CHAPTER 23

Apple and Microsoft Case Study

23.1   Industry Analysis

i. Threat of New Entrants: The threat of new entrants for Microsoft
is very low. In fact, Microsoft has practically been a monopoly
company. It held over 90% of the market share with their operat-
ing system and browser. Competitors have a hard time accessing
the market due to economic, technological, or legal barriers.
ii. Bargaining Power of Suppliers: The main suppliers for the industry
are hardware device suppliers and software tool suppliers. Principle
hardware components are mainly obtained from a sole supplier
(Intel). The power of suppliers is strong because of high impor-
tance of inputs.
iii. Bargaining Power of Buyers: The main buyers in the industry are
corporations, individual consumers, as well as government bod-
ies. These buyers could be divided into two segments: (1) lower
end buyers who are small businesses that serve local or regional
firms and (2) upper end buyers that include large corporations and
customers for whom a name reputation carries importance. The
buying power of these customers is limited because there are few
alternatives. Microsoft’s reputation in the industry helps gain a
competitive advantage.
iv. Threat of Substitute Products: Threat of substitutes always exists.
Apple is one of its most important threats. Microsoft’s profita-
bility suffered when better Apple software came into the market.

© The Author(s) 2018 331

F. I. Lessambo, Financial Statements,
https://doi.org/10.1007/978-3-319-99984-5_23
332 F. I. LESSAMBO

Microsoft has always positioned itself at a lower price than Apple

to retain their position in the software market.
v. 
Rivalry Among Competing Firms: Competition among existing
rivals is forcing to new product development, discounting, adver-
tisement, and service improvements. The dominant players like
Microsoft continue to intensify competition in the high-end ­market
from the diversification and other fields. The low switching and
high exit barriers also add to the rivalry. Thus, there is moderate
competition in the industry.

23.2   Apple

23.2.1  Overview
Apple Inc. is a US Company. Founded by Steve Jobs and Steve Wozniak
nearly four decades ago in a residential garage, Apple has become the
world’s most valuable high tech company. Its success results from a sim-
ple priority: Apple strives to make the best products on Earth through a
singular focus on its customers. Apple has introduced new products, new
categories, and even new markets that have profoundly improved people’s
lives around the world. True to its California roots, Apple remains head-
quartered in Cupertino, and it is now building a large new campus in that
community to accommodate its substantial growth over the past decade.
Apple designs, manufactures, and markets a range of personal com-
puters, mobile communication and media devices, and portable digital
music players. The Company also provides consumers a variety of related
software and services, including access to third-party digital content and
applications. Apple sells its products worldwide through retail stores,
online stores, its direct sales force, third-party cellular network carriers,
wholesalers, retailers, and value-added resellers. The hallmarks for which
Apple is best known creativity, innovation and design-drive its develop-
ment activities, almost all of which take place on Apple’s main campus in
Cupertino.
Apple launched the personal computer revolution in 1976 with the
Apple I, followed by the highly successful Apple II. In 1984, Apple reig-
nited that revolution when it introduced its first category-defining prod-
uct, the Macintosh. With innovations such as the graphical user interface
and mouse, the Macintosh made computing accessible to consumers and
set the standard for all personal computers that followed.
 23 APPLE AND MICROSOFT CASE STUDY 333

In 1998, Apple introduced the iMac, a groundbreaking new com-

puter for the consumer market. In 2001, the Company introduced the
iPod, another category-defining product that marked Apple’s expansion
beyond personal computing into the digital marketplace.
Two years later, Apple launched the iTunes online music store, chang-
ing forever the way consumers legally acquired digital content. The
innovative design and customer-focused engineering evident in these
products laid the foundation for the Company’s explosive growth over
the next decade.
In 2007, Apple introduced the iPhone, which quickly set the standard
for smartphones. In 2010, Apple introduced the iPad, which established
a new market for tablet computers. The iPhone and the iPad illustrate
Apple’s emphasis on delivering an unmatched user experience and supe-
rior technical performance. These products generated unprecedented
commercial success and growth for the Company and created extraordi-
nary value for its shareholders.
In 2008, following the introduction of the iPhone, Apple launched
the App Store, which has fundamentally transformed how custom-
ers acquire and use software. Today, Apple customers can choose from
among 850,000 applications in the App Store. Customers currently
download approximately 800 apps per second. Just days ago, the fifty bil-
lion app was downloaded—about seven downloaded apps for every per-
son on Earth.
The Company sells its products worldwide through its retail stores,
online stores, and direct sales force, as well as through third-party cel-
lular network carriers, wholesalers, retailers, and value-added resellers.
In addition, the Apple sells a variety of third-party iPhone, iPad, Mac
and iPod compatible products, including application software, and vari-
ous accessories, through its online and retail stores. The Company sells
to consumers; small and mid-sized businesses; and education, enterprise,
and government customers.

23.2.2   Business Strategy

The Company is committed to bringing the best user experience to
its customers through its innovative hardware, software, and services.
The Company’s business strategy leverages its unique ability to design
and develop its own operating systems, hardware, application soft-
ware, and services to provide its customers new products and solutions
334 F. I. LESSAMBO

with superior ease-of-use, seamless integration, and innovative design.

The Company believes continual investment in research and develop-
ment, marketing, and advertising is critical to the development and
sale of innovative products and technologies. As part of its strategy, the
Company continues to expand its platform for the discovery and deliv-
ery of third-party digital content and applications through the iTunes
Store. As part of the iTunes Store, the Company’s App Store and iBooks
Store allow customers to discover and download applications and books
through either a Mac or Windows-based computer or through “iOS
devices,” namely iPhone, iPad, and iPod touch ®. The Company’s Mac
App Store allows customers to easily discover, download, and install
Mac applications. The Company also supports a community for the
development of third-party software and hardware products and digi-
tal content that complement the Company’s offerings. The Company
believes a high-quality buying experience with knowledgeable salesper-
sons who can convey the value of the Company’s products and services
greatly enhances its ability to attract and retain customers. Therefore, the
Company’s strategy also includes enhancing and expanding its own retail
and online stores and its third-party distribution network to effectively
reach more customers and provide them with a high-quality sales and
post-sales support experience.

23.2.3   Financial Statements

23.2.3.1 Apple—Consolidated Statement of Income

See Table 23.1.

23.2.3.2 Apple—Consolidated Balance Sheet

The amount of the net sales has increased consistently from 2012 to
2014, with a significant increase in 2013. Likewise, the COGS shows the
same trend, that is, an increase from 2012 to 2014. However, as to the
net income, it has declined from 2012 to 2013 with a little improvement
in 2014 (Table 23.2).
The amount of the total assets has increased from $207,000 (2013)
to $231,839 (2014) with a big change in the long-term marketable
securities. The amount of the total liabilities has also increased from
$207,000 (2013) to $231,839 (2014).
 23 APPLE AND MICROSOFT CASE STUDY 335

Table 23.1 Apple—Consolidated statement of income

Table 23.2 Apple—Consolidated balance sheet

Source SEC—Apple, Form 10-K

336 F. I. LESSAMBO

23.2.3.3 Apple—Consolidated Statement of Shareholders’ Equity

The balance amount of the total shareholders’ equity has increased from
2011 to 2013. Fiscal year 2014 shows a decrease from the previous year:
$123,549 (2013) to $111,547 (2014) (Table 23.3).

23.2.3.4 Apple—Consolidated Statement of Cash Flows

A constant increase of the operating activities: $50,856 (2012) to
$53,666 (2013) to $59,713 (2014). However, the firm has significantly
decreased its investing activities from the same period of time: $48,227
(2012) to $33,774 (2013) to $22,579 (2014). The financing activi-
ties seem to be constant with a little increase from $10,746 (2012) to
$14,259 (2013) (Table 23.4).

Table 23.3 Apple—Consolidated statement of shareholders’ equity

Source SEC—Apple, Form 10-K

 23 APPLE AND MICROSOFT CASE STUDY 337

Table 23.4 Apple—Consolidated statement of cash flows

Source SEC—Apple, Form 10-K

23.3   Microsoft

23.3.1  Overview
Microsoft was founded in 1975. Its mission is to enable people and
organizations throughout the world to do more and achieve more by
creating technology that transforms the way people learn, work, play,
and communicate. Microsoft develops and markets software, services,
and devices that deliver new opportunities, greater convenience, and
enhanced value to people’s lives. Microsoft does business worldwide and
has offices in more than 100 countries.
Microsoft generates revenue by developing, licensing, and supporting
a wide range of software products and services, by designing, manufac-
turing, and selling devices, and by delivering relevant online advertising
338 F. I. LESSAMBO

to a global customer audience. In addition to selling individual products

and services, Microsoft offers suites of products and services.
Microsoft products include operating systems for computing devices,
servers, phones, and other intelligent devices; server applications for dis-
tributed computing environments; productivity applications; business
solution applications; desktop and server management tools; software
development tools; video games; and online advertising. Microsoft also
designs and sells hardware including PCs, tablets, gaming and entertain-
ment consoles, phones, other intelligent devices, and related accessories.
Microsoft offers cloud-based solutions that provide customers with
software, services, and content over the Internet by way of shared com-
puting resources located in centralized data centers. Examples of cloud-
based computing services include Bing, Microsoft Azure, Microsoft
Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype, Xbox
Live, and Yammer. Cloud revenue is earned primarily from usage fees,
advertising, and subscriptions. We also provide consulting and product
and solution support services, and we train and certify computer system
integrators and developers.
Microsoft conducts research and develops advanced technologies for
future software, devices, and services. The company believes that we will
continue to grow and meet our customers’ needs as the productivity and
platform company for the mobile-first and cloud-first world. That it will
continue to create new opportunities for partners, increase customer sat-
isfaction, and improve our service excellence, business efficacy, and inter-
nal processes.
Operating Segments
During the first quarter of fiscal year 2014, Microsoft has changed its
organizational structure as part of our transformation to a devices and
services company. As a result, information that our chief operating deci-
sion maker regularly reviews for the purposes of allocating resources and
assessing performance changed. Therefore, beginning in fiscal year 2014,
Microsoft reported its financial performance based on its new segments:

• Devices and Consumer (“D&C”) Licensing,

• D&C Hardware, and
• D&C Other, Commercial Licensing, and Commercial Other.
 23 APPLE AND MICROSOFT CASE STUDY 339

On April 25, 2014, Microsoft acquired substantially all of Nokia

Corporation’s (“Nokia”) Devices and Services Business (“NDS”).
Microsoft reports the financial performance of NDS in its new Phone
Hardware segment. Prior to the acquisition of NDS, financial results
associated with Microsoft joint strategic initiatives with Nokia were
reflected in our D&C Licensing segment. The contractual relationship
with Nokia related to those initiatives terminated in conjunction with
the acquisition. With the creation of the new Phone Hardware segment,
the D&C Hardware segment was renamed Computing and Gaming
Hardware in the fourth quarter of fiscal year 2014.
Microsoft segments provide management with a comprehensive
financial view of our key businesses. The segments enable the align-
ment of strategies and objectives across the development, sales, mar-
keting, and services organizations, and they provide a framework for
timely and rational allocation of development, sales, marketing, and ser-
vices resources within businesses. Additional information on our oper-
ating segments and geographic and product information is contained in
Note 21—Segment Information and Geographic Data of the Notes to
Financial Statements.
Competition
The Windows operating system faces competition from various software
products and from alternative platforms and devices, mainly from Apple
and Google. We believe Windows competes effectively by giving custom-
ers choice, value, flexibility, security, an easy-to-use interface, compatibil-
ity with a broad range of hardware and software applications, including
those that enable productivity, and the largest support network for any
operating system.
Competitors to the versions of Office included in D&C Licensing
include global application vendors such as Apple and Google, numer-
ous web-based competitors, and local application developers in Asia and
Europe. Apple distributes versions of its preinstalled application software,
such as email, note taking, and calendar products, through its PCs, tab-
lets, and phones. Google provides a hosted messaging and productivity
suite and distributes its productivity services through the Android and
Chrome operating systems. Web-based offerings competing with individ-
ual applications can also position themselves as alternatives to our prod-
ucts. We believe our products compete effectively based on our strategy
of providing powerful, flexible, secure, and easy-to-use solutions that
work across a variety of devices.
340 F. I. LESSAMBO

Windows Phone operating system faces competition from iOS,

Android, and Blackberry operating systems. Windows Phone competes
based on differentiated user interface, personalized applications, compat-
ibility with Windows PCs and tablets, and other unique capabilities.

23.3.2   Business Strategy

Accessibility, as part of overall usability, is a fundamental consideration
for Microsoft during product design, development, evaluation, and
release. Microsoft endeavors to integrate accessibility into planning,
design, research, development, testing, and documentation. Microsoft
addresses accessibility by:

• Continuing our long-standing commitment and leadership in devel-

oping innovative accessibility solutions;
• Making the computer easier to see, hear, and use by building acces-
sibility into Microsoft products and services;
• Promoting innovation of accessibility in the development commu-
nity and working with industry organizations to encourage innova-
tion; and
• Building collaborative relationships with a wide range of organiza-
tions to raise awareness of the importance of accessibility in meeting
the technology needs of people with disabilities.

23.3.3   Microsoft Financial Statements

23.3.3.1 Microsoft—Consolidated Statement of Income

The increase in the revenue is line up with the increase in the COGS
from 2012 to 2014. The net income is also growing within the same
reported period: $16,978 (2012) to $21,863 (2013) to $22,074 (2014)
(Table 23.5).

23.3.3.2 Microsoft—Consolidated Balance Sheet

The amount of the total assets has increased from $142,431 to
$172,384. The liabilities’ increase seems to be triggered by the current
liabilities within the same reported periods (Table 23.6).
 23 APPLE AND MICROSOFT CASE STUDY 341

Table 23.5 Microsoft—Consolidated statement of income

Source SEC—Microsoft, Form 10-K

23.3.3.3 Microsoft—Consolidated Statement of Shareholders’ Equity

The amount of the total shareholders’ equity has increased consist-
ently from $66,363 (2012) to $78,944 (2013) to $89,784 (2014)
(Table 23.7).

23.3.3.4 Microsoft—Consolidated Statement of Cash Flows

The net cash from operations has increased from $28,833 (2013) to
$32,231 (2014) after a small decline in 2013. The net cash used in
financing has increased from $8148 (2013) to $8394 (2014) after a
decline in 2013. The same can be said concerning the net cash used in
investing (Table 23.8).
342 F. I. LESSAMBO

Table 23.6 Microsoft—Consolidated balance sheet

Source SEC—Microsoft, Form 10-K

23.4  Financial Analysis

23.4.1   Common-Size Income Statement Analysis

Common-size income statement is an income statement in which states
every line item on the income statement as a percentage of the value of
sales. Common-size analysis is an excellent tool to compare companies
of different sizes or to compare different years of data for the same com-
pany. There are two reasons to use common-size analysis: (1) to evaluate
 23 APPLE AND MICROSOFT CASE STUDY 343

Table 23.7 Microsoft—Consolidated statement of shareholders’ equity

Source SEC—Microsoft, Form 10-K

information from one period to the next within a company and (2) to
evaluate a company relative to its competitors.

• Apple

The increase in the net sales from $156,508 (2012) to $170,910 (2013)
to $182,795 (2014) is not reflected in the net income from the same
period. The trends in the net income are a bit hard to comprehend.
However, the amount of cash dividends declared per common share has
significantly increased within the same period (Table 23.9).

• Microsoft

The increase in the amount of the revenue from $73,723 (2012) to

$77,849 (2013) to $86,833 is reflected in the increase of the net income
from the same period. The cash dividends declared per common share
has also increase within that period (Table 23.10).
344 F. I. LESSAMBO

Table 23.8 Microsoft—Consolidated statement of cash flows

 23 APPLE AND MICROSOFT CASE STUDY 345

Table 23.9 Apple—Common-sized income statement

Table 23.10 Microsoft—Common-sized income statement

23.4.2   Common-Size Balance Sheet Analysis

A common-size balance sheet is a balance sheet that displays both the
numeric value and relative percentage for total assets, total liabilities, and
equity accounts. Each single asset line item is compared to the value of total
assets, and each single liability line item is compared to the value of total
liabilities, and any equity account is compared to the value of total equity.
346 F. I. LESSAMBO

• Apple

The amount of the account receivables seems to increase at a lower rate

8% (2014) than the amount of the account payables, 13% (2014). Also,
we can notice a significant increase in the amount of the long-term mar-
ketable securities (Table 23.11).

• Microsoft

The change in the amount of the account receivables from 12% (2013)
to 11% (2014) seems to line up with the change in the decrease of the
amount of the account payables, 3% (2013) to 4% (2014). The short-
term investment has decreased within the two years (Table 23.12).

Table 23.11 Apple—Common-sized balance sheet

 23 APPLE AND MICROSOFT CASE STUDY 347

Table 23.12 Microsoft—Common-sized balance sheet

23.4.3   Comparative Common-Size Analysis

Common-size analysis is also an effective way of comparing two compa-
nies with different levels of revenues and assets within the same industry.

23.4.4   Financial Ratio Analysis

Financial ratios analysis is the most common and widespread tools used
to analyze a business financial performance over a period of time, with
key competitors and within its overall industry. The trend of these ratios
348 F. I. LESSAMBO

over time is studied to check whether the financial status of a firm is

improving or deteriorating, outperforming or underperforming. For
the sake of this illustration, I selected the following ratios: three liquid-
ity ratios (current ratio, quick ratio, and cash ratio); three solvency ratios
(debt-to-assets ratio, debt-to-equity ratio, and financial leverage); and
three profitability ratio margins (gross profit margin, operating profit
margin, and net profit margin). Very often, analysts would also calculate
market-to-book and value-to-book ratios, which are beyond the scope of
this illustration.

Liquidity Ratios
Total current assets
(i) Current ratio =
Total current liabilities
Apple

2013 73,286
= 1.68 2014 68,531
= 1.08
43,658 63,448

Microsoft

2013 101,466
= 2.71 2014 114,246
= 2.50
37,417 45,625

(Cash + Cash equivalents

+ Marketable securities + Receivables)
(ii) Quick ratio =
Total current liabilities

Apple

2013 14,259 + 26,287 + 13,102

= 1.23 2014 13,844 + 11,233 + 17,460
= 0.67
43,658 63,448

Microsoft

2013 3804 + 73,218 + 17,486

= 2.53 2014 8669 + 77,040 + 19,544
= 2.31
37,417 45,625

(Cash + Cash equivalents)

(iii) Cash ratio =
Total current liabilities
 23 APPLE AND MICROSOFT CASE STUDY 349

Apple

2013 14,259
= 0.33 2014 13,844
= 0.22
43,658 63,448

Microsoft

2013 3804
= 0.10 2014 8669
= 0.19
37,417 45,625

Solvency Ratios
Total debt
(i) Debt-to-assets ratio =
Total assets
Apple

2013 16,960
= 0.08 2014 28,987
= 0.12
207,000 231,839

Microsoft

2013 12,601
= 0.09 2014 20,645
= 0.12
142,431 172,384

Total debt
(ii) Debt-to-equity ratio =
Total equity
Apple

2013 16,960
= 0.14 2014 28,987
= 0.26
123,549 111,547

Microsoft

2013 12,601
= 0.16 2014 20,645
= 0.23
78,944 89,744

Total liabilities
(iii) Financial leverage ratio =
Total assets
Apple

2013 83,451
= 0.40 2014 120,292
= 0.52
207,000 231,839
350 F. I. LESSAMBO

Microsoft

2013 63,487
= 0.45 2014 82,600
= 0.48
142,431 172,384

Profitability Ratio Margins

(Net Sales − COGS)
(i) Gross profit margin =
Net sales
Apple

2013 170,910 − 106,606

= 0.38 2014 182,795 − 112,258
= 0.39
170,910 182,795

Microsoft

2013 77,849 − 20,249

= 0.74 2014 86,833 − 26,934
= 0.69
77,849 86,833

Operating income
(ii) Operating profit margin =
Net sales
Apple

2013 48,999
= 0.29 2014 52,503
= 0.29
170,910 182,795

Microsoft

2013 26,764
= 0.34 2014 27,759
= 0.32
77,849 86,833

Net income
(iii) Net profit margin =
Net Sales
Apple

2013 37,037
= 0.22 2014 39,510
= 0.22
170,910 182,795

Microsoft

2013 21,863
= 0.28 2014 22,074
= 0.25
77,849 86,833
 23 APPLE AND MICROSOFT CASE STUDY 351

23.4.5   Comparative Financial Ratio Analysis

Comparative financial ratio analysis compares one company’s perfor-
mance to another business. Such a comparison allows managers and
executives to determine the financial standing of the company relative to
its key competitors under the same economic conditions. Comparative
ratio analysis tends to strip away any accounting policies that change
or alter a company’s earnings, allowing for a one-tone review on finan-
cial performance. An effective comparative ratios analysis would require
besides the industry information that the analyst look for each one of the
companies used in the comparison its line of business (major products,
major suppliers) as well as its major factors or influences.