Washington, DC, April 19, 2011 --  

Microsoft's decline in importance highlights the boon of the hyper-competitive consumer tech market.

When IBM's market value surpassed Microsoft last week¹, it was a dramatic turn of events for a company that was nearly destroyed by its partner turned rival. IBM was the company that put Microsoft on the map in 1980 by licensing MS-DOS for its new IBM PC. Within a few years, Microsoft began selling its rickety operating system to rival manufacturers, eventually dooming IBM to irrelevance in the rapidly growing PC market. As IBM faltered, Microsoft surpassed the company in market capitalization in 1996,² and IBM finally threw in the towel by announcing the sale of its PC business to a Chinese competitor in 2004.³

But IBM catching up with Microsoft says less about the renewed growth of "Big Blue" than it does about the more recent stagnation of Microsoft. About a year ago, Apple also surpassed Microsoft in terms of market capitalization⁴, and it now has one and a half times its value.⁵ Microsoft's stock value has actually gone down over the past decade -- never returning to what it was worth before the dot com bubble burst in early 2000. Meanwhile, rivals like IBM, Apple, Google, and Amazon have been growing strong.

Despite continued strong earnings, investors have little confidence that Microsoft can compete with its rivals. The once ascendant and seemingly omnipotent Microsoft is now struggling to compete in a host of leading edge technologies like smartphones, cloud computing, and tablet computers. Two of its chief competitors, Google and Amazon.com, did not even exist at the time Microsoft created its Internet Explorer browser -- an act that instilled so much fear of Microsoft dominance that it that led to an anti-trust case by the Justice Department.

Apple, at the time a marginal and sickly competitor to Windows PCs, is now the most valuable tech company in the world. While Microsoft continues to dominate the market for PC operating systems, this is increasingly irrelevant -- smartphone sales surpassed sales of PCs for the first time earlier this year,⁶ and the technophiles are in love with the iPad, not the Windows 7 laptop.

Today, it is Google and Apple whose dominance creates fear in the market. Apple because it dominates the tablet and music player market and Google because it dominates search, web advertising, and other web technologies. But as the decline of Microsoft shows, tech dominance is often fleeting. In just a few years, Amazon managed to surpass Apple's iTues store in music sales, and Google's Android managed dislodge Apple from its lead position in the smartphone market.

This competitive tech marketplace is fantastic news for consumers. They reap the benefits of products that keep getting better and less expensive all the time. The same was true back in Microsoft's heyday -- it's just that then it was computer hardware manufacturing that was returning hyper-competitive benefits, while a single operating system dominated. In today's post-PC markets, no single operating system or hardware manufacturer dominates, and no web service provider is without intense competitive pressure.

For Microsoft, the loss of its dominant position is not great news, but it's probably not as bad as it now seems. Just as IBM rebounded from its lowest days, Microsoft probably will too. IBM did so by switching from an overly-competitive consumer market to selling boring, but more profitable business software and services. This is essentially what is happening to Microsoft, whether it likes it or not. Selling Windows 8 and Office 2012 to big corporate IT departments may not have the sex appeal of controlling the tablet, mobile payment and cloud computing markets, but it can still generate revenue to run a business.

Given Microsoft's weak track record on innovation when compared to its current rivals, it had best learn to like being boring.

Related Web Columns:

Waning Monopoly, April 12, 2005

Destructive Forces, June 13, 2000

Dangerous Jargon, December 29, 1998

Sherman's Grudgematch, November 4, 1997

Notes:

1. Reuters, IBM passes Microsoft's market cap after 15 years, May 23, 2011

2. Ibid.

3. CNET News, IBM sells PC group to Lenovo, December 8, 2004

4. Wired, Apple Passes Microsoft as World's Largest Tech Company, May 26, 2010

5. Google Finance, Market Capitalizations, May 30, 2011

6. CNN Money, Industry first: Smartphones pass PCs in sales, February 7, 2011