Apple’s
2014 Fall Collection
Apple’s Fall 2014
Collection, featuring new iPhones, a new watch, an update to the iPhone/Ipad
operating system (IOS), and (a month later) new iPads, was very well received
by the tech press.* Stock traders waffled a bit, concerned that watch sales
might be hurt by the fact that the new device requires an iPhone to operate.
But when orders for the new phones surged a few days after the first event, on
September 9, Apple’s stock price went up.
So the short term news is
good for the Colossus of Cupertino. What about the longer term? What does the
Fall 2014 Collection say about where Apple will be a year from now? Two years?
Five?
To answer that question
we need to look at how well Apple is doing with its Software Solar Strategy.
A Software Solar Strategy
(SSS) is a company’s attempt to set itself at the center of its customer’s
existence—the company becomes the sun around which all activities must revolve.
The concept of an SSS
emerged in the third wave of computing, around 1965 to 1990. The target
customers at the time were businesses and large organizations, and the
competitors were IBM, DEC, HP, Data General, Unisys, and a few others. These companies
strove to get their targets so deeply locked into a proprietary technical
ecosystem that essentially all major purchases had to be from that vendor.
Having an effective SSS
is a CEO’s dream: you don’t have to compete every day and in every way because at
any given time your customers will find it difficult and expensive to buy from
anyone else. Somebody comes out with a better gizmo than yours? No problem,
your customers can’t use it without junking a huge existing investment. So
you’ve got time to come up with an alternative—and maybe yours doesn’t have to
be as good.
IBM had already achieved
celestial status with large customers by the 1960s.
The conventional history
is that Big Blue’s downfall started when the Justice Department’s antitrust
division slowed its momentum, leaving it vulnerable to more agile competitors.
The company, the narrative goes, was then hammered by the appearance of the PC,
a radically disruptive technology that in a mere half decade drove a giant and
hugely profitable enterprise to the brink of oblivion.
This story is accurate,
but few have drawn the full lesson. Specifically, it wasn’t the advent of the
PC that doomed the old IBM, it was the fact that there were so many important
customers, primarily small and medium businesses, that IBM had long ignored
because they were too small to fit in an approved SSS orbit. These businesses comprised
a key segment of the early and enthusiastic adopters of the PC.
Together with
another ignored segment, young analysts at big companies who didn’t have easy
access to IBM’s big systems, this unquenched market allowed the PC business to
grow separately from IBM. Big Blue’s Solar System Strategy became a supernova.
Has Apple learned from
IBM’s mistakes?
Based on its early
history, the answer is a clear “no.” Since its founding, Apple has been a great
technical innovator and used that as a rationalization for high prices rather
than expanded market share. This was also IBM’s path.
Apple has achieved the
appearance of mass appeal, since a large segment of the population actually can
afford an iPhone. But the overall numbers are deceiving, since Apple has kept
its sights primarily on the high margin, high end of the market. Cupertino
leads in smartphone market with about 42%, ahead of Samsung at about 28%, but has
less than 10% of the overall world market of 6.8 billion devices. Given Apple’s
limited focus, Samsung and others have been able to get huge profits by sliding
underneath while at the same time competing fairly effectively at the top. Most
of the 90%+ that isn’t Apple uses the Android operating system (OS) and there’s
reason to believe that people moving up from basic cell phones to smartphones
will choose the OS they’re already comfortable with, particularly if the
devices are cheaper.
Here’s where the Fall
2014 Collection may mark an important turning point.
Under Jobs, Apple did
careful customer research then made a decision on what to go for. Apple’s
choice became the Apple Way and alternatives were mocked.
Among the targets of
Jobsian derision were big phones (“phablets”) and allowing any outside
additions or modifications to the core iPhone/iPad operating system, IOS.
The Fall 2014 Collection
backtracked on both of these key points. Apple now has a 5.5 inch
phablet (which is generating huge initial demand) and has agreed to let others interact with the core of IOS 8, notably to allow the alternative swipe-type keyboards that are wildly popular in the Android community.
phablet (which is generating huge initial demand) and has agreed to let others interact with the core of IOS 8, notably to allow the alternative swipe-type keyboards that are wildly popular in the Android community.
These two concessions represent
big changes in ideology and are far more important than any individual product.
But Apple still has a
long way to go.
Today’s emerging SSS is
one in which an individual’s entire life is linked through an integrated set of
pieces from one vendor. Consider what Google already has: email, calendar, cloud services, photo, music,
video, movies, and applications like word processing and spreadsheets. All these
run on all major hardware/software platforms.** The crown jewel of Google’s SSS
is the Chrome browser, an increasingly capable piece of software that runs on
everything and has the potential to tie everything together—it is now also a
fast growing stand-alone operating system. With all these pieces working in
sync, Google will know even more about each user and therefore have a foundation
on which to sell more ads, messages that are precisely targeted and therefore
much more lucrative. When you leave the house for errands, Google’s eerily
prescient Now software will deliver ad-messages that suggest where to go and
what to buy. You’ll probably follow along because, well, The Google Knows.
Google isn’t perfect; it
has so far done a poor job of putting its pieces together in a coherent way,
and it doesn’t have a foothold in hardware, an area that Apple has miraculously
managed to transform from low margin to high margin.***
Still, by comparison, Apple
is weak. Much of its software runs only on Apple software/hardware platforms,
which means customers must have exclusively Apple devices to build rich
personal connections.
A particular Cupertino weakness
is the browser, which increasingly looks to be the linking point that connects
software and services. Apple’s Safari is a factor only on the IOS platform; it
doesn’t run on Android devices or on Windows tablets, laptops, and desktops. Whoof,
85% of the market gone.
As an example of the
problem confronting Cupertino, it is trying to sell its systems to automobile
manufacturers, a comparatively small market (tens of millions vs. hundreds of
millions of phones annually) but one that is nevertheless potentially lucrative
because it is sticky—during the years you own your car you’ll want to buy
compatible gear. Apple brings prestige, but consumers are likely to be turned
off if they don’t own Apple devices at the outset.
Another market, much
larger in volume, is the coming Internet of Things (IOT). It’s now economically
feasible to put a microprocessor, a wireless radio, and web-compliant software
in just about anything. Current targets include: thermostats, light switches, door locks,
coffee makers, audio gear, televisions, dishwashers, and--you get the idea.
Will Apple require that people buy exclusively high priced Apple-branded
products to use emerging new services? If so, Google’s Android will eat them
up.
Beyond Google, Apple’s
competitors in a Software Solar Strategy are Microsoft (weak now but with a
very good plan), and Amazon (some serious missteps so far but an indefatigable
racer).
The importance of a solid
SSS is dramatized by Apple’s biggest challenge:
what will happen when its products are no longer leading edge and cool? Some
think that won’t happen. But such an idea is nonsense—Samsung’s current phones
match the iPhone in technical specs and one, the new Galaxy Note Edge, is at
least as cool as any iPhone.
There will also come a
day, not too far in the future, when young people will associate Apple products
with old people. No amount of sexy ads will overcome such a perception. And
there will be a trendy competitor or three on hand to grab the youth market.
Without a solid SSS, and
with products that are no longer leading edge and perceived as cool, Apple
could take an IBM-like plunge in profits.
Apple’s fate isn’t
sealed. It should be possible to have an effective SSS while maintaining
high-margin products. But the leaders in Cupertino will need to learn from
IBM’s mistakes and accept that some short-term sacrifices are necessary in the
search for long-term stability. Likely this will mean getting at least some of
its software into lower-cost devices that can serve as links to a larger Apple
mother ship.
If you’re the kind of
investor who flips stocks back and forth like chips on a roulette table (a fair
analogy in my mind), I have no advice for you because I never track prices. But
if you’re a serious long-term investor, I’d say that Apple is worth watching.
If Tim Cook does make thoughtful moves that sacrifice short-term profits for
long-term share, then the traders will flee, the stock will drop, and it will
be time to buy.
Apple’s Fall 2014
Collection showed some important changes in corporate mindset. A few more steps
on that path and Google will have a real competitor and consumers will have a
richer set of options.
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* Many in the
tech press are very smart, but they often obsess about odd things. Much
attention is given to how new phones feel in the hand. But how much weight
should one give to an action that sane users will take only once? Who cares
about the feel when the phone will remain imprisoned in its case until traded
in?
** Examples of
platforms are IOS/on Apple’s A-series CPUs, Google’s Android on a variety of
ARM-based CPUs, and Windows on Intel CPUs.
*** One great Apple success has been its ability to design highly
competitive CPUs for mobile devices, the A-series. The recent X version in the
iPad Air2 is a triumph that makes the iPad competitive with desktops for things
like games and photo editing. But the chip side is another looming challenge
for Cupertino. The cost of chip making is soaring, and industry observers
believe only two or maybe three companies will have the ability to manufacture
(“fab” in industry jargon) state-of-the-art chips from 2016 or so on out. Two
of those, Intel and Samsung, are major Apple competitors. The remaining player,
Taiwan’s TSMC, will be limited in capacity and may be able to soak Apple if it
knows the American company doesn’t have other options.
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