share in mobile and tablet. This will lead to more record quarters from MS I’m sure, and that will in turn lead to far more R&D and new divisions it starts that run at a loss for a long period of time too, until they too make a profit.

Apple has, and will always have, a strong loyal brand following, so though I don’t see Apple holding onto its massive market share in mobile and tablet, its future remains very bright. Apple will command a premium and will have customers flocking for its products. The company makes very good profits on all its devices and most of its businesses, so the company seems set for many years to come.

My concern is for Google if I am honest. Though the company is growing, the mobile war is far more important to them than anyone else. If Android loses market share, then the number of people relying on Google services for search will drop (especially as more of us use our mobiles).  This means their core business revenues will take a knock. The Motorola deal for Google is so important, if Google can make money from actual devices, while gaining greater data and ensuring its browser and search services are delivered to devices, it can retain its core revenue. The problem is, their business model relies on Android success, and if companies like Samsung start selling more Windows Phone devices, then Google almost becomes dependent on Motorola’s success. If that is the case, has Google got time enough to try and build that brand to compete with the likes of Samsung, and more importantly Apple?

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