Nothing can grow forever, especially a company. Apple (NASDAQ: AAPL) appeared to defy this for a long time, but a year ago income growth came to a screeching halt as shrinking margins sliced revenue growth. Shares briefly topped $700 per share before plummeting, dipping below $400. Apple's iOS is fighting a battle against Android that echoes back to the PC wars of the '90s.

Investors are antsy. Which way will it go?

[Yahoo Finance]

Clearly, a lot of investors have lost confidence in Apple's ability to grow. The two major arguments:

1. Apple no longer innovates, and

2. Android from Google (NASDAQ: GOOG) is like the IBM PC and clones and Apple will lose again.

The first belief appears to have been at least somewhat refuted by the recent release of the iPhone 5s. While many bemoan the fact that the iPhone 5c did not address a lower price point, the 5s has overall seen very positive reviews (WSJ has a summary).

Here I want to address that second point, summarized nicely by Sam Grobart in his excellent Bloomberg interview with Apple's Cook, Ives & Federighi:

"You could say that Apple's approach in mobile ignores history, specifically the Mac/Windows wars of the 1990s, which Apple clearly lost. In this scenario, Android is Microsoft's Windows—available to all kinds of manufacturers—while iOS is on only Apple devices. Microsoft made money by charging Dell, Hewlett-Packard, and others to put Windows on their PCs, and Apple's market share shriveled." [emphasis added]

The prevailing meme here is that Apple lost the PC wars because Windows was an open hardware system and the Mac was not.

The problem here is not that this is wrong, but that it is only a portion of reality – and to my mind, the smaller portion. And while there may be other problems for Apple, this is not one of them.

Mac vs. PC – What really happened

To understand the personal computer wars of the '90s, it helps to understand how we got there.

In 1970 there were no personal computers.Throughout most of the 1970s there only early precursors of today's PC. There are several contenders for the first PC: Datapoint 2200, Olivetti Programma 101, Xerox Alto, etc. Yet these were either expensive or too simplistic to be really called a personal computer. The real PC was not possible until the advent of the microprocessor, which incorporates the functions of a computer's central processing unit, or CPU, on a single integrated circuit.

It was only in 1971 that integrated microprocessors first became available, with the first 8-bit processor, the Intel 8008 available in 1972. These processors made the modern PC possible, and in 1977 the trinity of commercial PCs became available – the Commodore PET, the Apple II, and the TRS-80.

Meanwhile, many other PCs were developed, but there was a problem. Every computer has an operating system (OS). This is low level software that provides basic functionality that is used by other programs. For example, if a program wants to write a file to disk, then it calls an operating system function or routine that will do that, and sends it the data to write. Without this, every program would need to reinvent the basic, low level code to write to disk.

The same is true for writing to the screen, sending a beep to the speaker, or nowadays drawing graphics, displaying photos, or getting data from wi-fi. The problem then was that every computer had its own OS, so software had to be rewritten for every model. There were a dozens of different makes of PCs. It was chaotic.

Enter CP/M. This was an operating system that if ported to a computer system would allow application programs to be used without a rewrite. They would need to be compiled on the new platform, but not rewritten. (Well, at least in theory. Generally rewrites were necessary for some parts, but not nearly to the extent that was required before.)

In 1981 IBM released the IBM PC. It ran using PC-DOS (Disk Operating System), which was based on CP/M. Eventually IBM contracted with Bill Gates and Microsoft (NASDAQ: MSFT), which went on to create MS-DOS, and the rest, so they say is history.

1981 IBM 5150 [source: Wikipedia]

MS-DOS was originally associated with the IBM PC, and as I recall, there was tremendous excitement about IBM's entry to the market. IBM was, at the time, one of the largest corporations and the leader in computer hardware and software. The PC immediately became the gold standard.

As the compatible MS-DOS was available, a group of clone makers sprung up, pretty much beginning with Compaq. In just a few years, other competing OSs – CP/M, and others – all faded away, leaving Apple, Atari, Commodore and MS-DOS.

At the time there was no graphical OS, and no mouse or track pad, only command line access. There was a scrolling display with the command line at the bottom and you'd have to enter cryptic commands to navigate the disk file system, find the program or file you wanted, and then open it. "CD" meant change directory and you would enter the path to the directory you wanted. "DIR" would list the files in the directory. It would look something like this:

[Source: http://www.osdata.com/system/ui/screens/smsdos.htm ]

In 1984 Apple launched the Macintosh, the first commercially successful GUI OS computer. Steve Jobs had visited Xerox's PARC and bought the basic technology from them. From that simple, little black-and-white screened computer, the modern PC evolved as Microsoft copied the concepts with their various versions of Windows OS.

Mac aficionados

In the end, the partnership of Microsoft and Intel beat down the competition. (Macs at the time were built on Motorola chips.) Apple was on the verge of extinction.

Apple had existed in large part due to its devoted following of graphic designers. They appreciated the design of the Mac, the finesse of Mac OS, and the insane attention to detail in every aspect of design. They also appreciated the superior reliability of the machines. Without a doubt, Macs were much more stable than Windows PCs. This allowed them to be significantly more productive.

Wintel Dominance

The question now is, why exactly did MS Windows come to dominate so completely?

The pundits like to say that it was due to the fact that Wintel was an open system, while Mac is not.

  1. Macs were more expensive to buy.
  2. Macs were not compatible.
  3. Macs did not work with a lot of industry standard hardware (e.g. IDE drive).

There is a certain amount of truth to this. The problem is that those who are anti-Apple take this partial truth and believe that this is all there is to it. But there is a lot more.

The simple fact is that Bill Gates wanted Microsoft not to be the dominant player, but the only player, and ruthlessly attacked all competition.

Let's look at compatibility. At one point Apple added the ability to mount PC hard drives. Why did Microsoft not add the same for Mac drives? Was it beyond their programming capacity? Word and Excel existed on the Mac as well as the MS Windows. (Excel was actually first developed on the Mac.) Yet there were file compatibility issues for years. Why? Was it impossible for Microsoft to create compatible systems?

Then came the browser wars

Gates and company saw (rightly so) that as computing moved to the Internet and was accessed via browsers, that this would change the industry to a more open one that would decrease reliance on any one particular OS. This was particularly true with the introduction of JavaScript, a programming language for web browsers. The code exists on a web site, and runs in your web browser.

This was a threat to Microsoft's desktop hegemony, so the company fought back. Microsoft created an alternative to JavaScript called Jscript, which ran only on Internet Explorer. Since all MS Windows PCs shipped with IE, almost all PCs had it. So web developers developed for that flavor of the scripting language, thus making all others (e.g. Netscape) incompatible.

Oh yes, Microsoft also made IE for the Mac. But the Mac versions were always behind and never compatible. Website code became a tangled web of:

  • if browser = "Netscape" and version = "2.0" then [code for this version]...

And this was repeated for each browser and version. It was ugly. There were many, many web sites that never bothered to make a Mac-compatible site. Mac users were left out in the cold.

Microsoft – leveraging its virtual monopoly – had manipulated the software landscape to isolate and marginalize all competition, especially Apple and the Macs.

There are enough problems in the world without adding an incompatible system to your life. The Microsoft strategy was effective. It was only when the company was staring down federal lawsuits for monopolistic practices that it signed an agreement with Apple to guarantee continued MS Office development. This was necessary for Apple to survive.

Conclusion

So, while there is some truth in the assertion that Macs lost to Wintel PCs due to the closed nature of the system, in reality this is just a small part of the equation. To those who try to say that today Android is the Microsoft that will marginalize iOS in like manner, there are just too many reasons the situation is not analogous.

Apple may or may not continue to lose market share. It may continue to have margin compression. However, it will NOT lose market share because it is a "closed" system just like the Mac was vs. the Wintel PC.

In a follow-up article I will describe just why the current situation is so different.

The battle for high-tech turf

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Malcolm Manness owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.