Apple computer and its red-hot iPhone have dominated the business news recently. By all accounts, with good reason. I haven’t had the opportunity to play around with an iPhone yet, but the early reviews have been very positive. Initial interest demand has been high, especially given the usual amount of mystery and intrigue woven by Mr. Jobs and the folks at Apple.
For a first-time entry in to a large, competitive business such as cell phones–you’ve got to be impressed. Yet I’ve got this vague feeling of familiarity when it comes to this story–I somehow feel that I’ve seen it and heard it all before….
THE RETURN OF JOBS
Apple Computer since the return of Steve Jobs from the hinterlands has felt a lot like the Apple from Jobs initial run at Apple. He’s restored the company’s attitude, and dominates publicity, product direction and what feels like nearly every little detail about the company. Not bad for what is roughly a $20B company. It speaks to how strong and impressive Mr. Jobs’ personality and skill set really is. He has done a tremendous job bringing Apple back from the brink, and it appears that they may be headed to heights that weren’t even approach in his first tenure at the company.
There are many reasons that Apple and Steve Jobs, over a long period of time, have proved to be an interesting story. There are the breakthrough products, invention of new categories, tremendous highs and lows in financial results, strong, eccentric personalities, and boardroom intrigue–all multiplied when Jobs is factored in.
But the thing that I’ve always found most interesting about Apple has been its corporate strategy.
APPLE CORPORATE STRATEGY
Lets first give Steve Jobs and his strategies their due; he’s done a whole bunch of things right. It’s hard to imagine where this company would be if they hadn’t brought him back for his second tour. But like most strong personalities, along with his myriad strengths–he’s got a few quirks as well. Some might argue these quirks are actually weaknesses. I’ve always thought that his biggest weakness was being a “control freak”. Some might argue that this is actually reflective of strength, indicative of a strong leader who is forcing a change in the status quo to his vision. At times it appears so.
For example, the original Mac was a great triumph at first. It set a new standard for PC usability and industrial design, and was a huge seller in the beginning. But in creating the Mac, Apple also:
1) Didn’t use standard (Intel) chips, but more expensive ones from weaker competitors
2) Was a relatively “closed” system
3) Couldn’t be upgraded much at all
4) Kept Prices and margins high, unsustainably so with hindsight
A SUSPECT BUSINESS MODEL?
Maybe most interesting of all from a strategic perspective, is Apple’s choice of a business model. Apple has always been an innovator in software, with most of its differentiation coming in this area. (At least this is true since the Mac was introduced–the original Apple hit product, the Apple II, was pure hardward innovation.) Yet the company has always tried to make its margin selling hardware devices, bundling in its software with its hardware, mostly for free. I believe that this closed, single vendor, hardware/software bundled system approach can be the right strategy in creating a new market. It allows a pioneer to control the user experience, while realizing larger margins and profits in the short run to support innovation. But as markets grow big, that approach which works so well in the beginning often becomes an albatross as other players enter a larger market, and figure out how to take cost out of the system. These strategic choices (flaws?) were some of reasons that ultimately led the Mac platform to be a distant also-ran in the PC races (although one with a rabid core following), even though it had a large advantage in technology and a healthy market share initially.
iTUNES AND THE iPOD
Interestingly, Jobs followed a similar basic strategy with iTunes and the iPod. He innovated with cool, hip industrial design, a classically simple but elegant user interface, and (maybe most importantly) broke the logjam with the Record labels on downloadable songs–for the first time creating a site with a truly wide selection of mainstream songs, downloadable without hassle. He once again has kept this a pretty closed system, not allowing other devices to download to iTunes, or other music sites to feed the iPod–although he has shown signs of opening this up recently. Once again, pricing is pretty high, relative to competitive “systems”. Apple has so far been able to keep a comfortable lead in the online music space–but using a timeline which is required to measure markets of this scope–one must remember, it is still very early in the game.
My feeling about this “closed system approach” that Jobs favors, is that in consumer electronics and computing, it often works very well for a while–but then backfires as the market grows and matures. Technology commoditizes, and markets eventually lean toward openness–which provides greater choice and lower costs to users. Jobs waited way too long with the Mac, and retreated on the strategy when Apple belately tried to open up the platform, just as he returned for his second run with the company. Apple may be headed toward open PC computing again with the new MacTel platform, but in my opinion, that ship has likely sailed long ago. It would be a long hard pull for the Mac to once again compete as a mainstream PC platform. Of course Steve Jobs is nothing if not audacious, so I wouldn’t put it past him to try.
iPHONE STRATEGY – GOOD & BAD
This brings us to the iPhone. Apple has been up and down during it’s corporate life, more often than a cat with nine lives. Right now, Apple is definitely riding on a high. When you take a look at this iPhone recent introduction, there is a whole bunch of familiar Apple/Jobs strategy going on. You see the innovation pointed at a major market that is populated by major players, but a relatively poor user experience. In this case it’s the poor user experience of the cell phone industry, just like PCs and downloadable music, which were frustrating to consumers when Apple innovated in those markets. The innovation is out of the old Apple playbook: led by cool industrial design, and a breakthrough, simple but elegant user interface. All of this, along with typically brilliant Apple PR, has led to the iPhone “mania” that is reminiscent of past Apple introductions. The iPhone sure looks like a big hit at this point, and no doubt will be in the short run.
But will Apple and Jobs be able to sustain the iPhone momentum, like they have with the iPod/iTunes to date, or will the initial success fade like it did with the Mac? While Jobs is now a more seasoned, and even more successful electronics industry icon, I would argue that there still may be a few of the old flaws in his game. The price point Apple introduced the iPhone at is very high, relative to most cell phones with a similar level of capabilities. The phone was introduced with a battery that can’t be upgraded by the user, something that has been standard in the cell phone market (and most portable consumer electronics) for many years. iPhone owners will have to send the product away to get the battery changed–who can go days without their phone? This is an incomprehensible mistake in strategy, in my opinion.
And finally, and most importantly, Apple chose the most “closed system” approach of all–the iPhone with only be available on one Cell Phone network, AT&T;, for at least 5 years. I find this part of the strategy astounding. First of all, it seems to me to be completely unnecessary and yielding few benefits to the company. It appears that Apple did this to have leverage in their cell phone partner negotiations, all
owing them to retain control on some items, and keeping their prices high. I think Apple is being penny-wise and pound foolish here. The have a hot product; now is the time to establish the Apple brand as the preferred high end supplier of smart phones. But they can now accomplish this in only a segment of the huge cellular audience, for completely artificial reasons. Shutting out the bulk of the market in this fleeting time of major advantage, for bit higher margins and control on a few areas that most cell phone manufacturers do without? It’s hardly worth in my opinion.
Also, the Cellular Network Operator partner they have chosen is very suspect. While AT&T; is the biggest wireless operator in the US market and a fine company, they are behind in the game technologically in the wireless Internet part of the cellular market–the very aspect in which the iPhone shines as a mobile device. So the wonderful new features brought to wireless web access by the iPhone will slow to a crawl on the inferior AT&T; data network. It may be like running a great graphical user interface over a dial up modem–frustrating. If all you do is sit and wait for the network, it won’t matter much how slick or intuitive the device UI is.
FLAWS IN APPLE’S iPHONE GAMEPLAN?
My feeling is that there may again be some major flaws in this most recent Apple strategy. This may again cause the company to give up an early lead, in a market in which they’ve contributed true innovation. I’m not privy to all of the information that Apple management is, of course. And it’s always easy to second-guess from a distance, after the fact. So it’s quite possible that I’m just missing something, and dead wrong in my take. Plus, the whole picture of Apple’s market entry hasn’t been revealed yet. For example, I haven’t seen or heard anything about Apple’s partnering strategy with Cellular operators outside the US, but I am very interested to see how this compares to the US strategy. Will the strategy be similar or very different internationally?
Steve Jobs has contributed greatly to the development of the worldwide computer and electronics business. He has had many great successes, and also fallen a few times. He is an iconic figure who isn’t afraid to take a stand. Apple has ridden Job’s strategies to great heights several times; and also to great depths a time or two as well. Along the way Steve Jobs has provided a wealth of controversial material for columnists, writers, commentators and anyone else with an opinion. I am fascinated to watch as his strategy for this latest chapter, the iPhone, plays out in the marketplace.
So there you have it–that’s my take. Post a comment and let me know what your own thoughts are on Mr. Jobs, Apple and the iPhone.
“Yet I’ve got this vague feeling of familiarity when it comes to this story–I somehow feel that I’ve seen it and heard it all before….“
Apple waited too long to open up the Mac platform but it was not Jobs’ doing, he left Apple in 1985. He was not the CEO by the way, it was John Sculley, who considered licensing the Mac OS but backed out of the idea. The first Mac clones appeared in 1995, Jobs didn’t return before 1997 and ended the ill-fated program. Apple was not in good shape and the opportunity was past. Nowadays the Mac is not really mainstream, yet it grows at multiple times the market growth.
The IBM PC was not really ‘open’. The BIOS was proprietary, the cloners reverse engineered it to produce the first IBM compatible systems. The clone market took off because Microsoft was allowed to sell MS-DOS to other manufacturers. The clones took IBM by surprise. Later, IBM introduced PS/2, the OS/2 operating system, etc, to recapture the market with its proprietary technologies, but it was too late, by that time Windows 3.0 was bundled with PC clones.
The x86 architecture was not as prevalent as you think in the 1980s. The Motorola 68k was widely used: Apple, Sinclair, Tandy, Atari and Commodore Amiga personal computers, and let’s not forget the Apollo, Sun and SGI workstations… The choice of the PowerPC in 1994 is far more debatable, the other platforms (Atari, Amiga, etc) had already disappeared and the PC clones running on x86 processors were now ubiquitous. But Jobs had nothing to do with the decision. The transition to Mac OS X, which is easily portable, finally opened the door to the Intel switch.
The original Mac wasn’t a huge seller. Jobs’ stated objective before launch was to sell 2 million Macs by the end of 1985. According to Owen Linzmayer’s book Apple Confidential, it took until September 1985 to sell 500,000 Macs. (In 1985, Mac sales slowed down from the first year.) Apple didn’t reach the one million mark until March 1987 and the 2 million mark until 1988. By then, Steve Jobs was long gone. The Mac finally found its niche, mostly in education and desktop publishing, but its worldwide market share never exceeded 12 percent.
Thus, the Mac is in no way comparable to the iPod, which is extraordinarily successful in its market (over 100 million iPods sold since fall 2001, 70 percent market share among portable music players in the U.S.). Ditto for iTunes (several hundred million users, the vast majority on Windows PCs) and the iTunes Store (staggering market share, several billion songs downloaded).
I don’t think it’s so early in the game, the first iPod was unveiled 6 years ago. The legal download market is still young, but it doesn’t really matter, the iPod is far more lucrative than music downloads. The system was never completely closed, most iPod owners still load their entire music library, ripped from their own CDs or downloaded from p2p services, on their iPod. Going forward many music stores will start selling DRM-free music.
I’m kinda worried about the exclusive partnership with AT&T;, on the other hand it will really boost Apple’s bottom line. The carrier will pay Apple a monthly fee for every iPhone customer, and AT&T; won’t meddle with the interface of Apple’s cellphones nor with the user experience. Apple sold 9.8 million iPods this quarter, and 270,000 iPhones in the first 30 hours of sales. They expect to reach the 1 million mark by September. Other models will be introduced to sustain the momentum.
All in all, I don’t agree with your take that a closed approach often works for a while but then backfires. It didn’t happen with the Mac (not a huge seller to begin with), nor with the iPod (still the leader by a wide margin after 6 years in the market). The openness of the PC platform is a strange quirk of history (but it democratized personal computing). And some of the strategic choices are wrongly attributed to Steve Jobs in your article. But it was still a good read.
Phil Morettini of PJM Consulting says
I enjoyed your comment–thanks for reading the article. You’re pretty well versed on this issue, and have a different set of opinions on it.
But as long as you’re taking me to task for supposed inaccuracies, let me take you to task for a few of the weaker items in your comment.
You said “Apple waited too long to open up the Mac platform but it was not Jobs’ doing, he left Apple in 1985.”
My point was that Jobs never did open up the Mac, he wanted it closed and proprietary from the beginning. Sure, it was other CEOs that continued that policy for many years–but once they belated opened the Mac up, Jobs shut the program down as soon as he returned. Every opportunity he had, he kept it closed. I stick my my original statements and conclusions.
You said “The IBM PC was not really ‘open’.” Sure it was. It wasn’t because IBM WANTED it to be per se, but they let it be by using standard off the shelf components, and stupidly allowing Microsoft to sell MS DOS to other manufacturers. I never said why it was open–just that it was. And it certainly was. The fact that someone had to backward engineer one component (the BIOS) is kind of a weak argument to say it wasn’t open.
Also, while the x86 architecture hadn’t yet reached dominance back then, it had already taken a huge lead. My feeling is that Jobs/Apple chose something else feeling they HAD to be different and not do business with the MS/Intel enemy, not because the Motorola 68x series was superior.
You say that the original Mac wasn’t a huge seller, but in comparing it to current day iPod sales you are being a bit disingenuous. It’s silly to compare PC volumes in 1985 (at much higher price points at the time, especially) to a much lower cost consumer product in 2007. It’s apples to oranges, no pun intended. I will agree that the iPod is a much bigger hit today than the Mac was in it’s time–that’s a fair statement. But the orginal Mac WAS a hit. I was never trying to contrast levels of success between the Apple products in this post–just show the similarities in strategy over a long period of time.
You make some good points on the iPod and iTunes–but in fairness–I stated that there are some signs of openness in that system, relative to the other examples. And I really disagree with you that it’s “over” in music players. This is still a very young market, with lot of change and innovation to come. 6 years is nothing–do you think music is going away anytime soon? It’s been here a while and changed alot. I don’t know how old you are. You’ve either got a few years on you or have studied your history of computing. But I remember when IBM was absolutely DOMINANT in PCs–all computing for that matter. It wasn’t really all that long ago. Apple still has plenty of time to squader the Music Player market. Maybe that won’t–they got a great lead. But go back and study some more computing history on companies with positions easily as dominant as Apple currently is in music, in their markets: Lotus, WordPerfect, Ashton-Tate, Novell, ray, WANG, DEC and a long list of others. They either have ceased to exist, or are a skinny shadow of their former selves. Will Apple keep their dominant position in MUSIC? This is the technology business. Too soon to tell–it really is early.
Mitchell Gooze says
Not having seen your post previously, great minds think alike. While not going into the same level of detail, I posted on my blog with similar concerns as to whether Apple was making the same mistake again.
Mitchell, I’ve heard from some real Apple zealots very upset with suggesting there could be chinks in the armor….