Gates Finally Trumps Jobs: MSFT Vs. AAPL

For Bill Gates the wait must have seemed to last more than a lifetime. Microsoft (MSFT) and Apple (AAPL) both became modest-sized businesses in the early 1980s. But the Bill Gates’ company murdered Apple for most of the next two decades. The Mac was a niche product, but Windows was not.

All of that changed with the introduction of the iPod. Over the last five years Microsoft’s shares have barely moved. Apple’s are up about 1,700%. That seems to be changing.

In the last quarter, Apple’s forecasts indicated that sales of its iPod have finally started to slow in earnest. The Mac is still a niche product that runs clever ads about how its OS is better than Microsoft Vista. A look at Microsoft’s quarter would indicate Vista sales are surging. Apple’s ads may be funny, but they are wrong.

Microsoft’s device operation which includes Xbox and the iPod knock-off Zune will never match the earnings of Apple’s iPod operation but Redmond is finally making money in the video game business.

What Gates has always known and Jobs has always feared is that the software business is much better long-term than hardware. Windows works on a broad spectrum of devices from PCs to handhelds. Microsoft’s business software will work on product from Sun (JAVA), HP (HPQ), Dell (DELL), IBM (IBM), and an almost endless list of products from companies around the world.

Software still has marvelous margins. Microsoft’s client division had operating income of $3.36 billion on revenue of $4.34 billion last quarter. Margins in the business division were almost as good.

After yesterday’s post-market trading, Microsoft’s shares are up 10% over the last three months. Apple’s are down 25%. Wall St. is rotating out of Jobs and into Gates. The difference in share performance is going to last a long time.

Douglas A. McIntyre