With Microsoft trying to push the message that Apple are overpriced, I find it ironic that in the midst of a global recession, the company whose products are supposedly too expensive for a recession, managed to turn out another record quarter while Microsoft, trying to bill itself as the wise choice in a world of budgeting, turned its first quarterly drop in profits (year over year) ever. What Apple has done though, is not just manage to avoid the harsh economic climate, but shatter one of the long held axioms of the technology industry, that cheaper is better, and the competition are left scratching their heads.
In a world where Microsoft Windows was the dominant force in computing, not just based on numbers, but in mind share also, PC makers had only one thing to differentiate themselves among the less technology savvy customer: price. The race for the greater number of unit sales drove profit margins down, which could easily be offset by greater unit sales. A decade of price wars has left such a delicate balance between market share and making money that any external force could easily upset that balance and spell, if not doom, then serious problems for the computer industry. The global recession certainly falls under the definition of such an external force. Computer makers responded the only way they knew, by making even cheaper products. Some would argue that the success of netbooks would validate the “cheaper is better” mentality, but then if that was the case Apple, by only selling premium products and by not having a netbook for sale should have reported massive losses.
Yet they didn’t. They reported another great quarter. Mac sales were marginally down, but this can be explained (at least this is what Apple are saying) by the fact that Apple had a major product introduction in the quarter last year and didn’t this time round. Even with that, the fall in numbers from the year ago quarter is marginal considering the economic conditions. So why then are consumers buying Apple products if they are so “overpriced”. Surely people must, with limited budgets, go for the cheaper option, right? That’s certainly what Microsoft seem to believe. But they’re not.
People on budgets are instead buying smarter. They’re not throwing their money away on cheap crap. They’re choosing to buy quality products that they feel give them better value for their money, even if it costs a little bit more. People are sick of the issues with windows. They don’t want to replace their laptop every 8-12 months. Many people I know who have bought the cheapest dell etc thinking they’re saving a penny often find their computers unusable after 6-8 months. Of course tech savvy windows nerds might be able to restore them to life, but the average consumer just thinks his or her laptop’s had it and goes and buys a new one. People aren’t willing to do that now. They want something the believe will last. Sure macs have their problems but Apple have done such a good job with their “get a mac” ads that people believe the hype, and combined with the success of the iPod, the company has brought home the idea that Macs are the quality option. Whether it’s true or not is irrelevant, the effect it is having on the market is the same none the less.
The effect this is all having on the rest of the computer industry and the technology industry as a whole should not be underestimated. For many this simply can’t be true. You get the sense from Microsoft’s advertising that they’re like a child throwing a tantrum that Apple has no business being successful, that they’re deceiving everyone with their “quality” when all you need is something that works and is cheap. After all, that’s what they’ve done from square one. The problem for the computer industry runs even deeper though that having to face this new reality. For PC manufacturers, who might want to make quality products (take the Dell Adamo for example. It is a quality piece of hardware, but it still runs Windows) are in a no win situation because the perception most people have of the quality issues with PC’s is because of Windows. Unfortunately manufacturers don’t really have much of a choice. The perception of Vista must surely be dragging down the sales and reputations of major PC brand names, which might explain why many netbook manufacturers are putting Linux on their machines.
Microsoft on the other hand is tied to its partnerships with Hardware manufacturers. They don’t make their own computers and without the PC industry no one would have a reason to buy Windows. That can’t be a happy relationship right now. Especially as Microsoft has just put out a bunch of ads telling people not to buy premium PCs. Im sure manufacturers of high end machines loved that. The PC world has become the symbiotic relationship from hell, while Apple, because of it’s instance on owning the whole show, has remained in control of its own destiny.
At the end of the day, despite the rampant fanaticism on both sides, computer companies are just businesses, whose primary reason to exist is to make money, and in terms of industry reputation, Apple has become the king at making money. That crown once belonged to Microsoft, and I suspect that loss of status infuriates them more than anything. Microsoft may still turn larger profits over all than Apple but Microsoft is a much larger company. If you compare earnings per share, Microsoft delivered 39 cents per share, compared to Apple’s $1.33. It’s ironic that the one thing that everyone said would be Apple’s downfall, not licensing it’s operating system, has perhaps become the one thing that every other manufacturer now envies. While other companies are dependant on Microsoft for direction, Apple can steer their own course, react far quicker to market fluctuations, and more importantly make a lot of money, when all around companies are struggling.
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Only MS would spend money telling people they are the computer to buy when you’re only requirement is “a large screen and less than $700.” I’m sure PC makers who try and sell a PC for more wonder who to thank for delivering that message.
JBelkin hits the nail on the head. I feel no sympathy for MSFT; Apple worked hard to acheive the best products. MSFT had plenty of time to improve the UI; the security; the stability; and the performance of Windows and mostly twiddled their thumbs. The fact is, if you do serious WORK, you want a serious computer, a Mac.
I’d rather be a pauper free to chart my own course than a king shackled to others’ whims.
Why are you comparing earnings per share? That’s a completely meaningless number to compare. What were you thinking?
According to Answers.Com (and I quote)
“EPS serves as an indicator of a company’s profitability…..
…Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component of the price-to-earnings valuation ratio. ”
I would hardly consider that “meaningless”
The point i was making was to illustrate that adjusted for size (with microsoft being a much larger company) Apple punches far above its weight when it comes to making a profit. While it may not be fair to use EPS to calculate an exact ratio of success for evaluation purposes, or that the number of shares each company has could be used as an accurate way to measure their size, my use of EPS was merely to illustrate the point, which I thought was pretty obvious from the post to begin with
EPS is not meaningless for the uses given at answers.com. However, it is completely meaningless to compare EPS between two *different* companies. Thought experiment: company A and company B are the same in every financial measure (revenue, earnings, number of employees, etc), except that A has 1 million shares of stock outstanding, and B has 10 million.
B’s EPS will be 1/10th A’s EPS.
See the problem with comparing EPS across companies now? A has sliced their company into 1 million pieces, B has sliced theirs into 10 million. B’s share price will be about 1/10th of A’s.
(This is also why it is wrong to compare share prices. People often assume that if company A is $100/share and company B is $10/share, it must mean A is making more than B, or is bigger than B, or has more sales than B).
If you divide EPS by share price, you’ll get a number that is somewhat reasonable to compare across companies. Equivalent, but easier to work with and understand, is to ask how much you’d have to spend to get $1000 of earnings. That’s a valid way to adjust for size.
Using your numbers, and the most recent closing stock prices, you’d have to buy $50k worth of MS stock to earn $1000 a quarter at the EPS you cited. You’d have to buy $75k worth of Apple stock to earn $1000.
Another way to compare companies that takes into account size differences is to look at earnings per employee. Apple was about $138k/employee over the last year. Microsoft was somewhere around $190k/employee.
The lesson to take away from this is that any financial statistic whose value depends on the number of shares outstanding should not be used to compare different companies.
Again, I disagree…
From About.com
“For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?
It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.”
So EPs is neither meaningless, and is a valid comparison tool. Again – I wasn’t making actual comparison – just demonstrating the point that one company is seen as better at making money than another. I think for shareholders EPS is a valid concern. Every disctionary definition of EPS says it’s a valid and important benchmark of profitibality.
You’ll have to forgive me. I’m sure you know what you’re talking about, but every dictionary and refrence site I’ve looked up researching this article and in response to your post says it’s a valid way to compare companies. I’ll have to give the trusted online references the benefit of the doubt.
It’s not even like the point I was making was wrong. I don’t think anyone in the the market considers Micorosoft a better bet than Apple right now.
And another thing….
Number of employees is not a fair metric as Apple owns retail stores and therefore a disproportionate extra number of lower-paid. employees.
As for your other example, that’s just silly. You’ll never get $1000 of earnings unless there’s a share buyback. As a shareholder you don’t actually get anything of the companies profits, this makes no sense.
As i said numerous times I was making a symbolic comparison, which i believe based on my research an numerous online examples is a fair point. Obviously you disagree and that’s your right but I don’t agree with your logic or your dismissal of what is written in various places.
Again, numerous online refrences say EPS is a reasonable way to determine the PROFITIBALITY of companies. Which is what I was doing. I said before and I’ll say it again. I’m giving them the benifit of the doubt.
Suppose I make 50000 dollars a year. My friend in Japan makes 2000000 yen a year. Do you think he makes more money than me? If you applied the same reasoning that you are using with EPS, your answer would have to be yes, because 2000000 is much bigger than 50000.
Of course that’s wrong, because 1 dollar does not equal 1 yen. You have to apply a conversion.
You have to do the same thing with shares. If you want to compare any share-based statistic across companies (as opposed to with past quarters or years of the same company), you need to apply a conversion factor to take into account that the companies have a different number of outstanding shares.
Go back to about.com’s page on EPS, and click the link there on why share price doesn’t matter. The arguments there apply equally well to any per share statistic.
I’ve thought of one more way to try to explain this. Consider stock splits. Companies don’t like their stock price to be too high, so they occasion split the stock. Apple, for example, has done this three times, each time converting every share into two shares. Microsoft has done it 9 times, 7 that were 2 for 1, and 2 that were 3 for 2.
Stock splits don’t change the value of a company much. After a 2 for 1 split, there are now twice as many shares out there, but they are worth half as much per share, so the total stays the same. (There actually is some change…the share price usually ends up slightly above half of what it was, because with the per share price being lower increases demand a little, but we can ignore that here).
Now we can do a little thought experiment. Suppose Apple decides that they want their shares down around $20, so they do a 6:1 split. Every Apple investor ends up with 6 times as many shares as they now have, but the shares are worth $20 each instead of $120 each. And now imagine Microsoft and Apple have exactly the same performance next quarter that they had last quarter, so they end up with the same revenue, sales, expenses, profit, etc.
Microsoft again gets EPS of $0.39/share. Apple’s EPS would now be $0.22/share.
If you think of a company as a pizza, and a share of stock as a slice of pizza, EPS is like how much cheese is on a slice. If someone tells you a slice of Pizza Hut pizza has more cheese per slice than a slice of Roundtable Pizza. Does that mean Pizza Hut is more generous with the cheese? You can’t say based just on the CPS (cheese per slice). Maybe the Pizza Hut pizza was a large, and the Roundtable was a small? Maybe Pizza Hut cut the pizza into four slices, and Rountable cut it into 12? What you’d need to compare to tell which is the cheesier pizza is the cheese per square inch.
When I say that it is completely meaningless to compare EPS between two companies, I don’t mean that EPS is not useful *when* *combined* with other information. If you combine it with some other statistic that is based on number of shares, in a way that the number of shares factor goes away, you can then get a meaningful comparison. If you check back at the references you have been using, I think you’ll find any example where they use EPS as part of a comparison of performance between different companies involves using it in a calculation with some other share-based statistic.
(Well, there is one situation where comparing EPS alone will tell you something useful: if company A’s EPS is positive and company B’s is negative, you can conclude A did better than B!)
That’s the best I can do to explain this. You are obviously a smart guy, so if this doesn’t do it, then I suck at explaining, and hopefully someone else who is better than me will jump in.
Good Job on the articles you have here, thank you for putting your time into it!