Google, Microsoft, Apple and
Amazon.
Financial analysis
Google, Microsoft, Apple and Amazon
Object : Financial analysis - Key analysis of the competitive advantages for future lead
19/02/10
Author : Samuel MORILLON, Chief Operating Officer Cybion S.A. - MBA Insead, Engineer.
In less than one decade, the ITs business has spread on the worldwide mainstream demand. Handsets,
multimedia gaming platforms, Internet take in average more than 2 hours per day per customer in western
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countries . In this new business consisting in providing both hardware and contents for customers
communications, searchs and leisures, new names such as Facebook, Amazon, eBay, Skype, Yahoo or Google
have occured. These new companies challenge already existing firms such as Microsoft, IBM, HP or Apple. The
purpose of this document is to study the financial statements from key IT firms to estimate potential trends. Four
companies are studied, respectively Microsoft, Google, Apple and Amazon.
Introduction
The IT market for consumers can be structured in two main segments respectively hardwares and
contents. If hardwares still requires payments when contents can be obtained either for free or
competitive prices, standards supports connexions between the different brands. These recent easy
interactions between all the IT tools accelerate the technological and behavior current convergence.
Google has based its financial success on one specific step of the value chain: its ability to provide
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accurate data for free. It represent more than 60% of the Internet connection worldwide . Google has
acheived in 2009 a turnover of 21,795 billion USD mostly based on its connected dominant position
in online advertising. The company faces now a growth challenge and focuses on vertical integration
with handsets and OS. This integration pushed Google in frontal competition with historic and new
business actors : Apple, Microsoft and Amazon.
Draft #1 - Search engines market shares worldwide
(Source: Comscore/Les Echos, 23/02/10)
The 5-years long success of Apple comes from its capability in selling high-end solutions. It has
achieved a turnover of 36,537 billion USD in 2009 with a progressive domination in online music. Its
market-building reputation has been confirmed both in hardwares (new macs, ipods, iphones) and
attached contents (itunes, istores,…). Apple is now in frontal competition with Google, Microsoft and
more recently Amazon with it new iSlate and the attached book store.
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Source : Cybion 2010 - To confirm.
Source: Comscore/Les Echos the 23th of february 2010.
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With 19,1 billion of annual turnover and more than 50% of marketshare worldwide in the book
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services , Amazon is the biggest book store. If its profit margin of 4,7% is far below its above listed
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competitors’ average , Amazon tries to position itseft as the online access to knowledge. However, it
faces technical challenges as the company has based its success only on transaction. The success of
its tablet must be confirmed.
Finally, all these recent evolutions mustn’t let forget the global dominant position of Microsoft. In less
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than four years, the company has doubled its operating turnover at 58,437 billion USD . In 2009,
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the financial size of this company was mostly equal to the sum of Google and Apple together . On the
hardwares and contents for consumers business, Microsoft is present in all high value segments such
as office services (MS Office,…), games (XBOX,…) or OS (Windows,…).
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However, since the late 1990s and more than 9 billions USD annual spendings in R&D , Microsoft
is facing new challenges:
•
•
•
The development of Google. Bing, the search engine represents less than 11% of marketshare
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worldwide both in USD and connexions . The success of the partnership with Yahoo &
Facebook in technology and advertising must be confirmed.
The come-back of Apple and its high-end positioning in all the payable segments of the ITs, in
general, and handsets in particular.
The development of e-stores and online applications and OS both for handsets and PCs.
All these US competitors have their own vision of hardwares and contents for consumers business
and each of them has based its success in developing new specific markets. However, the recent
convergence drive them to competition.
In this area, on one hand, if Microsoft is clearly the company with the biggest assets and the most
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structured organization . It hasn’t succeed in maintaining the momentum effect, creating both
innovations and value with the web.
On the other hand, if Google and Apple have succeed in catching value from new businesses, the
success of Google is mostly based on the performance of its algorithms when Apple uses its strengths
in marketing.
Draft #2 - Incomes comparaison between Microsoft, Google, Apple and Amazon
(Source: Cybion 2010, annual reports)
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Source: Cybion - To confirm.
Source: Annual report 2009.
Source: Annual report. Arithmetic average of 27,5% for Microsoft, Google and Apple.
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Source : Annual report 2009.
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Based on operating turnover.
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Please read the draft #1 below.
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Source : Annual report 2009. According to Les Echos in 2009, this is the biggest value all industries included.
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Source: CEO of Microsoft during the « Salon de la micro-entreprise », Paris October 2009.
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Source: Annual report 2009 - They have more than 16 bilions USD in cash.
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Historic key points
Google
Google Inc. was founded by M.Larry Page and Sergey Brin during their PhD at Stanford University. It
was first incorporated as a privately held company in late 1998 and its initial public offering was in
2004.
The first funding for Google was 100 KUSD from Andy Bechtolsheim, co-founder of Sun
Microsystems. On June 7, 1999, a $25 million round of funding was announced and in 2004 Google's
initial public offering took place. The company offered 19,605,052 shares on 271 millions shares at a
price of $85 per share valuating the group at 23 billion USD. The 22th of February 2010, the stock
value was 547 USD.
In 2000, Google began selling advertisements associated with search keywords. Nearly 99% of
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Google's revenue is derived from its advertising programs. For instance, for the 2006 fiscal
year, the company reported $10.492 billion in total advertising revenues and only $112 million in
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licensing and other revenues . It has 19835 employees worldwide.
Google supported its growth while investing in it search engine, customizing advertisement solutions,
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using the DoubleClick technology and draining most of the websurfers to their information free
channels.
Amazon
Amazon.com, Inc. is the largest online retailer. It was founded by M. Jeff Bezos in 1994. It started as
an online bookstore, but soon diversified to product lines of VHS, DVD or toys.
The Web site CDNOW is powered and hosted by Amazon. It was the same case for ToysRUs.com
until June 30, 2006. Amazon.com operates retail websites for numerous companies such as
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Target, Timex Corporation, Marks & Spencer, Mothercare, or Lacoste .
Firm's net present value is still negative. The accumulated deficit was $730 million in 2008, $1.4
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billion in 2007, and $1.8 billion in 2006 . However, on December 2008, Amazon entered the S&P 100
index, replacing Merrill Lynch after it was taken over by Bank of America. The 22th of February 2010,
its stock was 117,5 USD valuating the company at 55,2 billion USD. However, Amazon’ stock value is
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still fluctuating. During the last 12 months, the range was between 77,51 and 145,91 . It has 20700
employees worldwide.
Apple
Apple Inc. designes and manufactures consumer electronics goods and services. As of January
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2010, the company operates 284 retail stores in ten countries and an online store. Apple has about
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35,000 employees worldwide and it had worldwide annual sales of US$42.91 billion in 2009.
Fortune magazine named Apple the most admired company in the United States in 2008 and in the
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world in 2009 .
Apple was established on April 1, 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne to sell the
Apple I personal computer kit. The Apple I was sold as a motherboard (with CPU, RAM, and basic
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textual-video chips). It was market-priced at $667
.
By the end of the 1970s, Apple had a staff of computer designers and a production line. In December
1980, Apple launched the initial public offering of its stock to the investing public. When Apple went
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public, it generated more capital than any IPO since Ford Motor Company in 1956 .
In 1985, a power struggle developed between Jobs and CEO John Sculley, who had been hired two
years prior. Jobs resigned from Apple and founded NeXT Inc. the same year.
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Google Annual Report, Feb. 15, 2008
Form 10-K — Annual Report.
Bought by Google in 2004.
Source : en.Wikipedia.org the 22th of february 2010.
Source : Annual reports.
Source : Yahoo Finance - The 22th of february 2010.
Source: "Apple Tablet Media Event Today: "Come See Our Latest Creation". MacRumors. January 27, 2010. Retrieved January 27, 2010.
Source : Annual report 2009.
Source: Colvin, Geoff (March 16, 2009). "The World's Most Admired Companies 2009". Fortune 159 (5): 76.
$2.5 thousand in 2009 dollars, adjusted for inflation
Source: "Consumer Price Index (estimate) 1800–2008". Federal Reserve Bank of Minneapolis. Retrieved August 1, 2009.
Source: Wikipedia - To confirm.
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In 1996, Gil Amelio was CEO. He made many changes at Apple and chose to purchase NeXT and its
NeXTSTEP operating system, bringing Steve Jobs back to Apple as an advisor. In July 1997, Jobs
became CEO remplacing Gil Amelio after three years of financial troubles. Since this time, Apple has
managed a continuous growth with numerous innovations such as Itunes, Ipod, Iphone,(…).
The 22th of February 2010, its stock value was 201.67 USD valuating the company at 182,87
billion USD.
Microsoft
Microsoft Corporation manufactures, licences, and supports software products for computing devices
and games solutions. Its most profitable products are both Microsoft Windows and Microsoft
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Office suite. Its 2009 annual turnouver was 58.437 billion USD for a net income of 14.569
billion USD. Since the 1990’s, it is the most profitable IT company worldwide. It is 93,000 employees.
The company was founded in 1975 by Bill Gates and Paul Allen, to develop and to sell BASIC
interpreters for the Altair 8800. Supported by a partnership with IBM, Microsoft progressively
dominated the home computer operating system market, first with MS-DOS in the mid-1980s, second
with Windows. Microsoft is also present in cable TV with MSNBC cable television network and Internet
accesses with the MSN Internet portal. The company also markets computer hardware (mouses,
keyboards,…) as well as home entertainment products such as the Xbox, Xbox 360. The company's
initial public stock offering (IPO) was in 1986; the ensuing rise of the company's stock price has made
four billionaires and an estimated 12,000 millionaires from Microsoft employees.
The company has been the target of monopolistic practices and anti-competitive strategies. Both the
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U.S. Department of Justice and the European Commission have ruled against Microsoft for
antitrust violations.
The 22th of february 2010, its stock value was 28,73 USD moving between 14,87 and 31,5 USD
during last 12 months. Its financial value was 255,69 billion USD. This global capitalization
matches with the sum of the capitalization of the three french leaders of the CAC40, respectively
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TOTAL -107 billions euro-, EDF - 75,94 billions euro-, Sanofi-Aventis -72,99 billions USD- .
Financial statements
Cash flow
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Cash flow is a measure of a company's financial health. It is equal to cash receipts minus cash
payments over a given period of time. It can also be calculated with the net profit plus amounts
charged off for depreciation, depletion, and amortization. Cashflow is a tangible value corresponding
to what the company has in bank. It is the most objective and simplest indicator of an economic
performance.
Microsoft is clearly the most profitable company in the current portfolio. Like for the turnovers,
its 16,86 billion USD cashflow in 2009 was bigger than the sum of the cashflows of Google, Apple and
Amazon together. This success is based both:
• On the dominant position of Windows, MS office and a strong position in business consulting.
Even if this position is more and more challenged by solutions like openOffice, Linux (…), its
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revenue generates probably more than 10 billion of cash flow .
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• A strong position in servers and tools. Its attached cashflow is probably around 5 billions USD .
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Source: Annual report 2009.
Source: http://www.justice.gov/atr/cases/ms_index.htm
Source: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/382
Theorical assumption based on the ratio 1USD = 1 euro. Capitalization the 01/01/2009.
Please read exhibit #1 for more details.
10,86 billions USD in operating incomes.
5,327 billions USD of operating incomes.
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Draft #3 - 2009 Cashflows’ comparison between Microsoft, Google, Apple and Amazon
(Source : Cybion 2010, annual reports).
However, Microsoft hasn’t succeed in making money in different businesses such as online
services (loss of 2,253 billions USD in 2009 in operating revenue) and entertainment (169 millions
USD in 2009 in operating revenue). This fact is also true for Google and Amazon.
If Google initiates numerous innovative solutions -recently Chrome and Handsets-, 97% of its
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revenues still come from advertising and only 3% from licensings . For example, the Nexus One, its
last innovative handset faces a strong competition. During its first week of sales, 20 000 Nexus
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One were sold comparing to 250 000 for the Droid from Motorola and 1,6 million for the Iphone 3GS .
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Google’s global cash flow was 6,813 billion USD in 2009 .
Likewise, two years after its launch, the success of Kindle, the ebook from Amazon, the first
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company diversification, must be confirmed especially within a difficult competitive context with the
coming Apple’s islate. The attached revenue represents 2,6% of the global company operating profit.
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However, Amazon had a cashflow of 985 millions USD in 2009, plus 31% comparing to 2008 .
In fact, Apple is the only company having succeed in diversification. Its cashflow in 2009 was 6,4
billion USD coming from:
• 3,2 billions from Iphone’ success and the attached applications36.
• 2,2 billions from Ipod’s and Itunes37.
• 1 billions from the hardwares and attached softwares.
Draft #4 - 2009 Apple’s incomes split between the different products
(Source : Cybion 2010 based on 2009 annual report)
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Source: Google 2009 - http://investor.google.com/earnings.html
Source: http://www.pcinpact.com/affichage/54956-nexus-one-ventes-premiere-semaine-flurry/79628.htm. Please read exhibit #2 for more details.
Source : Annual report Google 2009.
Please read exhibit #3 for sales Kindle’s sales expectations in 2008.
Source : Annual report 2009 - 2008 cashflow was 747 millions USD.
Assuming all other businesses stables, in 2007, the cashflow was 3,6 billions (Source: Annual report 2007).
Assuming all other businesses stables, in 2005, the cashflow was 1,5 billions USD (Source: Annual report 2005).
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Internal efficiency
Internal efficiency is based on the amount of human ressources required to generate profit. The
attached indicator is calculated on the profit per employee. Internal efficiencies are different according
to the different industries. For instance, tourism required more manpower versus insurance to
generates the same amount of incomes. However, within a defined economic sector, it is a way to
identify to best economic practices but also the efficiency of management.
Google is the most efficient company. It produces 209 000 USD per employee when Microsoft
procudes 159 000 USD, Apple 157 000 USD and Amazon 31 000 USD. However, based on the last
two years evolution, Google requires proportionnally more ressources to maintain its growth. It
has to develop corporate activities such as advertising, marketing to promote its new products such as
Chrome. In these conditions, its efficiency formely based on a start-up growth has decreased by 28%
during the last two years. It was 288 000 USD per employee in 2007.
Moreover, Apple is gaining in efficiency - It was 99 000 USD per employee in 2006. This growth is
based both on the global success of its last products but probably also on its ability to focus on its
core strenghts -marketing and design- while subcontracting non-core activities -chip design…-.
However, according to company’s communication, the new ISlate has been completely designed by
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Apple including its chip . This will probably have a direct impact on company’s efficiency if the product
is not a blockbuster.
In these conditions, Apple, Google and Microsoft will probably converge to 160 000 USD per
employee which must be the best practices value in the communication and technology business. In
this comparison, Amazon is marginalized and presents values similar to logistic businesses.
Thus, except for Amazon, competition will probably not be based on internal’s efficiency and
management. Future growth and leadership will be based on competitors ability to create diverging
offers and impacting innovations. In this area, Apple is still the only company having succeed in
creating new profitable markets.
Draft #5 - Competitors profil per employee evolution since 2000
(Source : Cybion 2010 based on annual reports)
Research and development efficiency
Research and development expenses include payroll, employee benefits, stock-based compensation
expense, and other headcount-related expenses associated with product development. Research and
development expenses also include third-party development and programming costs, localization
costs incurred to translate software for international markets, the amortization of purchased software
code and services content, and in-process research and development.
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Source: ISlate video’s presentation - www.apple.com.
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During the last 4 years, all the competitors have increased significantly their R&D expenses .
Microsoft has increased its expenses by 10,3% at 9 billions USD, Amazon and Apple by 20%
respectively at 1,24 billions USD and 1,333 billions USD, and Google by 31,7% at 2,79 billions USD.
In global value, Microsoft is still the biggest investor in R&D. However, its investments are split
between different businesses with probably few synergies such as servers and video games. In the
same way, Google is also investing in numerous different businesses such as search engines, Google
Labs, handsets, (…). This last trend creates complexity and may bring confusion.
In these conditions, it may be more pertinent to compare R&D efficiency rather than R&D
expenses global values. R&D efficiency can be defined as the market performance resulting from
R&D investments. We have defined this ratio as the average cashflow generated during two years
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for 1 dollar invested in average during the two previous years .
With this ratio, we note that Google was the most efficient company until 2008. In 2007, based
only on the efficiency on its search engine, the company was able to generate 18 USD of cashfow for
1 dollar invested in R&D. However, this value has strongly decreased down to 6,6. This may be
partly linked company’s diversification.
On the opposite, with this ratio, Amazon is only able to generate 1,2 USD of cashflow for 1 dollar
invested. Similarly, Microsoft needs large amounts of investments to create value. Its ratio is 2,7.
Draft #6 - Competitors R&D efficiency ratio
(Source : Cybion 2010 based on annual reports)
Finally, in 2009, the most efficient company was Apple. It was able to generate 8 USD of cash for 1
dollar invested. The company has been the only one to have a continuous growth of efficiency in its
R&D since 2003. This is probably due to strong market oriented positions on profitable segments but
probably also on 30 years of continuous entrepreneurship. If the Islade is a success, it should confirm
that Apple is today the only company able to invent itself continuously.
Conclusion
If Microsoft is definitively the market leader in the hardwares/contents and software business, Apple
and Google are becoming challengers both on the contents segments and the hardwares.
If Amazon has developed a significant size, its ability to create value for investors must be confirmed.
In this context, the question for future lead will be linked to the capability of these groups to
manage internal and external growth.
For internal growth, Apple is probably the benchmark. It is the only company able to launch cash
creating innovations in different businesses. However, this capability may be linked to the
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Please read exhibit #4.
Please read draft #6 for more details.
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charisma of Steve Jobs. The success of the future ISlate, first non-Steve Jobs product, must be an
answer.
For external growth, Microsoft is probably the only company able to conduct major acquisitions. It
seems to be the only way for this company to drain innovation and future growth. Microsoft is
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present in all the economically performant segment of the ITs .
Google is probably in the same position than both Apple and Microsoft. Currently, it focused its
growth on Asian/Russian market with its advertising model. However, the current troubles with
the Chinese authorities may prove that the strategy is not a cash machine for the future. Google has
probably to diversify its incomes. Its ability to absorb other sources of cash different from
advertising must be demonstrated even if the company drains probably the highest number of
talents.
Moreover, the success of Google is strongly link to the vision of M. Eric Schmidt and the
question is also the sustainability of growth without M. Schmidt in a company presented with no
real hierarchy.
Finally, Amazon like ebay or other numerous online service, will probably have to face
unsustainable competition within the next years. Without any important return on investment, their
economic performances turn them into ideal target for the large leaders of the ITs.
Draft#7 - Competition maket domination per economic segment
(Source : Cybion 2010)
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Please read draft #7 below.
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Exhibit #1 - Competitors’ cash flow evolution
Cash flow (K.USD)
2000
2001
2002
2005
2006
2007
2008
2009
Microsoft
10 337 000
13 388 000
10 689 000
2003
9 771 000
2004
9 067 000
13 290 000
13 997 000
15 501 000
19 553 000
16 860 000
547 592
1 759 209
3 646 076
5 169 663
6 813 552
870 000
75 000
179 000
182 000
416 000
1 507 000
2 214 000
3 793 000
5 270 000
6 359 000
-505 274
-1 089 501
-386 244
-67 471
108 026
664 114
477 000
400 000
747 000
985 000
Google
Apple
Amazon
Draft#8 - Competitors cash flow evolution
(Source : Cybion 2010 based on annual reports)
Exhibit #2 - First week comparative sales between Apple’s Iphone and Google’s Nexus
Draft#9 - First week launch comparison between Iphone and Nexus One
(Source : Flurry)
Exhibit #3 - Sales and operating revenues attached to Amazon’s kindle
Draft#10 - Kindle’s sales and forecasts (Source: Citi Investment Research)
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Exhibit #4 - R&D expenses evolution 2000-2009
Draft#11 - Competitors R&D comparison
(Source : Cybion 2010 based on annual reports)
Exhibit #5 - R&D expenses evolution 2000-2009
Draft#12 - Competitors R&D comparison
(Source : Cybion 2010 based on annual reports
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