Why Microsoft Is More Like Philip Morris Than Apple4:28 PM EST Thu. Oct. 18, 2012
You might wonder why Microsoft is like Philip Morris, the company that manufactures and sells cigarettes and other tobacco products. For one thing, both companies have an iconic brand: Microsoft has Windows and Philip Morris has Marlboro. But what do cigarettes and software have in common?
Apple, on the other hand, has created the most iconic brands of our lifetime -- all starting with "i." In fact, the release of iPhone 5 sold at least five million units just days after it was launched earlier this month.
So why pair Philip Morris and Microsoft as like companies, when Apple and Microsoft battled each other for decades in the tech world?
The reason has to do with financial fundamentals rather than the businesses they are in. Microsoft and Philip Morris are tried-and-true, steady-eddy companies that plod along delivering sales, profits and dividends to shareholders. In fact, like General Motors of a decade ago, these are companies your grandmother would invest in to live off the dividends.
Apple, on the other hand, was a risk a decade ago and then went on a growth tear that few grandmothers would comprehend, let alone invest in. (Yes, I know -- Apple has started paying a dividend, but as a percentage of share price, it's tiny.)
Why am I bringing this up? Because if you're a solution provider, the companies that you partner with are your investments -- in fact, they are your bets. And, in making bets, companies such as Cisco or Dell -- thoroughbreds in their time -- have turned into plow horses.
It's true that Cisco, Dell, HP, IBM and Microsoft powered the solution provider industry over the past decade. But if you look at the growth rates of these five maturing companies, you can see that they are considerably lower today than they were in their heyday. This table shows the revenue growth rate averages for these five companies over the past 10 years, from 2002 to 2011, side by side with those over the previous 10 years, from 1992 to 2001.
NEXT: Revenue Growth And Avoiding The Inevitable
Of course, slower growth is inevitable for all companies as they mature. Add to that the fact that these companies are leaders in industries that have undergone seismic shifts in just about every way you can imagine. Some have done a better job of staying relevant than others. But, it's an axiom that when one tech wave gives way to another, leaders in the old wave rarely transfer their leadership to the new wave. Some of them don't even survive: think Wang or Digital Equipment.
Now take a look at the revenue-growth rate averages of five companies that are considered rising stars in tech from 2002 to 2012: Apple, Google, Rackspace, Salesforce.com and Cognizant.
And finally, take a look at the revenue-growth rate averages of five mature companies in mature industries, Altria, AT&T, Johnson & Johnson, Philip Morris and Verizon:
I'm sure I don't have to spell out the obvious -- but I will. The growth rates of the tech leaders of the 1980s and 1990s now more closely resemble those of mature companies in mature markets than those of the new leaders in new tech markets of the 2000s.
In other words, the world has changed for solution providers. The rising stars they relied on 30, 20 or even 10 years ago are out of their growth phase, and they're not going back. As a result, the fundamentals of Microsoft today have more in common with those of Philip Morris than Apple.
So if you're a solution provider and your growth is slowing, margins declining and valuations slipping, look to your stable of partners and, with a clear eye, ask yourself if you're betting on the wrong horses. If you are, make a different bet and change horses.
That may seem risky. But, it's less risky than plodding on with a plow horse to the very end.
Marty Wolf is Founder and President of martinwolf | M&A Advisors. Marty has been directly involved in the divestiture of six Fortune 500 divisions and has completed more than 115 transactions in the IT Services sector. A frequent commentator and guest blogger for leading business and IT media outlets, Marty also acts as a counselor and trusted advisor to CEOs of select IT firms.