IBM and Microsoft: competitive history and market dynamics

IBM vs. Microsoft

Comparison Between IBM and Microsoft

How different corporate emphasis upon hardware vs. software affects accounting practices and financial records

IBM and Microsoft are two technological behemoths. Both companies have been criticized for de facto and de jure monopolistic practices within the software industry at different junctures of their corporation's life. However, from a financial and an accounting standpoint, both companies have distinctively different strengths as well as have exhibited distinct differences in their financial structure, organization, and yes, investor public relations. Microsoft's emphasis on software has led to its stress upon encouraging individual education and familiarity with its web-based and software systems. IBM's need to purvey its hardware has resulted in more conservative advertising and inventory strategies, as well as more outreach to businesses rather than individuals, where depreciation of hardware goods can generate additional profits for the company.

The Microsoft Corporation is currently the more successful and the younger of the two companies. Microsoft currently, in contrast to IBM, is primarily known for its software capacities, rather than IBM's stress upon selling hardware. According to MSN Money, Microsoft "develops, manufactures, licenses and supports a wide range of software products for various computing devices." (MSN, 2004) The hardware/software emphasis of a company is important when understanding its financial base, as software is more dependant upon selling wide amounts of the service to a variety of sources, encouraging long-standing service use as well as simple purchasing of its products. This ensures that, regardless of hardware depreciation, different users may be 'locked into' Microsoft's proprietary software networks. Thus, Microsoft places a great financial emphasis on education, not only out of generosity, but also encourage to company profits. Rather than in terms of selling the maximum amount of general, tangible goods possible, the more people know how to use Microsoft, the better the service will perform financially, as more people will wish to utilize the software and update the software sold.

The Microsoft Company's software products "include scalable operating systems for servers, personal computers (PCs) and intelligent devices; server applications for client/server environments; information worker productivity applications; business solutions applications, and software development tools." (MSN, 2004) To encourage greater understanding of and overall use of its software, the Microsoft Company also provides consulting services and product support services, and it trains and certifies system integrators and developers. This aspect of generating revenue has been amongst the company's greatest strengths. By encouraging more individuals to 'tap into' Microsoft's capabilities as a software provider it has integrated more and more individuals into the Microsoft network.

Another key component of Microsoft's financial statements is the stress the company places upon its Internet access and service providing capacity. Although the inclusion of Netscape Navigator has incurred legal charges of monopolistic practices for the company, the 'connectedness' of the Microsoft network has been a substantial source of revenue for the company as well. Microsoft has also incurred profits through the use of this Internet accessing aspect of its company by including updates for its software upon the web, a frequent necessity for surfers and particularly young web savvy consumers who frequently share files and thus run the risk of exposing their systems to viruses, and who need the most technologically forward technology to use the web as they desire.

The Microsoft Company is not entirely software based. It has also solidified its image as a young company by selling its Xbox video game console, along with games and peripherals, creating an additional hardware component to its success. "Its online businesses include the MSN subscription and the MSN network of Internet products and services. The Company's seven product segments are: Client, Server and Tools, Information Worker, Microsoft Business Solutions, MSN, Mobile and Embedded Devices and Home and Entertainment." (MSN, 2004)

In contrast to Microsoft's emphasis on software, International Business Machines Corporation, more commonly known as IBM, is an information technology (IT) company. "Its portfolio of capabilities ranges from services that include business transformation consulting to software, hardware, fundamental research, financing and the component technologies used to build larger systems." It is thus more hardware, rather than software oriented, unlike the Microsoft Company. (MSN, 2004) "These capabilities are combined to provide business insight and solutions in the enterprise computing space. IBM's clients include many different kinds of enterprises, from sole proprietorships to large organizations, governments and companies, representing every major industry and endeavor. Organizationally, the Company's major operations consist of a Global Services segment; three hardware product segments: Systems Group, Personal Systems Group and Technology Group; a Software segment; a Global Financing segment, and an Enterprise Investments segment."(MSN, 2004)

Thus IBM, in contrast to Microsoft, stresses its component of consulting businesses, rather than on focusing on educating individual users as well. Because IBM has traditionally taken the lead in the development of computer hardware, unlike Microsoft's domination of the software industry, it also has a more substantial hardware and technically oriented development staff for such products, and must more aggressively market such products as tangible products, through brick and mortar endeavors, rather than as something that is downloadable on the web. Microsoft has made massive cash infusions to leading universities, giving MIT more than $50 million in grants, but always with a focus on key growth areas in software rather than hardware, including how to provide course instruction over the Internet. Microsoft has thus not had to focus on its advertising and marketing as much as IBM, because by generating the accessibility to its software system, it automatically locks individuals and companies into its systems, if not through monopolistic practices, then through convenience of use and customer familiarity.

Another critical distinction between the two different company's strengths is that Microsoft, from a financial standpoint has also incurred additional criticism, for its financial practices as well as the structure of its sold software packages to individual users. As early as October of 1998 a prominent British newspaper of record, the Independent newspaper, published an editorial, alleging Microsoft had erected a financial pyramid scheme in which employees were "prepaying" their own wages and thus being forced to plunder their retirement pensions. "A critical mistake of Microsoft's was not paying adequate attention to the SAS auditing standards which have very strict disclosure requirements. Most investors have never heard of the Statement of Auditing Standards but it is adherence to these standards that has resulted in Certified Public Accountants being granted a monopoly over the ability to express an opinion on audited financial statements. Far too much emphasis," when evaluating Microsoft, "has been placed on GAAP that are Generally Accepted Accounting Principles. Statements must indeed be prepared according to GAAP yet equally important is to conform to the SAS auditing rules." (Parrish, 1999)