Another We Know Better Than Apple Report

September 21st, 2010

Consider the disconnect. Apple’s market cap is way ahead of Microsoft’s, putting the company second only to Exxon. As I write this, Apple’s stock continues to rise ahead of the rest of Wall Street, meaning that, at long last, the financial community has a lot of confidence in the company.

At the same time, the critics continue to rant about the things Apple is doing wrong, which threaten to derail the company’s growth. Alas, those are the same things they’ve complained about for years, and there’s no more truth to the objections now than before.

Part of the problem is that Apple’s business model is not the same as the companies the critics want them to emulate.

Take Microsoft. Microsoft is in the business of selling software. It doesn’t matter if those software licenses come with new PCs or are bought separately. One license is as good as another; well, not quite, because the end user pays much more for the same products. But if a company buys a few million licenses every year, little things quickly mean a lot.

Google is in the business of selling ads. That may seem obvious, but it has to be mentioned over and over again. When somebody buys an Android OS phone, the wireless carrier and the handset maker get a sale. Not Google. Google only makes money if you click or touch one of the ads they present in their search engine or software. If everyone stops selecting those targeted ads, Google goes out of business. It’s as simple as that.

Apple, as most of the critics should know, but evidently don’t, earns the lion’s share of corporate profits from the sale of hardware. The OS is the value-added extra that makes that hardware distinctive. Yes, profits are also earned from software licenses, from iTunes and the App Store. But the latter two are there mainly to push hardware. In the end, iTunes and App Store profits are said to be small, hardly above the cost of doing business.

Yes, I realize the critics believe Apple makes money hand over foot from music, movie and app retailing, but the company’s financials do not support that contention. So unless they are prepared to claim Apple is releasing misleading, or outright false, numbers, there’s no reason not to take them seriously.

In light of this situation, Apple can’t act in the same fashion as Microsoft. If the Mac OS were licensed to third-party companies, sales of new Macs would be gutted. It doesn’t matter if the value proposition of a Mac is provably superior. In the end, loads of customers will buy based on price, not value. Apple would have to sell a number of operating system licenses to compensate for the loss of a single Mac sale. That’s where the numbers mean a lot.

There’s also the advantage of offering a reliable and predictable user interface across all products. You see, companies who license the Google Android OS are afforded the freedom to do pretty much what they want to the user interface, features, or bundled apps. Verizon Wireless is substituting Microsoft’s Bing for Google’s search engine on many models. The wireless carriers and the handset makers may add special apps and interface features for branding, or just to look different. What that means is that the Android-powered smartphone you buy may look and work somewhat differently when compared to another model from the same carrier, or a similar model from a different carrier.

When it comes to getting OS updates, nothing is guaranteed. The latest and greatest Android OS versions let you use a version of Adobe Flash, but you may not be able to download that update on your smartphone, unless you resort to some sort of hacking method.

Even if you could declare the iOS and Android OS to be fundamentally equal in most respects — and that’s a possibility that few experts will accept — it doesn’t help if you’re not assured of getting the latest version. Yes, I grant that older iPhones can’t use iOS 4, or will get only a subset of the new features. But that’s a hardware limitation, not the result of Apple’s refusal in inability to let you have updates.

At least Windows looks pretty much the same from PC to PC, except for the crapware the manufacturers load onto desktops to earn extra profits.

When it comes to the smartphone platforms, it may well be that, in the end, more people will be using an Android-powered device rather than an iPhone. But that’s the result of comparing the combined sales of several dozen models to just one. It’s also the result of dumping, since Verizon Wireless is still offering two-for-one sales. You buy one smartphone, the second is free. Sales double, but profits are being sacrificed in the name of volume.

In the end, Apple’s executives appear to know how to run their business in a way that delivers stellar growth and profits, not to mention value to the customer. If market pressures force them to change strategies, such as the recent loosening of requirements for the App Store, so be it. The customer benefits regardless, and if you don’t like what Apple does, nobody forces you to buy their products.

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2 Responses to “Another We Know Better Than Apple Report”

  1. Bobby Has says:

    Your above comments are correct. Why do people keep thinking Apple needs/wants to be the OS for 90% of the computer users like Microsoft is on the desktop and Android wants to be in mobile.? Apple’s combined hardware plus software combination keeps them amazingly profitable. No reason to bottom feed for the people wanting a $200-300 computer. The quality just is not there. Apple will also do fine in Mobile when Android passes them in total units in operation worldwide. Apple makes money on every unit sold period.

    Apple does not need 10/20/30% market to be successful. Just profit on each unit sold.

  2. Richard says:

    The question of whether Apple should expand its OS horizons beyond its own hardware platform is one for the share holders, who, I might add, seem perfectly content with the current state of affairs. All the rest is speculation, though sometimes interesting speculation.

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