Why did Microsoft beat Apple? And why Apple doesn’t care.

Last Updated on February 5, 2022 by Dave Farquhar

In the personal computer market, Apple and Microsoft are effectively a duopoly. And for some reason, both companies seem to like it that way. Why did Microsoft beat Apple? And why doesn’t Apple seem to care? The answer is nuanced, but not super hard to understand.

Microsoft beat Apple in personal computer market share because Microsoft achieved critical mass first, with a cheaper, good-enough product. Apple learned from this, then did the same thing to Microsoft in the MP3 player, phone, and tablet markets.

Apple’s early mistake

To hear Apple tell the story, Apple was the best-selling computer until IBM came along. But that never was true. The early market leader in personal computers was actually Radio Shack. And throughout the late 1970s and early 1980s, various companies took turns outselling Apple, including Atari and Commodore.

Apple welcomed IBM to the computer industry with a full page ad in the Wall Street Journal, believing it would legitimize the industry, but the ad came off as smug. Depending on who you ask, it was either the smartest or dumbest thing Steve Jobs ever did. Jobs was on to something, but I don’t think he understood exactly what just yet. Not in 1981.

Now, technically speaking, Apple did beat IBM. After all, IBM left the personal computer business 20 years later while Apple was enjoying a rocket ride. But IBM’s partner, Microsoft, turned out to be a different story.

Apple had other problems too. A price war in the early 1980s knocked off Apple’s other competitors one by one. But Apple was almost a casualty itself. Apple’s financial problems were one of the reasons John Sculley fired Steve Jobs in 1986. He returned to Apple 10 years later, when Apple was again on the brink of going out of business. During that time in exile, Jobs learned something. I think I know what it was. Jobs’ sales pitch after 1997 was subtly but critically different than it had been in 1990.

The rise of Microsoft

Microsoft’s brilliant move was refusing to sell IBM an operating system. Microsoft licensed its operating system to IBM. This allowed Microsoft to also sell its operating system to others. Microsoft had done the same thing with its computer languages and that strategy made millionaires of its young founders. This made it entirely possible for others to clone the IBM PC.

Apple released the Lisa and its GUI in 1983, and followed it up with the much more successful Macintosh in 1984. Meanwhile, Microsoft had been working on its GUI, Windows, since at least 1983. Windows finally hit the market in 1985. But it was in 1990 that everything really came together for Microsoft. In 1990, Microsoft released Windows 3.0, the first version of Windows that was usable. That same year, PCs powerful enough to run Windows without feeling sluggish became affordable. Two other key elements also started becoming affordable around 1990: sound cards and Super VGA graphics cards.

In 1985, it looked like the future belonged to the Motorola 68000 processor and computers based on it. This included the Macintosh, but also the Atari ST and Commodore Amiga. All of them had elements that made IBM PCs look boring and old-fashioned. But by 1990, with faster CPUs and graphics and sound cards bolted onto that aging standard, a PC could hold its own. It wasn’t necessarily better. But it didn’t have to be. Microsoft beat Apple because Windows PCs cost hundreds of dollars less and were good enough to attract a following.

How products achieve critical mass

There’s an axiom in engineering that it’s usually the cheap, good-enough product that wins. There’s a reason for that. It’s called the law of diffusion of innovation, which first appeared in print in 1962. The law of diffusion of innovation splits consumers into five groups.

On the left, we have the innovators. These are the first people to adopt a new technology. It’s a small but influential group. The second group is the early adopters, which is the next 13.5 percent. This first wave of people tend to be the first to buy things, and they tend to be very vocal. Think of the word “fanboys.” Most fanboys are in one of these two groups. Once you can get to around 3.5 percent, you have a cult following. These people will follow you and your product to the end of the world.

The third group is the early majority, which is 34% of the population. They don’t buy without someone in the first group convincing them to do so. At the end of the curve, we have the late majority, which is another 34 percent, followed by the laggards, at 16 percent. The laggards don’t buy in willingly.

Once you reach 15-18 percent market penetration, the scale tips and the early majority falls in your lap very quickly. This is what happened to Microsoft in the PC boom of the early to mid 1990s. Microsoft went on a rocket ride, Commodore and Atari and their three percent market shares vanished from the earth, and Microsoft beat Apple to within an inch of its life.

Microsoft didn’t need to be best. They just needed to make it to 18 percent first. And if no one else made it to 15 percent, they’d probably end up with a monopoly. Apple was nowhere near 15 percent. They were in slightly better shape than Commodore or Atari, but in 1996 a significant percentage of analysts expected Apple would go out of business.

But Microsoft figured out that being the bigger part of a duopoly had advantages over being a monopoly, at least from a legal standpoint. So Microsoft needed Apple, and Apple understood something Microsoft didn’t.

What Apple understood that Microsoft didn’t

If Microsoft had a theme song, it would be “I Can’t Stand Losing” by The Police. At least during the Gates and Ballmer eras, If Microsoft couldn’t have 100 percent market share, it wanted exactly as much as it can have without having the Feds on its back. This stance seems to have softened under Satya Nadella, but there’s still a fair bit of that in the company.

Microsoft and Apple look at the chart above very differently, particularly that last 16 percent. That last 16 percent includes my neighbor, who doesn’t own a computer and has no interest whatsoever in owning one. Her son is an IT director at a regional hospital chain and has had a very nice career, and that literally is the extent of her interest in computers.

Microsoft is bound and determined to sell her a computer, and they’re going to keep changing the UI until she buys one. They think if they can make it just a little bit easier to connect a printer, she’ll buy one. This next release of Windows 10 is going to be the one. Just ask them.

Apple looks at that chart and says that 16 percent of the population is never, ever going to buy your product. So they don’t waste any time or effort on that part of the population. They’ll get a bigger chunk of that 84 percent that remains if they write off the people who just don’t get it. That includes my neighbor, and that includes me.

Microsoft’s investment in Apple

In August 1997, Microsoft invested $150 million in Apple. At this point Microsoft had achieved about 97 percent market share, and there wasn’t much standing in its way to 100 percent. Plus, Microsoft was using its operating system near-monopoly to squeeze out competitors in two other software categories, office suites and web browsers.

The Federal Government was concerned and launched an anti-trust investigation. Having a monopoly isn’t illegal, but using a monopoly to get another monopoly is.

Why Apple was in trouble

Apple was in serious trouble. Their market share was dangerously close to what Commodore and Atari had fallen to before leaving the market, and their operating system lacked two critical features required in a modern computer. It had no memory protection and no true pre-emptive multitasking. Commodore ran out of money. Atari’s product went obsolete because it had the same problem as Apple. Apple bought Steve Jobs’ company to get its operating system, which had those features, but Apple needed to shoehorn Mac compatibility into Jobs’ OS and get it on the market before it ran out of money.

Jobs told the Federal Government to tie Microsoft up in litigation long enough to let him find a way to get a product to market. Then he went to Microsoft and told them he wanted two things: a commitment to produce Microsoft Office for the new OS and an investment.

Why Microsoft needed Apple

At the time, Microsoft Office was the best-selling software title on the Mac. That meant Microsoft made almost as much money on every Mac sale as Apple did. Plus, if Apple was alive and kicking, Microsoft could argue it wasn’t a monopoly.

Apple sweetened the deal with one more concession. In return for these commitments, Apple would make the Mac version of Microsoft Internet Explorer the default web browser on the Mac. Apple would include Netscape, but Microsoft’s browser would get top billing.

Microsoft’s desire to unseat Netscape as the top web browser made it vulnerable to Apple’s infinite play.

What Apple did next

Steve Jobs figured something out during or immediately after his exile. I don’t know when he figured it out and I don’t know when he started using it. But there’s a critical reason why NeXT was a commercial failure and Apple turned into the world’s first trillion dollar company.

Apple’s critics speak of Steve Jobs as having a reality distortion field. But how does someone get a reality distortion field?

Look at a Microsoft sales pitch. Microsoft always talks about being the best or being the best value. Sometimes they even claim to be the most innovative. All of that is debatable, but Microsoft got 97 percent market share at one point with that message so they might as well go with it. Is it inspiring? Not at all. But it didn’t need to be.

Now let’s look at NeXT’s sales pitch. Jobs basically got on stage and talked about being the best, the most innovative, the thing of dreams. That dreams bit was certainly creative, but his sales pitch was still basically the same as any other company’s.

Jobs famously asked John Sculley if he wanted to spend his life selling sugar water at Pepsi, or if he wanted to come to Apple and change the world. And after 1997, he started using that sales pitch on consumers. Gordon Eubanks, then the CEO of Symantec, famously said in 1994 that when Apple let the Mac become a religious issue, it created great press but limited the market.

Before Jobs came back, that was a problem. Jobs turned it into a strength.

Why

Apple’s sales pitch starts with why, instead of what. We think technology can change the world. We think differently. Sometimes the only words in the ad talk about how, and the picture tells you what and how.

How

Apple emphasizes how they make things over what they make. Apple spends a lot of money on industrial design. Apple’s messaging suggests that a product’s beauty, ease of use, and innovation is more important than what it is.

When you’re trying to sell to innovators and early adopters, why and how is more important than what. Selling vision and product philosophy is how you sell to evangelists rather than to ordinary consumers. Apple sells to the innovators and early adopters, and it’s the innovators and early adopters who sell Apple to the early and late majority.

What

Finally, after presenting you with a grand vision and talking about how beautiful and easy to use it is, Apple gets around to telling you what the thing is. Whether it’s a phone, an MP3 player, a TV set-top box, a tablet, or a computer doesn’t matter.

Around 2001, Apple stopped selling computers. Apple started selling an experience and a lifestyle. It starts with one product, and that product may or may not be a computer. Some people end up owning the whole product line including more than one of their computers. Some people stop at one or two products.

The result

This message and approach doesn’t work on everyone. But those people wouldn’t buy your product anyway. The shift in his message helped Jobs build a much bigger cult following than Apple had ever enjoyed. He was not an overtly religious man, but he was probably the greatest evangelist the United States ever produced. He built a following that would make D.L. Moody or Billy Sunday or Billy Graham insanely jealous.

Windows put Microsoft in a position to sell to innovators and early adopters and let them bring in a majority exactly once. Microsoft got into trouble when it used that position with Windows to do it again with Office and Internet Explorer. Apple’s approach lets them do it without needing to leverage an existing market position.

And that’s why, to an outsider, Apple appears to have a Reality Distortion Field. The outsider is looking at the spec sheet and finding gaps they don’t like. Apple isn’t selling the spec sheet. They’re selling an overall vision to people who take it on faith that the gaps in the spec sheet either aren’t all that big of a deal, or will get addressed with some future product update.

Why Apple doesn’t care about Microsoft anymore

When Apple announced Microsoft’s $150 million investment in 1997, the audience booed. Then Steve Jobs said, “We have to let go of the notion that in order for Apple to win, Microsoft has to lose.” I don’t know if that was scripted, but that line is telling. Jobs knew at least as early as August 1997 that there was some percentage of the population that wouldn’t buy a Microsoft product, and if he could figure out how to reach them, he would be successful.

That’s why the Mac is an afterthought. It has 10 percent market share. That’s enough that Apple can make money selling computers. Maybe there’s room for growth there and maybe there isn’t. Apple will be fine either way.

Apple doesn’t dominate the phone and tablet market quite to the extent Microsoft dominates the personal computer market. But its share in those markets is much higher than in the computer market and its profit margins are exceptional. Microsoft has tried to get into those markets but with very limited success. Google is Apple’s main competitor there, not Microsoft.

In the past, there were companies who would try to be all things technology to all people. IBM and Digital Equipment Corporation come to mind. Microsoft and Apple are both bigger than IBM now. So are Amazon and Google’s parent company, Alphabet. They all compete with each other on some fronts, but not all.

Not being all things to all people is part of Apple’s strategy. And while Microsoft plays to win every time, Apple’s playing a longer game, of staying in business as long as possible. Once a product isn’t essential for Apple’s long-term existence, it drops it. That’s why Apple doesn’t make printers or servers or wireless access points anymore.