21st Century War for Supremacy: Don't Discount Microsoft

Everyone loves an underdog. This was part of the rallying cry that brought Apple back from industry slug, to industry powerhouse. Remember the Mac v. PC commercials? The Apple ad campaign that took a direct shot across the bow of Microsoft's core business. Couple that ad campaign with the recent rise of Apple and Google into the smartphone market and the 21st century battle for technological supremacy appears to have entered a new dimension. The stakes are high, the competition ferocious and only those with endurance will prevail. 

The forerunner at this point in the battle appears to be Apple. Proponents of this belief suggest that a changing of the guard has occurred at the top of the tech industry since Apple overtook Microsoft as the largest technology company based on market cap. Simply put, market capitalization is the share price of a company multiplied by the number of outstanding shares.  The value of the share price is predicated not only on a company's performance to date, but more importantly for investors, the future prospects for growth. The net result of this market cap evaluation would be that investors believe that Apple has better prospects for future growth then Microsoft. More importantly for investors however is the forward looking Price-to-Earnings Ratio. In simple terms, the P/E is used as a price at which investors can expect a return on their money. So if a P/E is 20, it means an investor is willing to pay 20$ for every 1$ of revenue the company is expected to make. A hi P/E would indicate that investor believe the company will have higher earnings growth in the future. However the P/E cannot be taken out industrial context because over the longer term and eventually every company is bound to fall back into the floating average. Higher growth implies a solid research pipeline, with great R&D prospects and no major managerial disruptions. 

Big Three

According to a recent article in businessweek ("Mobile Wars") Apple spent 1.8B US on R&D in 2010; while MSFT spent 9.5B US on R&D in 2010, Google Spent 5.5B US in 2010. One contributing factor to the discrepancy in the budgetary difference is that fact that MSFT has a much deeper and longer term pipeline  then the other two. Put a different way, Microsoft still spends 5 times as much on R&D then Apple, and almost twice as much as Google. So while some may believe that Apple has all but surpassed Microsoft, according to Forbes Magazine top 2000 companies, Microsoft still ranks 25 spots higher then Apple.  

Looking at the line of Apple products, it is not difficult to deduce why it spends so little on R&D compared to revenue or industrial competitors. If you accept "Moblie Wars" premise that the Ipad is just an over sized Ipod touch,  then you can also deduce that the Iphone is just a tweak or two away from the the Ipod. This R&D strategy of slight tweaks to existing technology or products is not a long term strategy that most analysts would recommend. Comparatively, Steve Jobs health has been diminishing over the last few years. The company that he co-found has already demonstrated a lack of ambition and foresight in his absence. It cannot be predicted what may happen to Apple when, not if, Steve Jobs leaves his position, but we know where Microsoft is headed without its co-founder running the show.

Smartphone Market 

Apple is apparently leading the way to a new era in cell phone technology. Apple has less then 15% market share in the smart phone industry. Nokia, still the global leader controls between 38-40%, RIM is at 18-22%. It is always easier to grow by large numbers as the small guy. And while Apple's growth is phenomenal, Nokia was able to increase its quarterly shipment numbers by the same amount Apple shipped in total. 

Now add the fact that later this year Nokia is going to phase out its own operating system and in its place will be the new Windows OS and any prospect investor should really start to think twice. Much like Microsoft's first foray into the software industry many years ago when it used Apple, Dell and HP computers as platforms for its PC windows software, so too will it use Nokia as a distribution platform for its newest piece to its global software empire. 

The battle for the smartphone market does not solely revolve around the phone. If not more importantly then the phone are the accessories and services that are based around the product and Microsoft is much better positioned to take advantage of the services that surround the smartrphone then any of the competitors. Microsoft's near corporate monopoly over office software provides the tech giant with the infrastructural advantage that neither Apple nor Google can contend with. The ability to have your mobile device interact with every PC in your life is an advantage that cannot be overlooked or underestimated. 

"You May Have Won the Battle But..." 

As any historian will point out,  'One battle does not a war make'. Microsoft V. Apple (paradon me Google); we have seen this fight before in the Macintosh V. Windows battle of the early 90s. Round 1 went to Microsoft. When the dust settled, it was a unanimous decision. Yet again, two decades later, after Microsoft invested 150M US into its former adversary in 1998, we are treated to Round 2. Same companies, same industry. The only difference this time is that Microsoft has a massive advantage and giant head start. 


The key to long term success is endurance, the resources to survive downturns, and the will to re-invent oneself. No other company demonstrates this paradigm better then General Electric; an industrial leader across numerous industries and corporate powerhouse since 1896, when it was one of the original 12 stocks listed on the then newly created Dow Jones Industrial Average. GE has survived world wars, a plethora of recessions, industry and global downturns, consumer shifts, corporate trends, political changes and every other known factor of the global economic environment to remain the 2nd largest company in the world as of 2010, 114 years after it first became a public company. 

Microsoft has positioned itself to become the 21st century equivalent of GE. Constantly researching and developing new products for entrance into new markets and different industries, having the wherewithal to survive recessions and market downturns, expanding the core business not at the expense of, but in complement to, its other pursuits. 

At this point in the war for technological supremacy in the 21st century, Apple has demonstrated nothing more then its ability to create and upgrade consumer discretionary products, while Microsoft has developed a global technological empire that reaches every corner of the globe..... and is still growing.

The Politics of Recession: A Disturbing Parallel from 1929

 In 1929 the worst stock market crash in history crippled the global economy, ruined the livelihood of millions and led to the most politically turbulent shift in global affairs since the fall of the Roman Empire. As many political scientists, historians and economists concede, there is a direct correlation between the stock market crash and the political shift that occurred across the globe throughout the 1930s which culminated in the Second World War. When large parts of the population are unemployed, they have the resources necessary to mobilize, the will to form coalitions and devotion to formally set forth their grievances. Most importantly, during a recession dissents have the luxury of endurance to ensure demands are met.  

In the wake of the stock market crash of 1929, the 1930s were arguably the most turbulent decade in the modern era. Governments across the globe struggled to maintain social stability. The Japanese invaded China, the Italians invaded Ethiopia, the Spanish fought a brutal civil war and of course Hitler came to power in Germany and Stalin secured his grip over the Soviet Union by violent force. The Great Depression was not simply titled as such for the economic consequences. Fed up with capitalism, government bureaucracy and the established order; people across the globe rose up and tried to find a solution to dire economic situations. The economic situation in Germany resulted in what economists term "hyperinflation". 1 Billion Deutsch-marks (thats with a 'b') was barely enough for a loaf of bread. Money was literally worthless.

Every government attempted to secure their regime anyway they could, in most cases the easiest way out was to blame a distant people, propagandize them as "alien" and send in the marines. The goal for too many countries was the same, refocus the domestic public and preoccupy their current affliction while distracting their emotional economic claims.This method of distracting the populous' grievances by scapegoating is as old as politics itself. Couple the 1930s with the First World War and the use of propaganda would never again be relegated to war time use only.

Modern Similarities

Fast forward to the modern era. Every financial analyst, media outlet, and national news anchor referred to the recent recession as "the worst recession since the great depression". The Egyptian revolt is just the beginning. Now revolts are occurring across the Middle East. Iran, Bahrain, Jordan, Tunisia, Yemen are amongst the secondary countries to revolt against established regimes. Most of these countries exist outside of the established global order and contribute a very small percentage to the global economy with exception of Iranian oil. But if history can be used an indicator, the revolts will not end with a few fringe Middle Eastern and African countries.  

European candidates for revolt include but are not limited to: Italy, Spain, Ireland, Portugal, Romania and Poland. All riddled with debt, unemployment and fiscal mismanagement; these governments will eventually have to hamper progress and the prospects for growth even further when they necessarily increase taxes in order to balance the books. 

Only World War Two could interrupt the worst financial disaster in recorded history. Many economists believe the global economy may have taken another decade to return to pre-depression levels. Whilst we are currently being told that the contemporary recession is over and that the global economy has finally returned to a measure of growth, the effects of the worst recession since the great depression, have barely begun. 

The Game: Empires in the Current Era

As world leader and overseer of a global empire, America has but one priority- maintain global economic and military dominance. Drawing on lessons from the past, this stage of American empirical evolution should no longer focus on expansion, but rather to limit the exposure and influence of main competitors. Much like an industrial leader in a specific sector, a company will identify possible competitors and react accordingly. A nation, much like a corporate entity can only gain so much market share before it infringes the progress of another. Over the course of the last twenty or thirty years we have seen many of these industrial leaders (Microsoft, Google, Intel, GE, Exxon, etc...) use their dominant market position and industrial might to covertly and pervasively impede the growth of potential competitors. In the event that a competitor manages to build a higher quality product and appears capable of challenging the much larger entity at a future date, the bigger company can simply buy them out, thereby adding the new product to their already mammoth arsenal.
But every now and again a challenger will come out of nowhere (Google), the bigger company will underestimate the challenge posed to them (Microsoft) and become complacent with it's status as industry leader. Be it as a result of technological, industrial, or societal changes that the former has yet to fully incorporate into their operations, the new comer will grow so rapidly that it quickly eliminates the possibility of a takeover. This economic example is by no means limited to the business environment.
As demonstrated with previous empirical powers, there is always a challenger seeking to circumvent the power of the dominant nation. The fringe entity may be forced to combat the hegemon out of desperation, a distinct ideological difference or it could be politically motivated.  This was the case with Huns and the Roman empire, the British and the French in the 18th century, the Germans in the 20th and now add the Chinese challenge to the American empire as the most recent example.
Most experts do not look at the current rise of China as an empirical threat in the classical understanding, however it can be looked upon as nothing less. As the Chinese economy growths larger, it will require more sophisticated and detailed relations in various regions across the globe. These relations will eventually overlap in current American spheres of influence. Eventually the Chinese and American interests will clash, if they have not already done so. Issues of contention could arise over Chinese incursion into hitherto American dominated spheres of influence in energy rich areas of the globe. More significant, many experts believe that the issue of Taiwanese independence has the most potential to sour relations between the two. Echoing the British sentiment of the 1930s over Poland that eventually resulted in World War Two, multiple American administrations have put China on notice and have suggested that any uninvited disruption or intervention in Taiwanese political, economic or cultural life will provoke the United States to take immediate action. This has, at very least, been the historical rhetoric of the United States.
Whether the flash point will be Taiwan, Middle East energy contracts or a futuristic formally unseen point of contention such as the demand for fresh water resources has yet to been seen, but if history can be used as a guide, the flash point will come. At this juncture some observers fast forward to World War Three and doomsday scenarios; nothing could be further from the truth. War is never a decision that is reached lightly, and a war between China and the US could easily be calculated by both sides as a mutually destructive conflict, a war with no winners, persuading each to seek alternative solutions. Much more probable would be a new age cold war, where the actual fighting is done in remote parts of the world, and the nations dual for global ideological supremacy.
Some experts have suggested that as a result of the technological revolution in information processing and transference coupled with the onset of the globalization of trade that such notions of engagement, confrontation or provocation are at best hypothetical theories only. They argue that the economies of China and America are so completely tied to another that the need for each other supremely overrides any animosity. At present this idea indeed holds weight. The Chinese government purchases American Debt, the American debt is used to boost the economy and the US consumer purchases goods from China. And whilst economic ties are a great vessel for avoiding conflict, they can also be a source of tension, as the present currency crisis demonstrates.
Still other experts argue that mankind has reached a zenith of sorts in evolution which eliminates the possibility of "great power" conflict. Intellectuals and members of hi society thought the same when Gutenberg press was invented, as did members of society when the radio became capable of dispersing large amounts of information to isolated parts of the globe.
This paper does not advocate for the inevitable clash of great powers, it is simply meant to demonstrate history never ends and never begins; the moment we forget a piece of history we are doomed to relive it.

resources:

http://www.londoninternational.ac.uk/current_students/programme_resources/lse/lse_pdf/foundation_units/econ_hist/echist_ch3.pdf

http://www.gatt.org/trastat_e.html

Power Politics at its Finest: Understanding Foreign Affairs

The longest running war in US history. The defacto name of the Iraqi conflict. It is unfortunate that when our grandchildren read history, it will be distorted by this fact. The US Civil War, World War One, World War Two and the Vietnam conflict pale in comparison to the duration of the present conflict. How did it get to this? The world was led to believe that this would be a quick war, echoing the voices espoused by politicians prior to World War One.
Commensurate with any war are the political, economic and social concerns that can, in some instances, have a more profound influence on security policy. Historical examples include Britain's presence in India, Roman occupation of Egypt and Spanish rule of the Caribbean. This is also the case with the current conflict. The media, to their credit have done an admirable job covering the war. Putting at risk some of their most prized journalists and reporters time and again so that the population at the home front can receive the best possible picture of the conflict. But unfortunately the media have failed to cover a few key questions surrounding the motives behind the conflict.
War is never just war. As historians we are taught to look at the periphery issues and see how they correlate to the conflict and vice versa.  In business and economics it is the time honored tradition of waging the risk versus the rewards.
Most people know and have a good understanding of the immediate reasons for going to war with Iraq. Terrorism, WMD, Saddam was a poor leader.  The government needs, much like an increase in taxes or healthcare spending, to justify their actions to the voting citizenry. But immediate justifications for war are never given precedent over longer term goals.The longest and most pressing goal from an American perspective in the 21st century, much like her predecessors, is the preservation of the empire. America presides over the largest formal and informal empire in history. American corporations can be found on every continent, America's politicians influence policy in every corner of  the globe and America spends more on its defense budget per year then the next 8 largest countries combined. The administration will never react emotionally to any situation, even one as large in scope and scale as 9/11. Every possible outcome is analyzed and recalibrated to ensure that which ever action is pursued will not conflict with the priority of maintaining the status as world leader.
Using the aforementioned method of analysis there are a number of external, unseen benefits to the war in Iraq  that must have been considered before reaching the decision to proceed with conflict. First and most obvious is the oil. Some reporters have suggested that Saddam was prepared to enter into oil contracts with the French, Russian and Chinese, effectively closing (or at very least limiting) the oil exposure to American corporations. Secondly, and much more importantly, the Chinese were increasing their presence in the Middle East in order to guarantee rights to their insatiable appetite energy. From the perspective of the United States, this was simply unacceptable. The Middle East has, for at least a generation, been under the umbrella of American influence. A significant unchallenged entrance and presence of China in the Middle East would be seen as the first direct foreign policy challenge to US leadership in the region since the end of the Cold War. Moreover, it is quite telling that the most sophisticated and largest military power the world has ever seen is still stuck in a 3rd world conflict. That is to take nothing away from the insurgents, but it should be acknowledged that they are not facing the full force of the American military. For whatever reason this perspective has gone mostly uncredited among major media outlets and almost surely has been lost on the voting public. Yet this paradigm is always used as a method for historical analysis and thus can be applied in a present context.
Understanding this perspective is crucial to understanding the United States motives and continuing presence in Iraq, the Middle East and across the globe. Within the first year of the occupation the United States already began to build permanent bases in Iraq, an explicit message and warning to those paying attention that the US never had any plans of leaving when the war was over.
It is only through this lens and context that the smoke and mirrors that revolve around the international financial and political system can be pulled back for a more detailed, in-depth analysis of what drives the foreign policy decision making process in the modern era.