Technology Companies: Growth Over Market Share?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT) has been a mainstay of the technology world for decades and shows that while monopolies offer great profits they are by no means invincible. Monopolists and oligopolists maintain their dominance over a single market or a collection of closely related markets. Their focus on maintaining the status quo discourages new entrants by keeps the barriers to entry exceptionally high. The latest figures show that Microsoft has about 93% of the desktop and laptop market while Apple (NASDAQ: AAPL) has around 5%. Yet as open source software starts to move to the forefront and a host of other changes continue to transform the tech world Microsoft recently posted their first quarterly loss. Their dominant market share and historical success paints a great lesson for investors and shows that success can be a company's and investor's worst enemy.
It is common to frame Microsoft primarily as a stogy corporation with their lack of innovation as their primary sin but I believe the "why" behind the lack of innovation is of up most importance. Creating a multinational corporation capable of cornering, making, and developing a 93% market share is no easy feat. A huge number of sales people, middle managers, and engineers are required to create such a system. With Microsoft's 55,000 employees, the company could create their own small city. The development of the Machine takes up such a huge amount of resources and in order to maintain high ROE executives are forced to cut off ancillary interests which do not have proven ROI figures. Monopolists generate great returns and can charge exceptionally high prices for their products. This also means that entering into non-monopolized markets with an ambiguous expected market share with an unknown ROI appears to be a serious misuse of capital. Until consumers changed their preferences and smart phones and tablets started to overtake PCs, Microsoft had no good reason to try and redirect the Titanic.
I recently bought a new laptop and for the first time Microsoft Word, Excel, and PowerPoint were not necessary. Open Office provides all of the functionality that I need for work and school. Spending over $100 on Microsoft word versus $0 for Open Office is not a hard choice for as a consumer but it is a very difficult situation for Microsoft. Also, they are nowhere to be found in the growing mobile OS market. Even with more than 7 billion in cash and years of lead time they have still not been able to effectively enter the mobile market. This shows that money, time, and people placed within an institution dedicated to one market may find it impossible to redirect resources to another market. Institutional make up does matter. If product development were solely a question of cash then Microsoft would have a serious offering in the mobile market by now.
Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) provide further evidence that past institutional development plays an important role in the ability of a company to grow with consumer preferences. Dell's .45% 5 year revenue growth and HP's 3.67% 5 year revenue pales in comparison of Apple's 43.09% 5 year revenue growth rate. HP and Dell missed the development of mobile computing as a replacement for consumer PCs. The differences in strategy profound impacts on the relative merits of each company as an investment. Dell's total debt to equity ratio of .87 and HP's .94 is nowhere near Apple's 0.00. Dell and HP are fundamentally computing assembly firms. Just as Microsoft their institutional development have made them some of the most powerful firms in their respective markets but unable to truly develop into evolving markets. The development of the cloud technology has had a serious impact on corporate and consumer IT needs. Dell is starting to get into higher margin business software and applications but they have not been able to reinvent themselves as Apple has.
Just as Microsoft directed their resources to conquering their market Apple has done the same. Apple developed as an institution and a corporation by first understanding that they will never beat Microsoft on their home turf. Revenue growth and profit growth has not been fueled by trying to corner productivity software or the PC operating systems but by looking at mobile. Given that most people use their computers to go watch videos, read the news, send emails, and check social networks; Apple understood that the traditional PC has superfluous features for many of these tasks. Apple decided to grow their corporate institution around smart phones and tables thus cornering the latest growth area in consumer computing. The challenges in the 90s forced them to look at new markets and now they are a duopolist with growing profits and revenue.
Being a monopolist does not offer permanently guaranteed profits but it does offer great returns as long as the market remains strong. Monopolists have inherent dangers as the high ROI in the core market make investments outside of that core market have a relatively poor ROI. As monopolists continue to develop it is hard for them to change with the market as Microsoft's non-existence in the mobile market shows. No business enjoys permanent bliss but Apple is currently growing and connected with growing consumer markets. Apple is a growing monopolist just as Microsoft was in the 90s. The formula of a monopolist in a growing market is not a permanent silver bullet and investors must continue to watch for consumer preferences which can turn growth markets into declining markets. Still, by looking at the success and challenges of Microsoft the positives of Apple are obvious.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.