Breakdown: How Apple Blew by Microsoft

Preface: A dire diagnosis

"What would I do? I'd shut it down and give the money back to the shareholders."

Apple vs. Microsoft, then and now

• Apple Vs. Microsoft, 1997Apple, looking like it was on its last legs, put Steve Jobs in charge in a last-ditch effort to keep the company alive. The situation was so dire that they had to get a $150 million loan from arch-nemesis Microsoft, who by that point had become the 800-pound gorilla thanks to Windows 95. Meanwhile, Apple was playing catch-up with Mac OS.
• Apple Vs. Microsoft, 2010It's Apple that now has the 800-pound gorilla in the form of the iPhone, the dominant player in the still-growing smartphone market. While Microsoft, at this point a mature, still very profitable company, still owns the OS market, the launch of the iPhone has had the company playing catch-up in the smartphone space -- a market they'd been in for years before Apple came along.

The real story: Potential versus profits

• $222
  billion
  Apple's market capitalization
  as of Wednesday
  afternoon
• $219
  billion
  Microsoft's market capitalization in the same period source

• BIGGER PROFITS?
  Microsoft. The company made $58.4 billion in revenue and $14.6 billion in net income in its most recent fiscal year. Apple only (only is a relative term) made $42.9 billion in revenue and $5.7 billion in net income in the same fiscal year.
• MORE CASH?
  Microsoft. The company has $39.7 billion in its coffers compared with Apple's $23.1 billion, which means that even if they lose the lead in terms of stock price, they'll be fighting for years, if not decades, to come.
• MORE POTENTIAL?
  Apple. While Microsoft definitely isn't down or out, investors are clearly favoring the company's iPhone and iPad as having more potential for the long haul. MS makes most of its profits on older software like Windows.

• » Is anyone bigger? Yes. In terms of American companies, Exxon Mobil is currently bigger than Apple, at $278 billion. But that's it. That's right. Based on stock value, Apple is now the second-biggest company in the U.S.

Why has Apple grown so quickly?

• If you invested in Apple instead of buYing an original iMac, you'd have a lot of money. The device that paved the way for Apple's second act may have lacked a floppy drive, but it had all the hallmarks of an Apple launch – a product without comparison in the industry and a flashy Steve Jobs presentation. And if you bought stock instead of that landmark bondi blue machine, it'd be worth $46,000 today, according to Kyle Conroy's awesome mashup of product line with stock price. So how did Apple do it? Three factors explain the growth.

• CONSUMER FIRST
  Apple has never actively courted business customers in most of its markets – the ratio of Xserve-style solutions compared to consumer-friendly solutions like the iPad is really low. If the enterprise picks it up, it's icing. As a result, companies no longer dictate the technology that becomes popular.
• AN ECOSYSTEM IT OWNS
  When Jobs closed off the clone market, he used the opportunity to limit the number of models in the Mac line. It kept the build quality high and relied on high innovation and high profit margins rather than low prices (like Dell). They've used this model in every new market they've entered.
• THE HYPE MACHINE
  Apple's strongest asset is Steve Jobs. Their second-strongest asset? The hype around what Jobs is going to do next. Every aspect of the company's branding pushes this aura, from the stores to the Web presence to the commercials. The result? Lots of free publicity and huge first-day sales.

• » Stepping on toes: One question mark for Apple is whether the company has gotten too confident because of its success. This is especially an issue on the iPhone platform, where Apple seems to be setting stricter rules and damaging major business relationships (see: Adobe). It's gotten to the point where Google's ready to take on the company in key markets.

How Microsoft faltered

• ALSO-RAN INNOVATION
  Microsoft is mostly known today for the same technologies that it was 13 years ago. While at times it has succeeded at creating new markets (the Xbox, despite high early costs), many other times, the company is playing catch-up in markets where Apple already leads (the Zune, cell phones).
• NOTABLE GAFFES
  It's not just the blue screen of death anymore: The problems Microsoft has are often bigger. From a buggy, behind-schedule Vista to the Xbox 360's embarrassing and costly "Red Ring of Death," the company has had many PR nicks in the last 13 years. And the much-maligned Internet Explorer isn't helping.
• MATURE MARKETS
  Windows 7 and Office are huge moneymakers for MS, but they're also based off foundations for markets that may not exist in 10 years. Attempts to move forward are afoot (the Kin, Windows Phone 7 Series, the depressingly canceled Courier project), but are they enough to jump ahead?

• » Is a reinvention needed?: Probably. But that's what the tech industry is all about. If you're not innovating, you're being gunned at. The theory of "creative destruction," first suggested by economist Joseph Schumpeter in the early 1900s, holds that new, more efficient technologies keep coming along that have the effect of destroying business models. The end result is a better product for consumers, though at a cost to longstanding companies. Newspapers know all about this, and Silicon Valley does, too.

Microsoft CEO Steve Ballmer isn't scared

"I will make more profits and certainly there is no technology company in the planet which is as profitable as we are. ... Stock markets will take care of the rest."