armchair theorist

Note: This article was originally published on The Digital Movement. I have made some slight grammatical edits in this version.

Microsoft. Google. Apple.

Whenever someone starts a conversation about Silicon Valley, computers or even just technology in general, you won’t get very deep in the conversation until someone mentions one of these three companies.

That’s expected. Just like Exxon Mobil is the flag bearer for the energy industry (remember, I said energy, not clean energy) when one thinks about the poster child of the technology industry, most people will think no further than one of this triumvirate of companies.

(Perhaps a certain bookseller will join the three in the near future, but for now, it’s only these three.)

Collectively, Microsoft, Google and Apple made over USD 28.7 billion in revenues this past quarter (12.9, 5.9 and 9.9 billion respectively). More impressively though, all three companies managed to handily beat earnings expectations in a down economy, and managed to turn in a healthy 24% net profit margin on average between them (28%, 28% and 17%).

For the average consumer or business user, there is not a single day that goes by where one doesn’t use at least one product from any of these three companies. In fact, there are more and more people like me nowadays, who actually use and rely on multiple products from all three companies every single day without exception.

We’ve rarely seen this level of dependence on technology before. Even during the monopoly heydays of AT&T and Standard Oil, there would be days that go by where you didn’t need to make a phone call or use oil.

Fierce Competitors or Strange Bedfellows?

As a non-biased observer in the tech industry (okay, maybe a teeny bit biased), it is always amusing for me to see these three companies compete and clash with each other in virtually every segment of the tech industry. However – entertainment value aside – many observers will certainly question why these three companies try to do everything and compete with each other everywhere.

Does Microsoft really need to go into the portable music player or search business? Does Google really need to build mobile operating systems or be in the business of selling books? What the heck is Apple anyway? Is it a computer maker, a software company, a mobile platform or a music store?

To really understand the dynamics between these three companies and why they compete (or partner) with each other the way they do, one has to look a bit deeper and really try to understand their motivations and long-term strategies.

Here is just one person’s interpretation based on his own opinions and observations. Let’s start with Apple.

Just Apple Please; Drop the Computer

Apple doesn’t think of itself as a computer company anymore. Nothing illustrates this as well as the fact that Apple changed its name from “Apple Computer, Inc.” to “Apple Inc.” in 2007. Why should it be a computer company and compete with the other computer companies in the industry like Dell, HP and Lenovo? And does it make sense to compete as an OS company? Steve Jobs certainly didn’t think so, as he famously declared in 1996, “The PC wars are over. Done. Microsoft won a long time ago.”

While most people know Apple as the bright and shining Silicon Valley star it is today, Apple actually had to weather some tough times. Things were so bleak in 1997, that Apple received a $150 million dollar investment… from Microsoft, of all companies. In 1997, Steve Jobs returned for a second go as Apple CEO, and led one of the most remarkable turnarounds that the tech industry has ever seen. I believe the reason why Apple is successful today is because they believed in a few important principles.

First of all, even though the PC wars may technically be over, Apple sensed that there are still new markets to be tapped. For the lack of a better term, I’m going to call it Luxury Computing. Just like in a commoditized automobile market there exists a highly profitable market for high-end luxury sports cars, Apple felt that it can create such a market out of the computing industry as well. Apple believed that if you can create something so cool and so out-of-this-world that it immediately differentiates you from your competitors while not sacrificing on any functionality, then people will buy it. That was how Apple started rolling out its tremendously successful line of aesthetically-pleasing Macs – starting with the first “iMac” in 1998. Even the new name had some flair in it.

Beautiful aesthetics, excellent industrial design and perfect execution certainly helps differentiate one computer from the rest, but to Apple, that is not sufficient. In order to completely ensure differentiation, Apple felt that they needed to control every aspect of the user experience and ecosystem. This is the biggest difference between the PC world and the Mac world – in Apple’s view, there is too much risk in letting the ecosystem have a say in how happy your users are with your product.

This is why Apple felt like it wasn’t sufficient for them to build their own hardware. They also needed to create their own operating system (OS X), web browser (Safari), media player (iTunes), portable music player (iPod), mobile phone (iPhone), video codecs (Quicktime), online store (iTunes Store), retail store (Apple Store), backup device (Time Capsule), TV set top box (Apple TV), lifestyle software (iLife) and productivity software (iWork). And that list goes on and on.

In fact, I believe Apple’s ultimate goal is for consumers to be perfectly content and productive using 100% Apple products for all their computing and entertainment needs. And if users are happy and feel that they are using a luxury product, they are willing to pay more and contribute to higher margins.

This is also why Apple is seemingly trying to reach out in so many different directions at once. It simply cannot afford to trust any aspect of the computing experience to other parties and must always look to build and innovate something from within. Even the ecosystems that Apple does allow to flourish – like the iTunes App Store – are frustratingly regulated and controlled.

This also explains why Apple competes with Google and Microsoft on so many different vectors – web browser, mobile phones, operating system, software, etc. In its never-ending quest to provide users with the best differentiation possible, it has no choice but to compete in all these areas with the “Apple experience”.

If you look at how Apple has successfully transformed itself from a computer company to an all-encompassing consumer experience company, it really shows how Apple has a knack of creating new and profitable markets where it didn’t exist before. In Steve Jobs own words in 1996, “If I were running Apple, I would milk the Macintosh for all it’s worth — and get busy on the next great thing.” With Jobs as the CEO, Apple is good at finding the next big thing. And finding the next big thing is important, because for every next big thing that you can find, you can further increase your profits and reduce your risk by diversifying your business.

Want to bet against the Apple Tablet? I certainly won’t.

To achieve the goal of consistently finding their next big thing, Apple is willing to be an early adopter in technology. The iPhone is the world’s first fully touch screen-enabled mobile phone. The new 27” iMacs are something that has never been seen before. Even if this results in Apple being more expensive, so be it. You execute it perfectly, people will buy it.

One last interesting observation about Apple: Sometime around the mid-2000s, Apple forged a deep, yet unofficial partnership with Google, in a bid to – in my opinion – compete with Microsoft. It made perfect sense at the time. Apple provides the hardware, and Google provides the cloud services that add value to the hardware – particularly for devices like the iPhone.

However, Apple subsequently realized that Google was more of a competitor than a friend, and that partnership rapidly dissolved earlier this year. We shall see why next.

Google Wants to Help You Use the Internet

Google – one of the most profitable and powerful tech companies in Silicon Valley today – has an extremely simple business model.

It boils down to this: The more you use the Internet, the more money Google makes.

How do they make that money? Well, the more you use the Internet, the more likely that you will use their market-dominant Google Search. And the more you use Google Search, the more likely that you will have AdWords-driven advertisements thrown your way, which makes money for Google. Also, the more you use the Internet (particularly Google’s free services like Gmail), the more comfortable you will be in trusting your data and transacting in the cloud. And the more comfortable you are with the cloud, the more likely you are willing to pay to put your data in the cloud (Google Apps) or buy stuff from Google on the cloud (Google Bookstore), which also makes money for Google.

In fact, someone told me before that if you look at Google’s revenue over the years and plot that against global Internet usage over the years, it is almost a linear relationship. Simple, right?

This principle alone explains virtually every single product or service that Google comes up with. They either promote Internet use, or they act as a hedge to prevent other companies from disrupting the use of the Google-controlled Internet. And this is also why Google gives away virtually everything for free. They never intend to make money from these products and services – they will make back their investments from the increased revenue from increased Internet usage.

• Gears? It makes web applications more powerful, which will entice users to use the Internet more.
• App Engine? It promotes the rapid development of new Web 2.0-ish services, which will entice users to use the Internet more.
• OpenSocial? It promotes the rapid development of social networking-enabled services, which will entice users to use the Internet more.
• Chrome? What if one day Internet Explorer comes with a built-in ad-blocker? Chrome is a hedge against that.
• Android? What is one day the iPhone or Opera Mobile comes with a built-in ad-blocker? What if Microsoft forces all the mobile device makers who use Windows Mobile to default their search provider to Bing? Android is a hedge against that. (Others think so too.)
• Chrome OS? What if one day Windows comes with a built-in ad-blocker? Chrome OS is a hedge against that.
• Vehement support for HTML 5? What if the de-facto standard for Internet video and rich Internet applications continues to be plug-in based technologies like Flash and Silverlight? Google can’t possibly have the keys of their kingdom under the control of a couple of gatekeepers like Adobe and Microsoft! HTML 5 is a hedge against that.

This explains why Google competes with Apple and Microsoft on so many different vectors – web browser, online services, mobile phones, operating system, etc. In its never-ending quest to ensure that global Internet usage grows unfettered at a steady rate, it has no choice but to compete in all these areas.

This gets pretty annoying and disruptive for Google’s competitors, since Google loves to give stuff away for free when their competitors are charging for it.

Google also tried to invade Apple’s turf earlier this year with the whole Google Voice incident, which explains why their partnership fizzled shortly after the incident came to light.

To Google’s credit, it does recognize that it’s risky to only look at consumer Internet use as your primary revenue source, and has been diligently trying to diversify into the enterprise space with Google Apps. However, although Google is not established in the enterprise space yet, this is a shot across the bow to Microsoft, which lives and dies by the enterprise.

Speaking of Microsoft…

You Mess with Microsoft, They Mess You Back

When most people think about Microsoft, they think of a two-trick pony that survives only on its dominant Windows and Office franchises. The reality though, is that the Microsoft of today is an incredibly diverse company; in fact, based on Microsoft’s latest financial results, Windows and Office only contribute about 54% of Microsoft’s total revenues. Segments like the Xbox business and enterprise server business surprisingly contribute to a large part of Microsoft’s revenues nowadays.

However, having said all of that, Windows is still Microsoft’s bread and butter. If Microsoft loses the operating system, it’s game over for the Redmond giant. And if competitors are making it difficult for you to do your business, make sure you make things difficult for them to do theirs also.

This alone explains why Microsoft feels the need to diversify and compete in certain areas that may not be perceived as traditional Microsoft competencies.

None of this is as evident as Microsoft’s investment in the online business – particularly in search – despite losing money quarter after quarter.

Microsoft sees Google as a disruptive competitor, with free or cheap offerings looking to displace Microsoft offerings in both the consumer and enterprise space. Chrome OS is free, Windows is not. Android is free, Windows Mobile is not. Google Apps are cheap, Office is… well, perceived as more expensive than Google Apps.

Google can afford to be disruptive, because it has a massive cash cow called AdWords that can fund virtually everything they do. So if you are Microsoft, you have to force them to play defense as well, and you attack Google’s Internet empire with an Internet empire of your own. Thus is why despite hemorrhaging billions of dollars every year, Microsoft needed to put in the investment to commit to the success of Bing, Windows Live, MSN and the rest of Microsoft’s online properties.

It’s still early days – especially for Bing – but Microsoft needs to strategically be in the online game for the long haul. And if past history is any indication, Microsoft prevails more often than not whenever it consciously picks a battle it wants to win and commits serious resources to it.

As for competing with Apple… Well, there isn’t as much to say here.

As far as PCs are concerned, both sides seem to have carved out their respective niches, and it looks to be status quo for a while. Despite Microsoft’s gift to Apple called “Windows Vista”, Apple made no attempt to enter the enterprise space. Microsoft followed Apple’s lead and realized that people not only liked functional PCs, but also aesthetically-pleasing PCs. Thus Microsoft worked very hard with its ecosystem of partners to make sure Windows 7 (as well as the plethora of new PC hardware hitting the market now) are both functional and aesthetically-pleasing.

Microsoft also realized that Apple’s practice of offering an end-to-end consumer experience for the user is what users wanted, which is why Microsoft diversified into consumer electronics like the Xbox and the Zune. The future Microsoft will likely be an all-encompassing consumer-oriented company that brings a consistent computing experience across all of the devices that consumer will use during a day. Steve Ballmer alluded to it many times before, in terms of Microsoft’s “three screens and the cloud” strategy.

Now if only Microsoft can fix Windows Mobile…

A Classroom Analogy

So 2500 words later, what can we conclude or predict about the future?

Frankly speaking, in this volatile tech industry where a content management system for 140-character messages can get a USD 1 billion valuation, we really can’t conclude or predict anything.

However, if I was a betting man, I would bet that all three tech giants will be around for a long while to come. I believe there may be a redistribution of market share for certain products and services, but all three companies will stake out their sweet spots and remain incredibly profitable while keeping each other in check. And ultimately, the big winners in that scenario are us, the consumers.

Try this analogy: If you were in a classroom and there were three girls you liked in your class, who would you rather date?

• Would you date the girl who is always gorgeous with her expensive designer clothing and perfectly-manicured nails who desires to bring you all over town to all of her favorite nightspots to make sure you always have a good time? (Apple)
• Or would you date the cute and confident girl who always volunteers to help you with all your home work and keeps you company whenever you need it because she thinks that it’s mutually beneficial for the both of you to be hanging out together all the time? (Google)
• Or perhaps you prefer the pretty and tough girl who despite her previous, colorful life experiences making her more mature and worldly than the rest, she doesn’t like to brag about herself and whenever you need anything, you know you can always depend on her? (Microsoft)

IMO, the only acceptable solution (for this make-believe world at least, but perhaps not for the real world) would be to accept polyamory and to date all three at the same time.