Where Apple and Microsoft Part Ways

By Charles Haddad Is what's good for Microsoft good for Apple? Microsoft clearly thinks so. Two weeks ago the software giant tried to use the media to force Apple into following its agenda. The strong-arming took the form of Microsoft Mac unit head Kevin Browne bellyaching to several news outlets that Apple wasn't doing enough to promote OS X, Apple's new operating system.

Apple's allegedly weak marketing of OS X is hurting Microsoft's bottom line, Browne mused. He said Microsoft has only sold 300,000 copies of Office X -- less than half as many as it had expected to by now. If sales don't pick up -- and soon -- Microsoft might stop developing future versions of Office for the Mac, Browne insinuated.

IDLE THREATS. How George Steinbrenner-esque of Browne. The infamous owner of the New York Yankees loves to threaten to move his team out of New York if the city won't build him an expensive new venue. Well, last I checked, the Yankees are still playing in the Bronx's aging Yankee Stadium.

There's no question that Apple needs Office, the standard in work applications. But what makes a buck for Microsoft won't necessarily fill Apple's till. The two have different agendas. One wants to use OS X to sell software, while the other wants to use it to sell hardware (for another view, see BW Online, 7/19/02, "Sorry, Steve. You Still Need Bill").

Microsoft rarely introduces an all-new piece of software. It makes most of its money selling upgrades to its flagship products, offering new versions of its stalwarts, Office and Windows, every 18 months or so. Then it heavily promotes all the reasons users should upgrade to the latest version -- at between $100 to $200 a pop.

OLD ECONOMY MODEL. Nothing wrong with that. Procter & Gamble has been using the same technique to sell toothpaste for almost a century. Yes, Gates may love to pontificate about information superhighways and life-changing digital lifestyles, but Microsoft's business model is pretty Old Economy.

Ditto for Apple -- although it's using a different business model. Like Dell or HP, Apple earns most of its money from hardware. So it tries to cajole users into buying a new Mac every couple of years. Faster and more powerful components are one lure. Software is another.

Sure, Apple does sell some software separately. It's hawking the next version of OS X, due out Aug. 24, for $129. But the upgrade won't be a big money-maker. Apple will gain most from OS X as users buy newer, more powerful Macs that can tap into the full power of the new operating system. Apple measures success, then, not in the number of OS X copies it sells, but in the number of OS X Macs sold.

A NICE MARKET. On that score Apple isn't doing too shabbily. Analysts figure that about 10 million Macs -- or less than half of all of them in use -- are capable of running OS X. Of those, 2.5 million are now running the new system. That represents a 25% penetration rate of the total universe of OS X-capable Macs. Sales of new Macs would probably be a lot better if the overall PC market weren't so depressed right now. Virtually every manufacturer has seen flat to declining sales this year.

While it's not huge, the OS X-installed base still represents a nice market. So why is Microsoft faring so poorly in it? The reason is more complex than Apple's marketing. Microsoft's Mac customer base has been in a slow but inexorable decline for years. From 1997 to 2001, some estimates put the number of Mac Office users down to 3.5 million from 8 million.

It's true that Macs continue to decline as a percentage of all computers in use. But it's also true that Office is very pricey. At $499 a copy, it's out of reach for many Mac users, who tend to be individuals or small-business users.

TOTAL TONNAGE. Besides, many Mac users don't see the point of using Office, let alone upgrading. They've got several inexpensive alternatives such as AppleWorks, Nisus Writer, and Mariner. None of them can match Office in the total tonnage of features. But then again, survey after survey has shown that few consumers use Office's most advanced features. And AppleWorks, which can do 80% of what Office can, comes free on most new Macs.

None of this is to say that Office X, the best version ever of this suite of productivity software, can't be a hit on the Mac platform. But to make that happen, Microsoft has to mimic the aggressive marketing campaign it uses to sell Office XP, which offers PC makers lucrative discounts to preinstall the software on their new machines. I'm sure Apple would be happy to accept similarly generous terms to push Office X. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online