Opinion: Microsoft need not fear Apple’s market cap

Microsoft may have sunk below Apple on the stock market but it doesn't mean that much

Microsoft may have sunk below Apple on the stock market but it doesn't really mean much

Microsoft may have lost much of its sheen but it is far from a company in trouble, says Jason Walsh.

Once the belle of the technology ball, Microsoft has been having a tough time of it lately. Never-ending problems with its X-Box hardware, internet initiatives continually eclipsed by Google and Facebook and now its old enemy Apple has apparently surpassed it in value.

This stuff is like catnip to tech pundits: big bad Microsoft being beaten by plucky (though increasingly evil itself) Apple. Alas, like all fairy tales it is mere kids’ stuff and while the moral may be worth debating, real life is more complicated.

Now Jean Louis Gasée, a former Apple executive who struck out on his own in the 1990s (and failed), says Microsoft is in serious trouble. While a lot of what he says is correct, his conclusion, that the company is in danger, is not.

All of this because Apple’s stock is now considered more valuable than Microsoft’s. But market capitalisation, as it is called, is no way to work out the value of a company let alone the relative values of two competing outfits.

For a start, the two companies products don’t actually overlap as significantly as people think.

Apple is in the following markets: consumer desktop computing and workstation desktop computing for the creative industries (design, publishing, photography, film and video, audio and three-dimensional graphics) with its Macintosh computer range, consumer electronics and servers.

In addition, Apple’s server business is severely limited to a couple of niches: supercomputing clusters and back-end support for the aforementioned creative industries. Arguably this is due to pure pig-headedness on Apple’s part as the company refuses to support key technologies such as virtualisation, presumably for fear of cannibalising Macintosh hardware sales.

Apple’s consumer electronics business, centred on the iPod, iPhone and now iPad, is impressive—and impressively profitable—but it is also relatively limited. Apple is still a new player in the market and has little interest in engaging with what it sees as outdated products such as digital radios, DVD and Blu Ray players. In short, the iPod and its siblings are surely the greatest consumer electronics success of the last decade but that doesn’t mean Apple is suddenly Sony.

Where there is a direct and historical overlap, such as between sales of Macintosh computers versus sales of Windows-powered machines, Apple has long enjoyed huge profits and even huger margins despite playing second fiddle to Microsoft—precisely the position Microsoft now finds itself in when it comes to new products.

Unlike the relatively narrow offerings of Apple, Microsoft, possibly the most boring corporation on the face of the earth, has its bloated fingers in every technology pie you can imagine. Even if in the areas where it has attempted to compete with Apple directly of late, such as consumer electronics, Microsoft’s efforts have been in vain, unlike Apple it is involved in just about every sector there is, including the invisible but massively profitable area of embedded devices, computers found in cars, washing machines and just about everything else.

These are not areas Apple has any interest in competing in and yet they remain profitable for Microsoft. And herein lies the source of the error: the whole exercise of comparing Apple and Microsoft is akin to comparing Apples to the shiny, enraged and purple heads of so many Steve Ballmers.

So why is Wall Street pimping Apple and dissing Microsoft? For the same reason it dismissed Apple in the late 1990s: stock markets are a guide to nothing.

Economic illiteracy isn’t only a characteristic of tech pundits, it’s also a blind spot for capitalists. Let’s have a quick look at some salient facts:

  • 90 per cent of investment expenditures are drawn from operating profits, not stock. (1) Despite their potential to ‘produce’ huge amounts of cash, stock markets are not even remotely close to being a major source of investment in actual business activity.
  • Between 1901 and 1996, net flotations of new stock paid for just four per cent of non-financial corporations’ capital expenditure. (2) Capital expenditure is expenditures that creates future benefits such as the purchase or upgrading of fixed assets, a cost that must be paid somehow but, it turns out, is paid from operating profits, not the issuing of new stock.
  • As a result of takeovers and buybacks in recent years, more stock has been retired than issued, resulting in the cold, hard fact that net new stock offerings were minus eleven per cent of capital expenditure between 1980 and 1997, making the stock market a negative source of funds. (3)
  • Anyone imagining this has changed since the late 1990s, a boom time for capitalism that has since been followed by a huge bust in 2001 and, most recently, a recession of the kind not seen since the 1920s, is doing just that: imagining.

To put it more bluntly, the stock market is still as full of shit as it has always been and Microsoft isn’t ’smaller’ than Apple, let alone on the verge of bankruptcy.

(1) See: After the New Economy, Doug Henwood, the New Press, New York, 2003, pp 187–188
(2) See: Wall Street: How It Works and for Whom, Doug Henwood, Verso, New York and London, 1998, p 72
(3) Ibid

Jason Walsh is a freelance journalist and editor of forth daily.

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