Apple is Here Today Because of Its Market Share and is MS the new America Industry GM - The Slow Downward?



As the MS music store launches, people love to drag out the MS versus Apple fight of yore and even cite the Netscape-Internet Explorer scenario as evidence that Apple is doomed.

But this is why when you are in court, you have to tell the whole truth and nothing but the whole truth because while some of the clichés are partially true, the whole truth is much more complex.

And like the forensics rage these days, we should realize the truth is not always so obvious.

APPLE SHOULD HAVE LICENSED THEIR OS

On the surface, the scenario seems to play out simply enough – Apple’s OS would have the market share that MS currently enjoys today. Is the world really that simple?

For those not around that time – early/mid 1980’s, technology and especially anything involving computers seemed otherworldly. 99% of people in the US never saw a computer other than on TV, the movies or a photograph. They were always huge mainframes with spinning tapes drives – seemed ominous, scary and otherworldly. Think HAL from 2001 or WARGAMES. And IBM was seen as this giant-brained company who controlled a secret world of knowledge, data and information. If IBM and its employees were not thought of as gods, they were at least archbishops and high priests of some secret order much, much smarter than you & I.

So even if you worked for a competitor like Digital, HP or NEC – even if you knew your colleagues at IBM were flesh & blood, you still respected the marketing & perceived eminence of the name IBM.

So, if IBM suddenly started selling a thing called PERSONAL COMPUTERS, who were you to argue with their choice of OS?

So, even if Apple had decided to license, what’s your first choice? The IBM choice or a choice from a company started by two scruffy guys named after a fruit?

If you’re HP, NEC, Toshiba, NCR (AT&T), Digital, and others in the first wave – Aren’t you going to choose what IBM chooses? If nothing else, to say – we’re selling you an IBM endorsed OS!

And of course, in a slight oversight, IBM did not get an exclusive license to sell DOS … aka: MS DOS, aka: Seattle Computer Products DOS. I’m sure there’s a fun account of how IBM arrived at that decision but I think mostly, they were arrogant – they just presumed if you’re going to buy a flavor of DOS, only an idiot would choose an non IBM DOS.

Of course, Steve Job & Wozniak were not that anxious to really “sell out” anyway but even if they were talked into licensing then – Bill Gates (just as scruffy looking) could simply point out at business pitches, “IBM choose us” (ignoring the factor MS DOS was really a modified Seattle Computer Products DOS).

Also keep in mind, MS was not competing against the hardware manufacturers – all they were doing was acting as a supplier – a key component but still just a supplier. Apple was not going to stop manufacturing hardware so even if Apple decided it was worth it (margin-wise/business decision-wise) to license, other PC hardware manufacturers would still have to compete against Apple itself. Would Apple have decided to give up part of the entire process just to license the OS?

That that in itself is risky? Most manufacturers would’ve tried to play both hands – some PC hardware manufacturers surely would’ve picked to sell Mac OS but exclusively? Highly unlikely. So, what’s Apple’s guarantee that if they gave up manufacturing machines and only sold OSes that next month, Tandy wouldn’t have stopped selling Mac OS and would go strictly with MS DOS? And I don’t think it takes a stretch of the imagination to see a scenario where Bill Gates & MS would suddenly drastically undercut Mac OS prices – after all, MS had virtually no infrastructure then – just programmers unlike Apple which had a manufacturing plants to pay for.

So while people are quick to mock Apple for losing market share, how many other companies have faced competitors like IBM, HP, NEC, Toshiba, NCR (AT&T), Digital, Microsoft, Intel, the 2nd wave of PC sellers like Zenith & Compaq and all the non corporate PC makers like Packard Bell, gateway & emachines – and still survived?

In fact, every PC maker that was once #1 in PC sales has either pulled drastically out of the market (IBM only sells to corporate customers essentially), gone (Packard Bell), or sold (too many to list). There is only three still standing. Apple. Dell & HP. HP obviously has dozens of revenue lines including the printer & server business to fall back on. Dell is #1 now but just like I’m sure people thought Tandy & Compaq would be around forever, it’s still too early to tell as they’ll be like Packard Bell – when your business model relies on being the cheapest assembler of PC components, when they lose that, that house of cards falls quickly.

THE LICENSING SCENARIO #1

But let’s say that Apple went all out – and they hired a ‘grown up’ to go out and pitch Mac OS as a choice and many companies offered a choice and things went reasonably well – let’s say Mac OS had 35% market share – a good business and we’ll ignore the revenue that Apple probably would have to give up as manufacturer also because it’s hard to say if companies would’ve been willing to license Mac OS if Apple was still selling hardware.

Who here thinks that Apple would NOT have been bought up?

Other than IBM who dismissed Mac OS as too GUI – there were about 10-20 multi billion dollar data processing/technology companies that could’ve swallowed Apple in 10 minutes. But like all scenarios you envision for some past, you have to detail speculation some more since the two Steve’s held most of the shares at one point but if Steve Jobs still leaves Apple in this new scenario and if someone like HP (who they tried to sell the original Apple idea to) came to them – who knows, right? Who wouldn’t want to own 35% of the personal computer OS market? As Monty Burns might say, “Ripe for the plucking!”

THE LICENSING SCENARIO #2

Or things don’t go that well. Remember, GUI was dismissed until Windows 95 came out so the Apple scenario of the early/mid 1990’s just gets pushed ahead by a few years. A few small clone makers jump onboard, eat all the low hanging & the best high hanging fruit while Apple still has to spend money on R&D and manufacturing and only getting the middle of the marketplace. (Like the scenario of the 1990’s – it’s pretty easy to guess that some people will undercut Apple while others will only buy the fastest chip and go for the highest end) – what does that leave Apple? So, while Apple might have a few more market share points – they have nothing to fall back upon revenue wise.

Again, someone probably would’ve stepped in and purchased Apple – maybe even Steve Jobs at Next with Canon/EDS backing.

THE LICENSING SCENARIO #3

Also keep in mind that IT departments were clamoring for standards at this point so regardless – maybe history does repeat itself. What’s IT going to choose? DOS or Mac OS in 1988? Even if the Mac OS had 35% of the market share? Part of MS’ victory at IT was it was willing to give IT what they wanted in admin tools – Apple did not – if the two Steve’s were still in charge, I can’t see that scenario changing. IT again chooses DOS. Or the worse scenario – Mac OS becomes more like DOS.

THE LICENSING SCENARIO #4

Or a combination of it but as the multi conglomerates get larger, instead of a relatively unified PC world choosing a standard MS DOS/Windows, wouldn’t the likely scenario have been that we would’ve had some weird hybrid of let’s license Mac OS & DOS, cram them together and call it HP World OS? And Toshiba would do the same and call it Toshiba Harmony OS? (At this point, Rob Glaser would’ve sat bolt upright in his Spiderman PJ’s and felt like his world changed but he’s not sure how and then drift back to sleep dreaming of a world of barb wire and donuts but I digress).

So, we’d end up with a lotto-like number of different versions of Mac & DOS OSes?

Then everybody would have to start buying each other out to get standardized? So we either end up exactly where we are now or instead of PC Magazine, we’d be reading “CanonTandy MacDOS magazine?”

Unlike some other people who are so sure the past will repeat itself or whose minds are so simplistic and believes that every action will cause the same reaction forever and ever … Personally, I have no idea what would’ve come true because each change in the past would’ve lead to a new branch of the timeline as you can see from some of these possibilities. None are so far fetched they could not have come true but the startling fact is that …

APPLE IS HERE BECAUSE IT’S MARKET SHARE WAS SO LOW

That’s right.

It is only because Apple was so far under the radar that no one absorbed it – and we even have proof when Sun tried to buy Apple in the early 1990’s. They were not even willing to pay the actual MARKET PRICE. They wanted a discount on the price it was trading at and when no one was really willing to tender at a price BELOW what it was trading at on NASDAQ, Sun gave up.

It is only because no one wanted a manufacturing arm of a PC company AND they figured it was a futile battle with MS because they saw the only battle as of market share in the PC marketplace. Just one quick stat – while MS has 20 times the market share of Mac in PC Oses, MS does not have 20 times the revenue of Apple – more like 5 times the revenue.

PART I

This is of course, not a complete day-by-day market share fight between Mac OS & DOS/Windows (there are many other factors such as if Motorola had been more competitive with its chip speed after 1986, some things would’ve been different) but as you can see, it’s more complex than envisioned and even if you turn the scenario inside out, that does not mean we would’ve have ended up right were we are now or living in an entirely different world but I can tell you that just swapping Mac & DOS market shares would’ve been a lot more complex that some simpletons envision.

But it is safe to say because Apple’s market share was perceived to be so low and ‘not worth the troble’ that it survived to fight the fairer fight in the age of the internet …

THE NETSCAPE SCENARIO

Again, the simple diagram is to follow the market share trajectory of Netscape versus IE but once again, it’s much complex.

The background is that MS controlled the desktop LITERALLY and figuratively. Once they saw the internet thing taking off, they took over – where Netscape was once bundled with some machines – it was no longer being bundled. At that point in the internet & the PC business, if you controlled distribution, you controlled the ballgame. MS used ever legal and some illegal means (as the courts have decided) in ‘bundling’ – in some cases going as far as having to bundle IE or that vendor couldn’t sell Windows.

So, they had the computer manufacturers locked up – whether or not they wanted to bundle IE on the desktop – they had to – as long as they still wanted to sell Windows.

MS obviously has a lot of pull in the corporate marketplace – some were easy to convince such as partners of MS – others might’ve needed some financial incentive such as discounting upgrade contracts et al. Netscape could not offer you a discount on selling you server software or trading marketing dollars for switching the corporation entirely to Explorer. It was essentially free so what difference did it really make – it could save them a few bucks and it might make things cozy with MS.

And in the era of dialup & AOL – what % of people could really download another browser? Most people didn’t even know how to download jpg's they could see on web pages – let alone navigate to Netscape, download another browser and load it. On the Mac side, sure – and advanced users knew how but even today, people do not know how to switch their browser startup page, you think they’d switch browsers?

And of course, if you own the OS, it’s easy to make sure your software loads and runs faster – in fact for a while there, you could not even access MS’ sites without IE and in many cases, you still cannot venture deep in MS’ sites without running IE. And certainly, Netscape had some speed problems that couldn’t be overcome in the era of dialup – you combine all those factors and that’s why Netscape loses.

SO, HOW ARE THINGS DIFFERENT NOW?

Many things:

1) MS has about 20 governments, and a couple thousand government agencies, states and counties ready to sue them at any maneuver that is even slightly egregious, illegal or unethical. MS cannot afford to antagonize anyone anymore. Governments and corporations will switch to Linux or Open Source if they can.

2) While corporations still need MS, the desktop technology is pretty normalized. Unlike the leaps from DOS to Window 3.1 to Windows 95 – There are plenty of companies and users who are fine running Win98 or 2000 – you might be missing some interconnectivity and some other behind-the-scenes things, is the cost of upheaval & the cost worth switching to XP – for many corporations, the answer is no – at least on a company-wide scale. They are not at the mercy of MS.

3) For consumers, the top uses are: internet, email, photos, IM, music, and maybe viewing some video – it’s all the same whether you use a Mac or any PC from 1998. Unlike the first few years of the PC revolution, if you need to do work at home, companies will give you a laptop so you are pretty free to buy any computer to use at home.

4) The internet is a great equalizer. You can buy an url on the desktop or even buy a bookmark when the consumer launches IE for the first time but unlike a real brick and mortar store, going to Walmart.com is just as easy as going to Joes-by-the-creek.com. If anything, jazzing up your front page with video and flash is much more annoying and more likely to drive people away than if you just have a clean page that says WELCOME TO JOE’S BY THE CREEK.com – unlike the real world where you can buy up Main Street, under price the Main Street mom & pop store or have a much bigger selection – on the internet, that doesn’t matter. I don’t have to drive anywhere and it doesn’t cost me any extra in gas whether I look at 5 websites or 200.

WHAT’S WRONG WITH MS MUSIC?

First, I’m sure they’ll do some business. Even Sony can sell 100,000 tracks a week with their crapfest of a music store and atrocious format and while they’re quick to tout 350 million users of Windows, to use get full use out of the MS Music store, you need to be running 2000 or XP, you need one of the 70 approved portable music player and be able & willing to download MS Media Player 10.

Let’s examine that 350 million users number. That is of course, worldwide so we can eliminate all the international users. We can also eliminate all the users using any versions older than 4 years old. We can also eliminate any non-small business users who are NOT allowed to randomly install software, cannot plug in external devices or purchase music tracks at work. We can also eliminate the huge % of Windows that are just terminals/servers (servers, cash registers, info kiosks, wedding registries, etc …). How many does that really leave us?

Journalists should be investigating when MS drops the number 350 million - where does that number come from? And what about the machines that don’t count?

The key is also you need to own one of the 70 approved portable players. If Apple holds about a 60% market share and sells about 3 million units a year – what’s left? 2 million non-ipods sold a year?

I’m not exactly sure if any of those machines have even been released yet so presuming sales of 2 million a year and with 3 months left in the year – albeit the holiday selling season – so at the end of this year, MS’ potential customer number is maybe 500,000 and of course, everyone is running 2000, XP and has downloaded Media Player 10?

We also have to keep in mind that many of these are flash players that hold 12-36 songs – how many songs will these people really be buying?

And while I have no hard numbers, I have to ask – if the bulk of PC buyers are looking for the cheapest machine ($499 to $999), are they really that eager to buy a portable music player AND buy tracks for $.99? Or the other end, the high-end gamers – will they fall in line to buy DRM tracks of music or are they the heaviest users of illegal p2p software?

Isn’t that why Windows users have always had portable players AND plenty of stores to buy from – have not really done so? Of course, it didn’t really help that YOU the consumer had to keep track of what tracks you could burn and what you couldn’t? Versus the simplicity of the ipod & the itunes music store?

THE ALLEDGED HOLY GRAIL OF DIGITAL: THE BEATLES

While I personally think the Beatles are great, too many baby boomer journalists are personalizing this.

How many true Beatle fans do not have the CD’s already (we’re discounting vinyl holders as not part of the potential audience for digital downloads) and why wouldn’t you just convert your CD’s yourself to no-DRM Mp3’s? How many of these journalists will be buying their Beatle tracks online only? How many older baby boomers have refused to buy tracks at a store because no Beatle tracks are available so far?

How many Beatle tracks will Nelly, Avril & Ashlee Simpson fans wanting to buy at $.99? You honestly think having Beatle tracks online will sway them to one store? I’m not saying they’re not going to buy a track here or there but overall, it’s not going to make or break anything – and if anything, the longer they wait – the more people will be filled up the ‘free & illegal’ tracks already.

Again, I’m not knocking the Beatles – I just don’t think they will move the needle substantially unless you come up with rare tracks available only online – that might move some to come online but at great numbers? Who but the hardest hardcore baby boomer would buy a demo of LOVE ME DO?

STREAMING RADIO

First, itunes offers you a couple dozens ‘internet radio’ stations right there on the front. To create your own FM, you need to pay $10 bucks a month and plug in your player (presumably overnight) – while that’s nice – again, limited audience. Satellite radio offers you something available no place else – either commercial free, programming unavailable elsewhere or where you normally cannot get reception. Because you are ‘trapped’ in your car, it replaces what’s available now.

If you are smart enough to sign up for MS music internet radio, buy a portable player and be able to set it up for internet radio, why not just play one of thousands of stations online for free, record the stream, convert it to mp3 and load it onto your ipod or portable player?

And again, it comes back to most of non-ipod sales being flash players, who’s going to go to all that trouble to download an hour of music for $10 a MONTH?

WHAT IS WRONG WITH MS?

In a nutshell, MS looks at their business with the greatest margins – MS Office, Windows & Server Division and is trying to replicate that model across everything else.

By selling upgrade contracts, they even out their revenue – if you look closely, their margins are close to 80%. That means for every dollar of revenue, they get to keep $.80! That’s almost unheard of. In fact, I’ll bet the U.S. Mint can’t make that printing money! So, how do they replace and extend that out?

They try to figure out every business out there that can give them a monthly return. That’s why they bought into the cable business. That’s why they’re working on a cell phone OS and why they started Xbox.

That’s why they went to so much effort to build that MS Watch OS. Because they saw that they could charge consumers $5 a month to get weather, sports and news. Never mind that no one asked for it or that the watch looks like something Kellogg’s rejected as too cheap to put in their cereal boxes – MS just Power Pointed out that $5. It’s not much but if they can get 50 million Americans to buy into it …

That’s why they’re wiling to spend $2 billion dollars so far on Xbox. Because every cartridge you buy earns them revenue and if you’re online, you have to pay them every month.

That’s why they’re desperately trying to build a cell phone OS business – so they can make something with every cell phone sold (600 million in cell phone sales) and on every download, upload through MSN IM.

Or a MS auto OS. Or why Bill Gates built that house with all the plasmas (when plasmas cost serious money) – so he could show off that you could change art & photos all the time – oh yea, and he buys a stock photo house, Corbis so he can keep charging for the same photo over & over again.

Or digital media DRM – they could care less about the actual reason or software but if they can make a couple quarters on every DVD-HD sold or a couple dimes on every CD sold or a couple pennies on every movie we download – that’s what they want.

They don’t want to sell us anything once – they want to put you down as payee EVERY MONTH – the ultimate health club you can never quit.

And the problem is that MS could care less about what we really want – the problem is they start with just trying to figure out how to nickel and dime us literally several times a day every day until we die. And the problems are products like a MS OS watch.

THE EMPEROR HAS NO CLOTHES

First, I don’t hate Bill Gates. While they did bend some rules and even break a couple, he delivered what people wanted then but now – MS & Bill Gates have seriously lost their way.

He delivered a BASIC when people needed one. While he did not invent the spreadsheet or the word processor, WORD & EXCEL were quantum leaps and what people wanted. He bought DOS to IBM because they needed a quick & dirty OS. He gave IT Admins what they wanted. And he is another in the line to show people that almost anything is possible. That you can build a $60 billion business from not much – while he was not exactly poor, his first business plans were from scratch.

What has MS done lately? Never mind the spy ware-virus ridden Explorer and OS – it’s going to take them another 2 years to come up with an OS – an OS stripped of everything new so it’s essentially an XP upgrade? What else are they working on?

And as for their marketing prowess? Now that they cannot lock out everybody else illegally? When consumers are actually free to choose – besides Windows, what do people choose freely from MS?

MSN could not dent AOL – even though MS has thrown $2 billion at MSN – not only could they not even buy customers with a $400 rebate, they missed the boat entirely on Google.

Expedia? Sold. MSN Auctions? There’s a raging success. Xbox – another $2 billion for about 15% worldwide market share. They “won” the handheld OS business as it’s falling fast. They’re still losing in IM to AIM. Home Networking hardware division – folded after a year – some marketing prowess, huh? Xbox sports games? Same – folded after a year of trying to compete with EA. WebTV? The Bob Windows OS?

A similar fate awaits MS Music? The question is why? I mean, we know they can’t resist the lure of being the patent holders on future DRM for all entertainment but honestly, why? Because it’s digital – they have to get involved? Consumers have decided Mp3’s are the digital format of choice for audio. For convenience, some of us are wiling to buy a DRM format (that we can easily burn to CD) but we don’t have to drive anywhere or buy an entire CD to get one song – for that, we have AAC M4p. We also have open M4p, ogg, flac, shn, ape, not to mention CD audio – so honestly, do we really need a 10th choice in music?

MS has also been plugging away on phone OS, and auto Oses, cable box OSes for 5-6 years with miniscule market share. Some of it is because no one wants to work with them fearing their viral claws but then the bigger question is – is MS done?

Sure, they have $60 billion in cash and they’re going to generate $6 billion in cash flow this year but were the 1990’s to MS what the 1950’s were to GM? In the 1950’s GM was the AMERICA company that represented all that was powerful & mighty about America – does that seem vaguely familiar about MS in the 1990’s?

GM has gone from over 50% market share in the auto business to 25% and dropping a bit every year – and propped by revenue and profits from GMAC, the financing arm – is that MS? Sure, they have a constant flow of revenue every year from Office, windows and servers but will they continue to waste and fritter away billions on projects that CONSUMERS don’t want? Is MSN the Vega? Is Xbox the Cimarron? We know WindowsBOB is the Pontiac Aztek. Sometimes we’re too quick to ask – what have you done for us lately – but honestly, after Windows 95, what have you done for us lately that’s actually innovative and that consumers actually want? And even though GM is losing market share overall, they have at least delivered dozens of cool cars in the last 50 years … but MS, a watch OS, really? WTF?

Posted: Thu - September 9, 2004 at 11:21 PM        

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