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Apple, Microsoft, and Ecosystems

In my personal portfolio, my best investment by far over the last few months has been AAPL, which is now up 48 percent over when I bought it. I was talking about the irrationality of markets with a friend the other day and commented that, as far as I could tell, the market was bidding up AAPL because of excitement over iPod sales, but I was holding AAPL because of the financial implications of the "iPod halo effect" -- that if Apple managed to convert even a fraction of Windows-using iPod purchasers into Mac OS users, it could easily double their market share, which would be momentous.

A couple of days later, I read the following on Paul Thurrott's Internet Nexus. It's an excerpt from an employee Q&A session with Microsoft executives. An employee had asked about competing with Apple. Steve Ballmer deferred to Jim Allchin, who gave his own answer, then turned the floor over to Robbie Bach.

Robbie Bach: There isn't a silver bullet you're going to fire in three months that suddenly is going to make the iPod business a bad business for Apple. But there is an approach we can take on the longer term that I think will bring out the strengths of our ecosystem and will bring partners to bear in a way that will make us significantly more successful and, in particular, will prevent Apple from leveraging their iPod success in a platform success, which is what we really don't want to have happen.
So there are two items of note here:
  1. Microsoft is clearly concerned about the iPod halo effect -- concerned enough that they have created a strategy to attempt to stifle it.
  2. What is this approach that Microsoft will take "on the longer term" that "will bring out the strengths of [its] ecosystem," "will bring partners to bear," and "will prevent Apple from leveraging their iPod success in a platform success"? Now I'm really curious.

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