How Apple eclipsed Microsoft

Relentless innovation, ruthless efficiency and great products have helped Steve Jobs's company steal a march on its old rival

Apple is now bigger than Microsoft, its old rival. Not just in market capitalisation but also in quarterly revenue and profits. Its enormous, ruthlessly efficient and capitalises on its strengths - its brand and marketing, and uses them to promote top class hardware and software packaged as brilliantly designed and easy to use products.

And now it is looking to China: "I've never seen a country with so many people rising into the middle class who aspire to own products that we make," Apple's chief executive Tim Cook said. He has his eyes on the fresh possibilities of the hundreds of millions of people there in a way that no other western company has: he doesn't just want to sell them phones, he wants to sell them iPads and Macs too. If China clicks– and the fact that some Chinese cities had fake Apple stores which were so good they were indistinguishable from the real thing – then Apple has space for years of growth.

iPod: revolutionising digital music

Apple began its comeback with the iPod, released on 23 October 2001. It wasn't the first digital music player but was easily the best in class (due to a clever choice of the hard drive – a first from Toshiba, for which Apple secured an exclusive contract) and the fact that it had previously developed a superfast connection system for video, called FireWire, which it adapted to transfer songs.

The iPod's ease of use easily won over consumers. Apple revolutionised the music player and digital music download market. Then came the iPhone, where Apple wasn't first with a touchscreen, yet did it far better than previous efforts by companies such as Nokia and LG, which sniffed at Steve Jobs's presentation but have since sunk into loss.

Apple hasn't been able to dominate the smartphone market, but it's noticeable that Google's Android mimics the iPhone system (but didn't before its launch: it used a keyboard-based system that looked more like a BlackBerry). Given that Android dominates the smartphone market, running on over 40% of handsets now being sold, compared to Apple's 18% or so, one could say that the "Apple interface" dominates.

iPad: tablets of success

Then of course there is the iPad. Apple spent nearly ten years, on and off, developing it; Steve Jobs thought that Bill Gates's announcement in 2001 of a Windows tablet was intriguing, but the design team led by Jonathan Ive couldn't make something with a touch screen that was a real pleasure to use. So it was shelved but the experience of touchscreens was then put to use to develop the iPhone. The iPad was the next step, and while Apple is again - just as with the iPod - not the first in the market, it has completely dominated it. It holds the Guinness world record for being the fastest-selling gadget ever. The iPad's market share is 75% and will retain its lead till 2014.

"I still believe that the tablet market will be bigger than the PC market," Cook said after the results.

Apple has a tiny share of the PC market – it just edged past 5% this quarter compared to the 95% of Windows. Is Apple ever going to reverse that? No, never. Its share is growing minutely and has done so for over five years. Apple's increase, though small, has affected PC sales.

Selling Apples

Apple's strength is the diversity of its range of products: phones, computers, tablets and it sells music, TV shows and films. It also sells huge numbers of mobile apps and simple hardware like mice and trackpads and keyboards. The company has colossal amounts of cash - about $70bn (£44.5bn), of which about half is outside the US (and would be subject to heavy taxes if it were repatriated). So it uses that cash to buy favourable terms and equip factories for its suppliers; in return it gets special treatment. It's the same method it used with the iPod, but now done with hundreds of millions of dollars unlike what it could offer a decade ago.

The iPod sales are falling year-on-year. Apple is mainly focussing now on its iPod Touch, in effect an iPhone without the phone. About 100 million have been sold. Many of these will be able to use the new iMessage service, which can send messages to other iPhone or iPad users over the internet. It's like an entry-level version of the iPhone (and a challenge to RIM's BlackBerry Messenger.

The company needs its rivals

The only thing Apple doesn't do is manufacture hardware. But Cook, who was hired by Jobs in 1997 has gradually changed that. Apple gives hardware contract to companies in China and Taiwan. Its most serious rival in hardware is Samsung, the South Korean conglomerate with whom it is fighting a series of court battles over patents on mobiles, smartphones and tablets. Samsung also has a new flagship Android phone, just released, but without the immediate UK availability of the iPhone 4S. And yet ironically, Apple is also Samsung's biggest customer. They need each other.

The other key rival is Amazon, which sells more content than Apple, but also does hardware through its Kindle, and especially the low-cost Fire tablet. Where Apple profits on the hardware, Amazon profits on the content, siting them at opposite ends of the same market.

Apple in the cloud

And then there is iCloud. Both Google and Microsoft have been pushing to take cloud computing to the next level. But Apple's iCloud service already has 20 million users, making it one of the biggest players in the sector. However, unlike Microsoft and Google, its aim is to use it to sell hardware, rather than software or services.

But for a really clear example of Apple's efficiency, consider a figure that's normally ignored: its inventory (the hardware that's sitting around in warehouses).

At the end of the quarter, Apple, despite its colossal turnover, had just under three days' worth of stock under its ownership. Far less than Nokia(35 days) or BlackBerry-maker RIM (45 days).

Short inventories are generally a good sign in a hardware company: they indicate good supply chain management and product planning. Steve Jobs hired Tim Cook to tighten up Apple's then-sloppy inventory management. He has got it down from weeks to days. Ideally, he wants it to be hours. But Apple's growth has defeated that ambition. It's not a bad one to miss, though.


Charles Arthur

The GuardianTramp

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