Apple's liberation, Microsoft's haunting

Apple amazing quarter has set the bar unrealistically high while Wall Street unfairly discounts Microsoft's.

If I were Satya Nadella, I'd run to the nearest church and hire an exorcist to scare away the ghost of Steve Ballmer. Microsoft is getting killed on Wall Street as the market reacts to a disappointing quarter and disappointing guidance.

In the short run, the analysts are right: Microsoft will have another difficult year or two before Nadella can get beyond the horrible mess left by his predecessor, Steve Ballmer.

Over at Apple, meanwhile, Tim Cook has finally appeased the ghost of his predecessor, the iconic Steve Jobs, and today needs a train to haul his company's record profits to Fort Knox.

If anyone requires convincing that Cook has come into his own, a couple of statistics should clear that up: Apple sold 34,000 iPhone 6 and iPhone 6 Plus every hour for the entirety of the December quarter and turned a profit of $18 billion, or about $8 million an hour — that's more profit than any company in history.
There's a reason that many tech executives dream of pulling a Michael Dell — taking their companies private. By its very nature, Wall Street has a short-term mentality — every three months it looks back a quarter and forward a quarter or two — which is why Apple is being rewarded on Wall Street and Microsoft is being punished.

With that in mind, you need to ask if Apple really as good as Wall Street says and if Microsoft really as bad. The answers are maybe and no.

Apple kills it in China, helping overcome U.S. saturation

One of the most striking numbers in Apple's earnings report was the $16.1 billion in sales revenue it reaped in China, which includes Taiwan, Hong Kong, and the mainland — an increase of 70 percent over last year.
Apple is not only doing well in China, it's turning the tables on the local competition. "The incredible popularity of the iPhone 6 and 6 Plus in China in Q4 2014 has led Apple to take first place in the Chinese smartphone market for the first time by units shipped. This is an amazing result, given that the average selling price of Apple's handsets is nearly double those of its nearest competitors," according to a report from Canalys, a market researcher.

That's particularly important because there are signs that the smartphone market in the United States is becoming saturated. It's becoming hard to find people who don't have a cellular plan. Before long, nearly 90 percent of all cellular customers will already own a smartphone, says AT&T CEO Randall Stephens.

China, though, is on an opposite trajectory, with major segments of its population becoming more prosperous and hungrier for the trappings of the good life. A market that large will help insulate Apple from the inevitable slowing of domestic demand.

iPads lose their luster, and no clear iPhone-size is hit coming

However, there is the iPad issue. Sales of iPads, along with tablets by every other major manufacturer, are slowing. Apple sold 21.4 million iPads in the last quarter, down 18 percent from 26 million in the quarter a year ago.

Asked about this on the earnings call with analysts, Cook really had no answer and said he doesn't expect a reversal of that trend in the next few quarters. While maintaining that he's very bullish on the iPad's future, he admitted that the company's understanding of that relatively new market is still incomplete. It's possible, he said, that the upgrade cycle for iPads is relatively long, and the larger iPhone 6 is cannibalizing tablet sales.
Mac sales are strong; in fact, they set a record at a time when PC sales continue to shrink. But the iPhone accounts for nearly all of Apple's growth.

What's next? Cook mentioned that the Apple Watch will go on sale in April and Apple Pay is gaining strength. No doubt the Apple Watch will sell very well when it first hits the market, but I'm far from convinced there will be sustained demand for the product or for Apple Pay. I could certainly be wrong, but both products strike me as solutions in search of a problem.

I’m not at all being critical of Cook and Apple. But it’s hard to believe that the company can continue to grow so rapidly. Some acts are simply too difficult to follow — so you can bet that in a year or so comparisons to this record-breaking quarter will lead Apple's critics to once again to moan, punish the stock, and wish that Jobs were back.

For Microsoft, it's Windows 10 or bust

Figuring out what happened to Microsoft in the last quarter doesn't require a lot of deep analysis. Windows sales got a pretty good bump last year when Microsoft ended support for XP. When that sales bubble inevitably popped, of course the most recent quarter looked bad by comparison.

Still, the rapidity of the Windows sales decline probably surprised Nadella and his team, and it certainly surprised investors who then pummeled the stock.

But that's on Ballmer, not Nadella. Windows 8, as we at InfoWorld have written many times, was a disaster. It's a millstone around the neck of a company that has yet to break with the PC-centric worldview of the past.

Nadella wants to make that break, and he arguably has the vision to do so, as my colleague Galen Gruman wrote earlier this week. What's more, Microsoft has a strong server product line and a solid cloud business with Azure, and they are unharmed by the repeated failures on the Windows and Windows Phone client sides.

There's a huge well of creativity locked inside Microsoft, and with Ballmer gone we'll see innovative new products like the HoloLens virtual-reality technology demonstrated at the Windows 10 event in Redmond earlier this month. True, that product was developed by the old guard, but the point remains: Microsoft is not filled with old fogies unable to think beyond Windows and Office.

It's worth remembering that Microsoft has a history of stumbling with early product launches, then recovering. The Surface tablet, for example, looked like a turkey when it first debuted and cost the company nearly a $1 billion in losses.

But Microsoft said Surface revenue hit $1.1 billion for the most recent quarter — up 24 percent year on year — driven by the Surface Pro 3 and accessories. Wisely, the company appears likely to kill off the nearly useless Windows RT version.

The real test will come in the back half of this year, when Windows 10 goes on sale. Many millions of consumer and business users are working on PCs that date back to 2009, the year Windows 7 debuted.
Even with the longer lifecycle of PCs these days, many of those people are more than ready to upgrade, a step they wouldn't take when it meant coping with the unfamiliar, frustrating interface of Windows 8. If Windows 10 is as good as the early releases lead many reviewers to believe, users will switch in a hurry.
According to a Computerworld analysis last year, Microsoft should be able to get about 18 percent of all Windows PCs onto Windows 10 within seven months of its release, which would be an uptake speed record for Microsoft.

Profits, however, won't take off right away. Microsoft will offer free upgrades for a year, a smart move, but one that will keep the bottom line from growing as fast as Wall Street demands.

Of course, Microsoft's future can't be only Windows 10. But ultimately revenue from the new operating system will stabilize the company and give Nadella time to implement his vision of a modern Microsoft. Wall Street may not be so patient, but customers should be.

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