The Battle Between Apple, Microsoft and Google: Strategic Lessons from a Converging Internet Industry 2000-2010 Case study Reference no 310-245-1 This case was written by Markus Schimmer, Professor Dr. Günter Müller-Stewens and Peder Sponland, University of St Gallen. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2010, University of St. Gallen No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. Distributed by ecch, UK and USA North America Rest of the world www.ecch.com t +1 781 239 5884 t +44 (0)1234 750903 ecch the case for learning All rights reserved f +1 781 239 5885 f +44 (0)1234 751125 Printed in UK and USA e [email protected] e [email protected] 310-245-1 Introduction Fromthefirstdiscussionsofa“galacticnetwork”in1962,theInternethasdevelopedintoan= enormous=informationinfrastructure.=Whileithasinitiallybeena=governmental=researchtool,=itsfull publicaccessin1994propelledthenetworkintoaglobalculturalphenomenon.Fouryearsafterits publicinitiation,alreadymorethan50millionprivate=userswere=online,followedbyanunlikelarger= numberintheyearsthereafter.Withabout2=billionusersin2009,theInternethasalsogrownintoan= own global economy of unprecedented= size. This new economy is driven by a relentless force of technologicalandconceptualinnovationsstemmingfromaninnumerablenumberofpartiesscattered= aroundtheglobe.Itsspeed=ofchangeandinnovationmakeittoahighlycompetitivearena. Apple,MicrosoftandGooglehavebeen=themostsuccessfulcompanieswithinthisarenafor=a= long time. Throughout the previous= decades,= they have internalized the economic laws and= technologicalcharacteristics=oftheInternetintheirbusinessthinking.Theirstrategiesand=competitive movesdidnot=onlyformtheinformation=economyasweknowittoday,butdoalsoprovideshowcase= examplesofhowprofitablemarketpositionscanbeachievedintheInternet. Thiscasestudycoversa=decadeof=informationeconomymarketevolutionandanswerssome very fundamental and= insightful questions: How did Apple, Microsoft and Google= successfully navigateanddefinethecompetitivearenaoftheInternet?Which=rolesdid=their=unique=strengthsplay for their strategies? Which specifics of the Internet did they have to account for? How could they sustaintheircompetitiveadvantageswithinsuchahostileenvironment? Apple,Microsoft,GoogleandtheInternetIndustryin2000 Apple was founded in 1976 by Steve Jobs and Steve Wozniak; stressing the importance of making= computers easy for all customers. The first proof of this was the revolutionary Apple II computer,whichconsumerscoulduse=straightfromthebox.BeforeIBMenteredthePC marketin= 1981,Applewasthe=industryleader.Thecompanywentpublicin1980;thelargestIPOsinceFord MotorCompanyin1956.Applehastraditionallyrelied=onproprietarydesignthatonlyitcanuse.One ofApple’sadvantagesisits=capabilitiesinbothhardwareandsoftwaredevelopment.Hardwarewas traditionally designed “from scratch” to differentiate it from competitors’ products. This made the cost structure quite high.= Software, such as Apple’s own operating system and= applications, was developedand=bundledwithAppleproducts.Inthisway,=Applehasbeenabletodelivercomplete solutionstocustomers,=leadingmanyto=favor=Appleproductsandallowingthecompanytocharge= premiumprices.Appleisstronginmultimedia=duetoitsearlyfocusonrelevanttechnologies=inthat area. Today, most people interested in mediarelated areas, such as movie editing and music development,useApple.=UnderSteveJobs,Applehasalwaysbeenverysecretiveaboutitsactions,in bothtermsinternaldevelopmentandexternalpartnershipsandacquisitions.=Thecompanyhasthus acquired something of a “control freak” image about its technology and knowledge. This, together= withthemoreidealisticapproach,hasmadeApplea=fascinatingandrathermysteriouscompanythat alwaysattractsalotofattentioninthemarket. Microsoft was= founded= in= 1975 by Bill Gates and Paul Allen. The company’s= core area has= becomethedevelopmentofoperatingsystems,=eversince=IBMin1980askedMicrosofttocreatesuch= fora=newlineofPCs.Bybuyingexistingoperatingsoftwareand=customizingittoworkexclusively with Intel microprocessors, Microsoft= gained a fast entrance into the market of operating systems development.ThesystemofanIBMPC8=incomparisontothatofothers8=wasmoreopenandmadeit easyforproducerstoduplicateforscale=efficiencies.=Microsoftaimedatlicensingitsoperatingsystem toanymanufacturerthatwasIBMcompatible.For=thisreason,Microsoft’soperatingsystemgained= dominant market share and continued= to grow in the following years. Today, roughly 90% of all worldwide personal computers run Windows software.1= The early success of Microsoft opened the door to expansion. Microsoft has also seen the potential for application development for other= 2 310-245-1 computers,suchasthosefromApple;anintegration=strategythathashelped=thecompanytofurther= developing Windows systems. From the beginning,= Microsoft has been= able to move quickly into marketswithitssolutions.=Thisspeedhasoftenbeenachievedbypurchasingexistingtechnologyand= knowhow and improving it in8house= to fit with Microsoft’s own ideas. In this way, Microsoft has usedpastsuccessesinmovingontoevenbiggeraccomplishments.Thishasledtofrequent=software= upgrades, increased applications development, and movement into related areas for= growth. Inevitably,thecompanylinkeditsproductstoanetworkview,wheretheuseofserversopenedfile= sharingbetweenPCs.Inturn,thesecouldbelinkedto=othernetworksviatheInternet. LarryPageandSergeyBrinlaunchedthesearchcompanyGooglein1998.Withthesimplest mission,toorganize=theworld’sinformationandmakeituniversallyaccessibleanduseful,=thetwo= founders started to download Web content into computers for organization. With its revolutionary link rating system PageRank, Google quickly established itself as a= strong search engine on the Internet. Today, Google has become an essential part of the everyday life for many internet users. Google’sgoalhasbeentobringhigher=qualityandimprovedsearchfunctionstotheworld.Because= the company’s growth has primarily= been through= word of mouth, no costs were associated with= marketingofthesearchengine.Thishashelpedthecompanytofocusonimprovingsearchtechniques andbuildinguphardwarefarmstocopewithincreasingdataandinformationfast.Thecompany’s= philosophyhasalwaysbeen“openness”.AlthoughthePageRanksystem’scodesaremoresecretive= duetothedangerofcopying,informationanddataaredistributedfree.Thisfostersanopensource= environment, which Google believes helps create better products and solutions than any inhouse developmentmodel.Armedwiththreecorporatevalues,“don’tbeevil”,“technologymatters,”=and= “we make our own rules”, Google has continued to leverage its strengths with strategies to be the ultimatesearchandcommunicationcompany. Bytheyear2000,theInternet=hasalreadybecomea=multibilliondollarindustrywithApple,= Microsoft and= Google being its major players. By this time, the direction of the Internets= further developmenthasalso=alreadybeenset.TheInternetwasshowingsignsofbecomingthemeltingpot= of media and entertainment, business and workforce= collaboration, telecommunication, knowledge andothermarkets.Italsobecameapparent,thatwithinthisconvergingindustry,personalizedservice provisiononaglobal=scalewouldbethekeysuccessfactors.Apple,MicrosoftandGooglewerethe firstandmostsuccessfulintakingactiontointegratemassiveservicesin=theirproductworlds.In2000, with Internet stock prices being down after the burst of the dotcom bubble, Apple, Microsoft and= Google found themselves as strong survivors within a deeply= distressed industry. This= situation, however,offereda=richmenuofopportunities.VariousITfirmswereforsaleor=willingtocooperate undermorefavorableconditions.Drawingon=theseopportunities,Apple,MicrosoftandGoogleset out to adjust their positionings and capabilities in preparation of the inevitable recovery of the= Internet. TheInternetIndustryanditsMostRecentPhasesofDevelopment 2000–2003:StrengtheningtheCoreandBuildingFootholdsinRelatedIndustries.= Withitsuncertaintyafter=thebubble,theInternetwasthenewworldwithunlimitedpotential, making=itimportanttofocusoncorecompetencestogeta=footholdintheindustry.Intheirbuildup phase,companiestriedtoavoidaggressivemovesresultingincounterstrikesandwasteofresources. Instead,firmstriedtocapitalizeonuniquedifferences=providinganadvantage,andbuildontheseby= accumulating knowledge= and information to construct a differentiated= power center. Apple= positioned=itselfin=digitalmedia,wherebothhard8=andsoftware=playedacrucialrole,whileGoogle= built up its search and communication= franchise for future expansion. Microsoft, already huge, anchored itself in entertainment, as well as building a= presence with futureoriented servers and= platforms.= 3 310-245-1 Apple:ArmingItselfastheDigitalMediaLeader. = Apple had build up a strong foothold in production of extraordinary designs and user friendlyproducts.Thecompanyhadbeenindigitalmediasince1999,whenit=introducedFinalCut= Pro.Thecompanywanted=toscaleupinthisarea;althoughnewintroductionswerejustbeginning, Applewantedtobuildupitsinternalcapabilities,especiallyinsoftwaredevelopment.A=newmarket= trendwithlowerR&Dcostsandoutsourcing=createda=senseofurgency.=In=2000,ApplehadR&D= expensesof$380millionandintegrated=theengineeringteamof=DVDauthoringsoftwarecompany AstarteinOctober,2000.Appledidnotrevealdetailsofthisacquisitionuntil=2001,whenitintroduced= IDVDandDVDStudioProaspartofitsdigitalmediaofferings,offeringnicelydesignedapplications