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A Tale of Two Innovators

New York — Here is an intriguing tale of two innovators. Apple gets a NORTH RIVER MANAGEMENT GRADE A+ and Microsoft gets an A-. Since 1999, Apple has seen sales grow by four times and stock by fifteen times. Microsoft, by contrast, has seen sales grow 2.7 times and its stock fall 40%. The big difference: how they innovate.



Apple has a well-defined brand message: we manage your entertainment. Microsoft once had a clear message: we manage your work experience. But, once the company attacked Netscape with its Explorer web browser in 1995, the company lost its way and fell into a "Let a thousand flowers bloom" strategy. The latest thing is to be in the search and advertising businesses. Why? Who knows. But it is what it is.


The results are startling. Apple will overtake Microsoft in sales in about 24 months. If current sales multiples hold — no sure thing — the company would be worth $417 billion. Microsoft would be worth $343 billion, though probably less because its market cap to sales ratio is falling with its stock price. Either way, it is likely that Apple will be worth more than Microsoft in the foreseeable future.


What drives the two apart is the way they innovate. Microsoft is all over the map, from games consoles to operating systems, from advertising to office tools. And it tries to do most of its innovation in house. Apple leverages other people’s IP to move its own IP to market fast and cost-effectively, and is focused on entertainment. Apple steers clear of upstream risks in operating systems and studiously ignores markets that do not benefit its core mission.


The core cash and capital velocity data of the two companies could not be more different. Apple is 58 Cash Velocity Index points ahead, giving it far more competitive endurance. What gives Microsoft its A Grade is its operating earnings as a percent of enterprise value, 49% as opposed to Apple’s none-to-shabby 30%. Of concern to Microsoft shareholders, it has eight days of inventory compared to Apple’s five: how can this be?


A good argument can be made — indeed will be made in business schools the world over — that Microsoft lost its way taking on Netscape in 1995. This was a big mistake that has cost shareholders dearly. Microsoft trades at the same price as it did ten years ago, almost to the day. The attempted takeover of Yahoo shows that management is still badly distracted a full thirteen years later.


Yesterday, Microsoft announced that it will not follow up its failed Yahoo bid with another buying spree. Perhaps management has begun to figure this out.


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