Despite the drubbing Apple Inc. (NASDAQ:AAPL)'s share price took following its recent earnings release, I remain optimistic for Apple's prospects in 2013. Apple continues to have the strongest ecosystem in the war of mobile device ecosystems currently underway between Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT). Tim Cook's statements at the conference call have convinced me that Apple will rise to the challenge of defending its market share.
Confessions of an atypical “fanboy”
Recently I had the moniker hurled at me as an epithet in comments on my posts. In truth, I doubt that ardent Apple fans would accept me as one of their own. Outside of iOS development work, most of my professional and recreational computing is done on Windows 7 PCs, which I assembled myself. I also don't fit the stereotype of an Apple Inc. (NASDAQ:AAPL) fanboy who is a technical know-nothing, since I have a relevant technical degree as well as decades of experience.
My investment and computing platform decisions are based purely on self-interest, not “brain washing” by Apple or anyone else. Remaining an Apple Inc. (NASDAQ:AAPL) investor is based on a cold, calculated assessment of Apple's competitive position relative to its principal rivals in the most important computing market today, that of mobile, Internet connected devices, consisting of smart phones, tablets, and tablet “convertibles.” In this arena, Apple only has two rivals that count at the moment, Google and Microsoft.
The war of ecosystems
As Stephen Elop put it so succinctly in describing the smart phone market, “The game has changed, from a battle of devices, to a war of ecosystems.” On the supply side of the ecosystems, Apple Inc. (NASDAQ:AAPL), Google, and Microsoft have organized keiretsu of affiliated companies and partners supplying components, accessories, software, and even entire devices. It is indicative of the paramount importance of the mobile operating system that the keiretsu are led by the suppliers of the OS.
The health and well being of the respective keiretsu depend mainly on the health and well being of the OS supplier. Thus, an assessment of the competitive strengths of the three main ecosystems should begin with a comparison of the basic finances of Apple, Google and Microsoft. In the table below, I show basic financial metrics for the big three, on a GAAP basis.
Much has been made of Apple Inc. (NASDAQ:AAPL)'s shrinking gross margin, which did decline from 44.7 percent a year ago to 38.6 percent in Q4 2012. However, different companies book expenses at different levels, so I prefer to compare operating margin for the Big Three. Operating margin is just the pre-tax operating income divided by total revenue, and all three companies report operating income on a GAAP basis. All three companies saw operating margins decline in Q4 as new products were introduced and margins were squeezed by intense competition. But Apple was in the middle of the pack for operating margin and margin decline.
The consumption side of the ecosystems is composed of new customers and existing users, and generates considerable income from app and content sales, and for Google, advertising. As the user base grows, revenue increases lead to a virtuous cycle in which the gravitational pull of the ecosystem becomes greater. The table below summarizes some metrics related to ecosystem consumption side growth and size:
Numbers I regard as particularly soft because of a lack of transparency are highlighted with a (~). Microsoft has never published sales numbers for Windows Phone, so it's difficult to estimate the number of existing users. Likewise, Google and Microsoft don't break out specific sales numbers for their online stores. The Google number is based on an annual “run rate” Google announced at their Q3 conference call. Microsoft recently announced that Windows phone content sales had doubled from the year ago quarter, but didn't give exact numbers. Obviously, the iTunes number includes some amount of sales that are derived from non-mobile devices, but I have no way to break down the number further.