Microsoft vs. Apple: Monopolist vs. Innovator 40 comments

Seeking Alpha ^ | 03/31/2009 | Jack Wx

[Swordmaker]

Both Microsoft (MSFT) and Apple (AAPL) belong to the Most Innovative Companies category; however, we rarely see anything original from MSFT. Rather, Microsoft is widely accused of copying ideas from Apple. I guess the reason MSFT is in this category is because the Windows OS has an innovative meaning to the entire human being. This type of innovation doesn't necessarily indicate creativity, which, on the other hand, is the exact characteristic that differentiates Apple from the rest.

On the other hand, Microsoft is the indisputable monopolist in the Operating System world, owning around 88% of the market, and Mac OS owns around 10%. However, according to many users with Mac experience, the OS from Apple is so much cooler than Vista, and for years, there have been voices arguing that Apple should license the OS to the OEMs, the same way that Microsoft sells its flagship product.

Here are some thoughts on the rivalry.

1) Why is Microsoft less creative?
With such a dominating market share, you might think that the business operation environment for MSFT won't be that tough. But it is the opposite - MSFT is constantly under immense internal/external pressure, which exhausts its power to stay innovative.

First, internally, the Windows OS, if not the most complex software system in human history, is well qualified to be one of the most complex ones. Virtually it is like a platform of your daily life, somewhat matching the unlimited possibilities in real life. To develop and support such a system is a daunting task for any single company. Think about it: billions of dollars in budget, thousands of developers, hundreds of modules, dozens of versions, iterations, releases, integrations, testings, code bases, documents ... there is an endless task list. If you have the experience managing a one million dollar project, you know it only takes a few mistakes to see your process spin out of control. Then try to imagine this monster at MSFT's hand. I have no clue how MSFT manages the life-cycle of Windows, but for sure it is a process demanding rigor, consistency, cautious planning and solid implementation. I won't say these values prohibit creativity, but for sure, they won't encourage creativity.

Second, Windows is an OS independent of the hardware, and MSFT only specifies the minimum hardware requirements. We understand that this is required for MSFT to maximize its market share. The result is, MSFT has to deal with the compatibility issue with hundreds of hardware variations. On the other hand, the OS is a platform, i.e., it opens its interface for thousands of other software companies to build upon, which creates another compatibility issue. Then adding the challenges created by rapid evolving technologies and backward compatibility, these could easily turn into a disaster that devours the company. Again this is the daily task of MSFT.

Third, Windows is estimated to have more than 1 billion users worldwide, which means it is open to unlimited possibilities/challenges/risks created by the immense brain power of a vast crowd, where exist countless usage patterns/habits, unbelievable stupidity and unimaginable brilliance, geeks, hackers, pirates, virus writers, Windows lovers, Microsoft haters..... As an indicator, MSFT never escaped from the criticism about the security flaws of Windows, even after spending billions of dollars year after year attempting to fix it. Here, code quality actually is only one side of the story, the other side, the enormous user base.

In summary, all these demanding tasks that fill the daily life of MSFT ultimately defined the overall operation atmosphere and corporate culture. Here, the top priority is about being solid, thorough, proactive and making less mistakes. Then how about creativity - stay original and novel? Sure it is nice to have creativity, but it is fine to live without it. It is a shame to copy ideas invented by others. But business-wise, what is the big deal? As long as it is legal, it simply means less cost.

2) Why is Apple more innovative?
At first glance, it looks like in the CPU market we have a similar competition pattern with Intel (INTC) controlling the market and AMD as a challenger. Here, the dominating market share gives Intel extra power over AMD, because it may directly squeeze the margin of AMD by reducing the price of its own chips. You may think that in the OS world,MSFT would have the same leverage over Apple, but not really.

The secret lies in Apple's bundling strategy, i.e., it doesn't allow the Mac OS to be installed on any non-Apple branded hardware. In other words, Apple refuses to open its software to the open public. What does Apple gain from this? It avoids the full-blown competition, as well as the big headaches that MSFT has to deal with (listed above). Furthermore, from the space that the monopolist's power can't reach, Apple created itself a very stable niche market with a group of very loyal users.

First, through bundling, Apple has full control over the hardware platform its software runs on, virtually eliminating all hardware compatibility issues that MSFT has, and rendering the backward compatibility into a minor problem. This translates directly into a lean product management process and less cost.

Second, Apple has full control over the look and feel of its product, thus retaining the leverage to consistently maintain the luxury and sleek style of its product, which caters well to its target customer.

Third, fat margins. A Mac normally costs twice as much as a PC with similar processing power.

And fourth, Apple has a small but friendly user base, characterized by higher income and education, which frees the company from dealing with all sorts of malicious behaviors that are very common in the Windows world. As an example, the user doesn't even need an anti-virus software on his or her Mac.

In summary, with MSFT taking on all the hatred and accusation, Apple operates under an environment with much less internal and external pressure, thus gaining the luxury to be internally focused, thus more innovative.

Disclosure: Long AAPL, no positions in MSFT.

[Swordmaker]

I strongly disagree with the author's assertion that Macs are twice as expensive as PCs with similar speed processors.

Fortune Magazine agrees with me.

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Oppenheimer: New iMac a better deal than Dell, HP

In reviewing Apple’s (AAPL) new desktops Tuesday, some analysts chided the company for not setting “more aggressive price points,” as Kaufman Bros.’s Shaw Wu put it, given today’s “tough macroeconomic environment.”

But not Oppenheimer’s Yair Reiner. He did a spec-by-spec comparisons with comparable Dell (DEL) and Hewlett-Packard (HPQ) machines. His surprising conclusion, given Apple’s reputation for premium pricing: he found the new iMacs to be “a better value than competing Windows-based products.” Specifically…

“A side-by-side comparison suggests the new iMacs match up favorably against Dell and HP’s All-in-One’s on a price-to-performance basis. For example, the $1,499 model has a faster CPU and RAM with better or comparable graphics, and is still $100-$250 cheaper (though it lacks a TV Tuner, ~$60-$100 upgrade).”

To get a feel for what he’s seeing, I’ve pasted one of his charts below:

[Swordmaker]

Apple the innovator, Microsoft the monopolist. PING!

Mac Innovator Ping!

If you want on or off the Mac Ping List, Freepmail me.

[Tempest]

It’s kind of funny, because if you really think about Apple is actually the monopoly.

[Swordmaker]

It’s kind of funny, because if you really think about Apple is actually the monopoly.

Not according to the courts. Psystar's attempt to defend itself by attacking Apple as a monopoly in "Mac OS X compatible computers" was thrown out of court on its ear. Apple is a monopolist only in the same way that Honda is a monopolist in reference to Honda automobiles. Economically and legally one cannot be a "monopolist" for its own copyrighted or patented products. One can only be a monopolist in reference to a "market."

[E Rocc]

Apple tried to build a vertical monopoly, building all the machines, all the peripherals, and even all the software.

While I think this should be legal, the suits against Microsoft were akin to suing Toyota for refusing to sell a car with a Ford transmission....or with no transmission (allowing the owner to install their own).

Microsoft may not themselves be innovators, but they establish a standard that allows innovations to reach a wide market.

[LifeComesFirst]

Neither of them have a monopoly on anything other than their own intellectual properties.

As an econ nerd, hearing a non-monopoly referred to as a monopoly is like claws on chalkboard.

[cybervyk]

You “monopolist” goons crack me up.
Microsoft OSs run on X% of the PC platforms worldwide.
Microsoft does not make the hardware, only the software and you CAN choose not to run it.
I do not have the numbers, but I’ll bet that a greater percent of Apple machines run an Apple OS. To boot, Apple makes the hardware.
It is nothing short of delusional for you adolescents to complain of monopoly on MS’s part.

I run Linux on a PC platform.

[dayglored]

> It’s kind of funny, because if you really think about Apple is actually the monopoly.

Ummm, sure.... just like H-P is a monopoly because they're the only ones who sell ProLiant servers. And Dell is a monopoly because they're the only ones who sell Dimensions...

What a dumb line of pseudo-reasoning.

Hello? Apple has a market niche, not a monopoly. They are the sole-source for their trademarked products. That's not monopoly.

Microsoft is a 9000-pound gorilla with huge market-share, but even they are no longer really a monopoly, since there are credible competitors who (finally!) are kicking MSFT's butt to an increasing degree.

I suggest that you look up your definitions.

[dayglored]

> Neither of them have a monopoly on anything other than their own intellectual properties. As an econ nerd, hearing a non-monopoly referred to as a monopoly is like claws on chalkboard.

Agreed. I do think there was a time when Microsoft displayed some of the characteristics of a monopoly, but even those days are long over.

[Tempest]

Sooo many levels

http://www.applematters.com/article/has_apple_finally_become_a_monopoly_like_microsoft/

http://arstechnica.com/apple/news/2008/01/apple-antitrust-suit-alleges-monopoly-over-music-players.ars

The psystar case is ongoing,, too.

http://blog.wired.com/business/2009/03/apple-denies-os.html

http://windowsitpro.com/article/articleid/94761/apple-faces-federal-monopoly-suit.html

[Tempest]

I suggest you look up the word reasoning...

[Swordmaker]

Apple tried to build a vertical monopoly, building all the machines, all the peripherals, and even all the software.

Hmmmm... that's why Apple provided Microsoft with the Mac OS codes to develop Microsoft Office, Word, Excel, etc. (which were developed for and released first on the Mac). That's why Apple's ran Adobe software, so they could write all the software. I don't think you know what you are talking about.

While I think this should be legal, the suits against Microsoft were akin to suing Toyota for refusing to sell a car with a Ford transmission....or with no transmission (allowing the owner to install their own).

No, the anti-trust suits against Microsoft had to do with MS using its Operating System monopoly position for the benefit of its non-OS products such as Internet Explorer over Netscape, Word over Wordperfect, etc. MS threatened retailers and computer manufacturers with not supplying them with Windows if they included competitors products with their computers. Microsoft lost.

Microsoft may not themselves be innovators, but they establish a standard that allows innovations to reach a wide market.

I think if it had been left up to Microsoft, there would be very little innovation. Their method of innovation was, shall we say, unique. I know of at least two cases where Microsoft STOLE software from competitors and used it in their competing products: Disk Doubler/Disk Stacker and MS using code from Apple's Quicktime in their original Windows Media Player. The copyright and patent infringement suit settlement on that last one cost MS $150 Million and they agreed to give Apple FREE licenses to some of their patents in perpetuity while still having to license patents and copyrights from Apple for cash. There are more examples, but these are the most well documented.

[Swordmaker]

Neither of them have a monopoly on anything other than their own intellectual properties.

The courts have ruled that Microsoft's ~90% plus of the Personal Computing Operating System market is a monopoly... and hence has restricted their freedom in certain ways that non-monopolists do not have to meet.

[Swordmaker]

It is nothing short of delusional for you adolescents to complain of monopoly on MS’s part.

Hmmmm. So the attorneys general of multiple states, the European Union, and the US Government are "adolescents?" All of these have won court cases against Microsoft's monopolistic practices and Microsoft has paid fines in the hundreds of millions of dollars because of losing those cases.

[Swordmaker]

Microsoft is a 9000-pound gorilla with huge market-share, but even they are no longer really a monopoly, since there are credible competitors who (finally!) are kicking MSFT's butt to an increasing degree.

At 90% of the personal computer operating system market, they are still considered a monopoly... and as such are constrained from certain practices that competitors such as Apple are not obliged to eschew. I grant you that their monopoly is fraying around the edges faster and faster... and even has some gaping holes appearing in the weave...

[dayglored]

> I suggest you look up the word reasoning...

rea⋅son⋅ing –noun
1. the act or process of a person who reasons.
2. the process of forming conclusions, judgments, or inferences from facts or premises.
3. the reasons, arguments, proofs, etc., resulting from this process.

Okay, you said:

It’s kind of funny, because if you really think about Apple is actually the monopoly.

It seems obvious that you label Apple a "monopoly" because they are the only outfit that produces their products. You think that because they are a sole-source for those products, and defend their trademarks and IP, that they qualify as a "monopoly".

I claim that is not a reasonable conclusion, given the proper definition of "monopoly", which necessarily includes the characteristic of being able to force people to buy their product because it's the only one available.

Apple makes computer systems. There are scores of computer system makers.

Arguing that a company with only 10% market-share can "force" consumers to buy their products is laughable. So I claim it is faulty reasoning, to form the conclusion that Apple is a monopoly, starting from the fact that they own trademarks.

[dayglored]

> At 90% of the personal computer operating system market, they are still considered a monopoly.

I disagree -- there are too many credible alternatives these days to complain that Microsoft can force people to buy their products.

Go back to the mid-1990's and the picture was very different -- the Mac was ineffectual, Linux didn't exist as a product. If you wanted to get things done in the mainstream, you pretty much HAD to have Windows, and of story.

The rise of Mac OS-X changed that for consumers, and the rise of Linux changed that for more technical and more experimental users. It won't go back.

Microsoft's position has been eroding quickly since about 2003, and they are now in the position of the Empire in Asimov's Foundation -- Trantor still shines brightly, but the structure is weakened and visibly crumbling.

I believe that we will see Microsoft drop to 70% marketshare within 5 years. The only reason that can happen is that they are no longer a monopoly.

[cybervyk]

“Hmmmm”, seems a little adolescent, too.

Frankly, telling me that Attorney’s General ( like Andrew Cuomo, NY, Richard Blumenthal, CT), European Union ( NWO ), US Gov’t ( Pres_ent Barrack Hussein Obama, Nancy Pelosi, Barney Frank ) agree with you does little to impress me that you are correct.

[sten]

hilariously funny

the monopolist would be apple, as they REQUIRE you to use THEIR hardware

the innovator would be microsoft, without whom apple would have vanished in the late 90s

what is really funny is just how accurate the 1984 commercial was. of course, what we didn’t realize back then was that the audience members were all mac-o-philes that will attack any microsoft product at the drop of a hat.

don’t think apple promotes conformity and uniformity? walk into any apple lab or store and you will seen all the exact same hardware from all the same vendor.

and yes, you can get a similarly equipped PC for about $600. of course, if microsoft installed all that free software on the box, like apple does, then there would be nonstop complaints about anti-competitive practices

[Swordmaker]

Sooo many levels

First of all, these are private civil lawsuits... not governmental actions against Apple.

In re: Somers v. Apple Inc., those articles just prove that anyone can file a lawsuit. According to Justia.com, the last activity on this lawsuit was on June 4, 2008, with NOTHING being done since then despite have been set for a hearing on March 23, 2009. There is no posting that a hearing was held... and no rulings. There has been no news about this, at all, and it may be that Somers dropped her lawsuit in light of the ruling by Judge William Alsop in the Psystar Inc. v. Apple Inc., case that held that "single brand products market definitions are irremediably flawed." Apple also demonstrated to Judge Ware that 30% of the MP3 player market is held by other than Apple products.

The psystar case is ongoing,, too.

Sorry, the anti-trust "monopoly" portion of Psystar's offensive defense was thrown out of court... wholesale.

“Psystar’s single-brand relevant market definitions are irremediably flawed. Psystar’s own allegations establish that there is no such relevant market as the ‘Mac OS market.’..

"Psystar’s effort to define a single-brand relevant market contravenes well-known principles of antitrust law. Relevant markets generally cannot be limited to a single manufacturer’s prodcuts.”—Federal Judge William Alsop

The judge just barely allowed them to re-plan their defense and now they are claiming "copyright and patent abuse."

Your linked article's headline is totally misleading since that portion of Psystar's claim has already been lost. The article you linked is actually about Apple's legal response to Psystar's new theory of their case. The judge's ruling specifically denied Psystar's allegations that Apple held a Monopoly position in reference to the "OS X compatible Computer market" and ruled that such a market was a fiction created by Psystar and DID NOT EXIST. The judge has not yet ruled on Psystar's new theory or whether he will allow them to continue with it.

On the other hand...Network World has just reported a breakthrough in the Psystar v. Apple case!

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Breaking: Apple settles with Psystar, agrees to license OS X

By Yoni Heisler on Tue, 03/31/09 - 10:52pm.

Apple's lawsuit against clone maker Psystar was settled earlier today as the potential downside of losing a protracted legal battle with Psystar became too risky for Apple to bear. The agreed upon settlement has many stipulations, but the most shocking part of the agreement is that Apple has agreed to license OS X to Psystar, marking a return to the Mac clone business that Steve Jobs quickly and enthusiastically axed upon his return to Apple in 1997.

There is no doubt that the terms of the deal are bound to send shockwaves throughout the Mac community, but parties close to the case say that Apple was forced into a corner where it couldn't even take a chance on receiving an adverse ruling in court. If Apple lost its case against Psystar, the results would have been disastrous as it would have enabled any hardware manufacturer to install OS X on their own hardware, and essentially sell Mac computers for a fraction of the price.

But why did Apple settle now? Well, up until now, Psystar has only been shipping desktop towers running OS X, but what really raised some redflags up at Apple were Psystar's recently announced plans to unveil a line of laptops running Leopard. Notebooks account for the vast majority of Mac sales, and that also happens to be where Apple's margins are highest. According to a source close to the case, Apple begrudingly realized that if their notebook business took a hit, it's financial position might take a nose dive. Apple, therefore, decided that if third parties would be selling computers running OS X, it had better position itself to get something out of it.

As part of the deal, Psystar agreed to pay Apple a one-time lump sum fee which will largely be based on the number of hackintosh boxes it has sold to date. How that fee will be calculated remains undisclosed. Under the licensing portion of the agreement, Psystar agrees to pay Apple a licensing fee for each piece of OS X hardware it sells going forward. Importantly, the licensing agreement with Psystar is non-exclusive, meaning the doors are now open for other hardware companies to strike similar deals with Apple. Actual details of the licensing terms were not disclosed.

It remains unclear if the decision to settle was reached by Apple executives, or if Apple's legal team advised that the odds of winning the case were too risky to move forward with litigation. Whatever the reason, the implications of the settlement are huge, and though Apple stands to profit from licensing fees, it's clear that Apple probably isn't too happy about the deal it felt it was forced to make. Though Apple has licensed clones before, Steve Jobs has never been a fan of that business model, and has often mocked Microsoft's user experience in that regard.

And one more thing, April Fools!