Two very different companies — Apple and Microsoft — posted financial results this week.
Apple is clearly the iPhone company, selling 35.2 million iPhones in the quarter ending 28 June, a rise of 28% from a year earlier. Profits were up to $7.75 billion, up from $6.9 billion year over year.
iPad sales are softening in the US and Europe, while still climbing in China and West Asia. iPad sales fell 9.2% year over year.
Mac sales grew for the third straight quarter, with sales up 18% with 4.4 million units sold. Note that Mac is closing on iPad, $5.44 billion in Mac sales contrasted with iPad’s $5.9 billion in sales. This looks like the business utility of Macs — desktops and laptops — and in the next quarters Mac sales could push past iPad for the first time since the iPad was introduced.
Obviously, the new partnership with IBM (see Apple and IBM team up to go after the enterprise together) has had no impact on sales in this quarter, but in the latter part of the year — once IBM has built its ‘100 business apps’ and geared up other aspects of the program — we should see iOS penetration in the enterprise speed up.
Microsoft, meanwhile, is taking a beating from Nokia’s drag on earnings. Nokia made $1.99 billion, but had losses of $692 million. You can see why Satya Nadella is moving to cut so deeply into the Nokia ranks (see Nadella makes Microsoft’s plans clear: 18,000 to go).
Overall, Microsoft reported $4.61 billion in earnings, or 55 cents/share. The source of its continued good results is enterprise. One side of that is OEM Windows sales, which enjoyed a spike as businesses upgraded operating systems, leading to $10 billion for the Device&Consumer product lines.
But the big news is the Microsoft Commercial segment, with $13.48 billion in sales. This includes Microsoft’s cloud offerings, like Azure, Office 365, Sharepoint Online, Exchange Online, etc. which contributed $2.26 billion, and is now at an annual run rate of $4.4 billion. Server products — Windows Server, SQL Server, etc. — yielded an additional $11.2 billion.
Despite the obvious enterprise skew in the results, Satya Nadella isn’t ceding the consumer segment, continuing his positioning around ‘dual use’, saying ‘Dual (consumer/enterprise) use is how we reinvent productivity’. He pointed out that the company has merged the enterprise and consumer teams for Lync and Skype, for example.
So, Apple is partnering with IBM to build business apps to bring into the enterprise, along with the already dominant position of iOS in business. Meanwhile, Microsoft has a great position in the enterprise for its cloud offerings, but instead of trying to consolidate that advantage, Nadella is committed to trying to push into the consumer segment and a dangerous war for mobile devices.
Ben Thompson wrote a piece recently where he proposed that Microsoft should be broken up into two companies: one based on the Windows franchise, along with consumer devices, and one based on Office and cloud services. This basically addresses the elephant in the room: Windows.
Thompson’s thesis is simple: Nadella has pinned the future of Microsoft on being a ‘productivity and platform’ company, and the core of that is Office and the cloud services that make all the money for Microsoft, and not Windows. As he wrote,
I would create two companies: the devices side, which includes Windows, Windows Phone, and Xbox, and let them do the best they can to grow that 14%. Heck, make Kevin Turner [the COO that advocated for growing the Windows franchise past 14% of all OS share at the recent Microsoft developer’s conference] the CEO. Windows profits will keep the company going for quite a while, and who knows, maybe they’ll nail what is next.
The other company, the interesting company, is the services side – the productivity side, to use Nadella’s descriptor. This company would be built around Office, Azure, and Microsoft’s consumer web services including Bing, Skype and OneDrive. These products don’t need Windows; they need permission to be the best regardless of device.
My bet is Nadella won’t do this all at once. He will cut bodies in line with strategic and financial realities, and slowly deemphasize Windows. But he won’t spin out the phone business, Xbox, MSN, Bing, and all the other lines of business that just don’t fit. At least not this year.
Meanwhile, he argues for singular focus on ‘productivity and platform’, while Apple/IBM, Amazon, and others are attacking his flanks in the enterprise space. We’ll have to see how that works for him.