Saturday, July 28, 2018

Microsoft is now bigger than IBM has ever been - but Google's growth is astonishing

Microsoft's latest financial results show that it is now bigger than IBM has ever been -- but Google got there first.

Microsoft reached another two milestones when it unveiled its annual financial results last week. First, as ZDNet noted, its annual revenues passed $100bn for the first time. Second, its $110.4bn turnover was not only bigger than IBM's, it was bigger than IBM's has ever been.

But I'm sure the Softies are not going to get complacent about that: Microsoft will also know that it has already been overtaken by a much younger firm: Google. (Technically, the company is now called Alphabet.) Worse, Google is still growing faster than Microsoft, though the success of Microsoft's Azure cloud may yet keep it in the hunt.

Graph of annual revenues for IBM, Microsoft and Google

Microsoft's annual revenues of $110.4bn took it past 'peak IBM', but Google did it even faster. (IBM and Google have different financial years so have yet to announce equivalent results.)

IT professionals know that Microsoft and IBM have been closely linked. IBM put Microsoft on the road to riches by using Microsoft Basic and MS-DOS in its industry-defining personal computer, the IBM PC, in 1981.

IBM also tried to kill Microsoft after the two companies fell out over OS/2, the operating system they developed to replace MS-DOS. It was the start of a bitter war that continued until IBM brought in an outsider who quickly realized that OS/2 had lost.

But even incoming CEO Lou Gerstner would not have imagined that Microsoft's annual revenues would overtake IBM's. That happened at the start of 2015 when I noted here that once-tiny Microsoft has overtaken the mighty IBM.

In that blog post, I contrasted the state of the two companies when the DOS deal was done:

At the time, Microsoft had annual revenues of $7.5 million (not billion) and a staff of 40 that included a new hire from Procter & Gamble by the name of Steve Ballmer. By contrast, IBM had a turnover of $26.2 billion and a staff of 341,279 - it was about the same size as General Electric and Gulf Oil, but made more profits than both of them put together.

Fast forward from 1980 to 2000, when Microsoft was losing an antitrust lawsuit and Ballmer was about to take over as CEO. In the aftermath, Microsoft did pretty well, growing annual revenues from $25.30bn in 2001 to $86.83bn in 2014, albeit it was heading for a fall. (In September 2013, Microsoft bought Nokia's smartphone business for $7.2bn. In 2015, new CEO Satya Nadella had to write off $7.6bn and restructure the company.)

As my graph shows, IBM's repeated failures were worse than Ballmer's big mistake. IBM's revenues fell from $87.4bn in 2001 to $79.1bn in 2017, after peaking at $106.9bn in 2011. This is the number Microsoft has just surpassed.

IBM has spent two decades promoting itself as the leader in new fields such as artificial intelligence, and scored a couple of PR successes. First, in 1997, its Deep Blue computer beat world chess champion Garry Kasparov in a six-game match. Second, in 2011, IBM's Watson computer beat human contestants at Jeopardy!, an American game show. Neither victory appears to have had any visible impact on IBM's revenues.

Of course, Microsoft is not the only company to start small and overtake the former Masters of the Computer Universe. Google did it even faster.

Google only got going in 1998, and the following year, co-founders Larry Page and Sergey Brin tried to sell it to Excite for only $1m. However, in 2000, Google started selling keyword-based advertising, and it did well enough to go public in 2004.

After that, Google's annual revenues blew through $50bn in 2015 and hit $110.9bn last year. In historical terms, its growth has been astonishing. In the current context of Amazon, Apple, Facebook, and Google, growing at an astonishing rate is the new normal.

IBM's revenues boomed when it converted enterprises to mainframe-based computing, Microsoft's boomed when the world adopted personal computers running Windows, Apple's when it reinvented and redefined the mobile phone industry, and Facebook's when it did the same for social networking.

Google, Amazon's AWS, and Microsoft are booming now because of the once-in-a-lifetime move to cloud computing. IBM could be -- perhaps should be -- booming as well. The next three years will tell.

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