In a recent conversation with Dale Vile, CEO of Freeform Dynamics, the rising UK analyst company, Dale questioned my expectation that Apple would eventually overhaul Microsoft to become the dominant force in PC computing.

I understand Dale’s skepticism. Microsoft’s grip on the PC market adds up to greater than 90 percent of PCs sold, no matter how you count it. And Apple’s overall market share is in the region of 3 percent. Using that particular stat, Apple doesn’t even look relevant, never mind competitive. However, that particular stat is completely misleading. It’s the one that Steve Ballmer & Co will look to for comfort as the Microsoft decline sets in, until even that stat offers them no comfort.

Let’s make the case for Apple’s continuing rise. We can begin with Apple as a company.

How much is it worth?

A good answer is provided by market capitalization, revenues and growth. So here are some current figures (as of June 12th, 2007).

Notice that Apple, whose main revenues derive from hardware, is growing much faster than Dell, HP or IBM—part of which can be explained by the fact that it is growing from a low revenue base. It is also growing at more than 3 times the speed of Microsoft. If current growth rates remain constant then Apple will have greater revenues than Microsoft within 5 years.

Now look at the market capitalisation figures. Apple is worth nearly twice as much as Dell and not much less than HP and IBM. This is because Apple’s share price is high, which in turn reflects current investor expectation that Apple’s iPhone is going to sell in the tens of millions—sustaining Apple’s high growth rate for at least several years to come.

Let’s move on to the “halo” effect. There can be little doubt that the iPod has boosted sales of Apple Macs. If the iPhone is successful (which is very likely indeed), it will also drive Mac sales. The iPod drove Mac sales because it worked better with a Mac and the iPhone will drive Mac sales for the same reason. Mac sales are currently growing at about 30% and PC sales at around 10%. There’s no indication that this difference in sales growth will go away any time soon.

Now let’s move on to the “US” effect. Apple is a much bigger fish in the US than elsewhere. It has a much bigger market share. In fact if you take the home PC market as 40% of the whole PC market and acknowledge that Apple primarily addresses that market, then its US market share of 5% equates to above 10% of the home market and if you narrow it down and just consider laptops, where recent figures suggest that Apple has over 10 percent of the market, then in the home market that looks closer to 25%. In the corporate market the buying decision isn’t made by an individual but in the home market it is.

So why is there a US effect?

The US effect comes from the US Apple ad campaign and the US chain of Apple shops. There are Apple shops now in almost every major city in the US and they drive Apple sales. There are only few such shops outside the US. About 50% of people buying Macs in these shops are first time Mac users.This is the “perfect storm” that Steve Jobs has cooked up. The iPhone and iPod are drivers of Mac sales and the Apple TV will be a driver too in time. The Apple retail chain coupled with a creative ad campaign drives sales of everything. The products are all aimed unashamedly at the consumer and corporate sales, as and when they occur, are simply a “halo” effect of success in the consumer market. But don’t underestimate that “halo” effect. It has just pushed Apple into the top ten server vendors.

The fact is that Vista didn’t stop Apple’s momentum at all and now that Leopard is about to be released, Vista already looks like yesterday’s OS. The curious thing about Apple’s success is that it is hardly competing directly with Microsoft at all. Microsoft doesn’t build phones (it only does a phone OS) and it doesn’t build PCs (just a PC OS) and it doesn’t do retail either. However at some point Apple’s success will reach a tipping point, and Microsoft will be in trouble in the OS market. I’m thinking about 2–3 years.