Friday, August 22, 2008

An antidote to iPhone complacency

My posting last night on Apple vs. Nokia got picked up by Seeking Alpha. It’s gratifying to get the exposure and discussion, although (as with any online discussion) the quality of the posts was variable.

Most of all, I was surprised to see the suggestion that I was too pessimistic on Apple. Readers of the Seeking Alpha site don't know me the way that my blog readers do, so let me fill in a few blanks.

I bought my first Mac in January 1984 and have never owned a DOS or Windows machine. I wrote a book on Mac programming and wrote columns or articles for 3 Mac publications. I started a Mac-only software company in 1987 and ran it for 15 years. Before the Jobs II era, we would have said "I bleed in six colors."

Today I'm a little more dispassionate as an academic strategy researcher. I did my PhD thesis on Apple losing market share in the US and Japan. I published a book chapter about why the conventional wisdom on Apple's cloning decision was wrong. Now I teach technology strategy to MBA students and consult to software companies.

My long history with Apple is EXACTLY why I think the ahisotric Apple bigots (particularly the iPhonatics) are missing the boat. In the 1990s, Apple had great products and technologies and still almost died. I know, I was there, and it’s why in 1993 I started looking for a new career to replace being a Mac ISV.

Yes Apple has had enjoyed a good run of innovation success. As I’ve noted earlier, in MP3 players Apple is crushing Microsoft and sells the vast majority of standalone MP3 players in the US. It also has dominant mindshare (again in the US) in smart phones.

However, when it comes to innovation, past performance is no guarantee of future success. Look at Apple in the 1990s. Look at Sony. Look at Ford or Chrysler or GE.

OK, some wiseass thinks because I make a blanket statement "don't stand still or (fill in the blank) will catch up," I don't know what I'm talking about. Would you prefer (say as an AAPL shareholder) that management says to the troops "We are so far ahead that no one will ever catch up?" Of course not.

Exhibit A is the old bumper sticker (and T-shirt) "Windows 95 = Macintosh '89". The problem was, Apple’s innovation (with the exception of the first PowerBooks) slowed to a crawl after System 7. Thus, Macintosh 89 = Macintosh 95 = Macintosh 2000.

Exhibit B is that 10x as many people bought Windows 95 as Mac OS 8, even though the latter provided a demonstrably better user experience. For Windows 3.1 the ease of use difference was dramatic, but for 95 it was not, and Windows 95 had other advantages: cheap hardware, more hardware variety, a larger potential installed base, more applications. Ease of use is important but it’s not everything.

A decade ago, Apple got crushed by Microsoft and nearly died. Today, there’s an even wider range of companies that could do to the iPhone what Windows 95 did to the Mac. What would it take?

First, Apple’s competitors would need to recognize what Apple has, and that it’s selling better. Nokia may be in denial, but I don’t think Microsoft or any of the major vendors in the US have missed Apple’s success.

Second, it would require the resources to apply to catching up to Apple. Samsung, LG, Microsoft and Nokia all have the resources to do so, and I think Research in Motion does too. In the short term, I’m ruling out Motorola and Sony Ericsson because their recent record on innovation is more dismal.

Third, it requires the ability to execute, in this case on software and user interface design. Obviously Microsoft could copy Windows and the iPod so there’s no reason that they can’t copy the iPhone. The other firms haven’t done well on software, but there’s no reason why they couldn’t procure that expertise. Maybe the gPhone is halfway decent. Or someone buys the PalmSource team. Or companies use the market to find some other open innovation solution.

Once LG or Samsung (or Nokia) has a decent alternative to the iPhone — particularly a CDMA phone — thanks to Apple’s foolhardy Cingular exclusive, the iPhone knockoff will have the upper hand with a majority of the market. The Koreans and Europeans will also have an advantage in their home markets where the iPhone has had a much smaller impact, in addition to the global economies of scale that Apple currently lacks.

Finally, other firms catching up to Apple will only happen if Apple is still roughly the same place when others match Apple’s existing offerings. Sure, Apple is on a roll, and as long as Steve Jobs remains savvy and healthy, their odds look good. But it’s not a lock.

Remember Netscape Navigator? The Motorola flip phone? The Sony Walkman? The Chrysler minivan? (The Boeing jumbo jet?) In many cases, a revolutionary product is all about the concept, and a concept can be copied. It’s not just about innovation activities, but also about the potential for those activities (as Geoff Moore argues) to achieve separation. If you can’t achieve separation, we call that commoditization. (NB: MCI, AT&T, the airlines, banks, or enterprise software vendors).

So I wouldn’t short Apple, but I also wouldn’t bet any sizable sum that all of its competitors will be asleep at the wheel for the next three years. And if Apple management shows signs of being as complacent as the Seeking Alpha iPhonatics, then sell! sell! sell!

9 comments:

Anonymous said...

Good post. Another factor I would point to is branding. Apple's "Too cool for school" image actually puts off a lot of people (witness the iPhonatics...). RIM's image as the stolid sober tool for business may prove to be worth a lot!

Summa said...

We enterprise buyers are torn between our desire for standards and our need to not be locked into a single vendor the way we have with Microsoft on the desktop.

Ultimately the Apple solution locks us into single-vendor solutions for hardware, software, and wireless carrier. RIM does that in two out of three categories as now does Nokia (having acquired all of Symbian).

Our fingers are crossed that Google's Android delivers as promised and we'll have a widely-accepted platform and our choice of hardware and carriers. Barring that, our most promising and "open" solution is...would you believe...Windows Mobile.

Ted T. said...

Joel, lots of good points but you must admit that the post Jobs I/pre Jobs II Apple which lost the OS war to Windows is HUGELY different from today's Apple. Yes, Jobs could get hit by a bus tomorrow, a lot of things can go wrong, of course there are no guarantees.

But betting on Jobs' untimely demise (as does Verizon's CEO) reveals the competitive bankruptcy of some of Apple's rivals.

If writing another OS X was so easy, Dell or HP would have done it a long time ago for their desktop machines, instead of their half hearted attempts at selling one flavor of Linux or another. It is no easier (arguably harder) to do it for a mobile platform.

Again, Apple could implode tomorrow, Android, against all odds could be a smash, but the LIKELY outcome is that Apple will win the smartphone war, but will avoid becoming a cell phone monopoly, but keep the profitable part of the market, just as they are doing with Macs.

Yes, there are many ways for Apple to fail, but if it doesn't implode, SOMEONE will have to beat it. Who and with which OS Joel?

Joel West said...

Summa,

I agree with your facts and almost entirely with your interpretation. The iPhone has tradeoffs — while it has important feature and ease of use advantages, the quality of integration comes at the price of closedness.

However, Android is not just a question mark in terms of how good it is, but also how open it will be.

Joel West said...

Ted,

You raise interesting points, but I'll decline one premise of your post.

Yes, there are many ways for Apple to fail, but if it doesn't implode, SOMEONE will have to beat it. Who and with which OS Joel?

If I were trying to offer stock advice, that’s a fair question. But I write about IT firm strategy, and here I’m writing about it from Apple’s standpoint. From Apple’s standpoint, it doesn’t matter who catches Apple — if anyone can, it’s a problem. So if I were VP of strategy for Apple, I would plan as though someone is going to.

If I had to bet, I’d bet on Microsoft: they’re good at copying, and they’re certainly above average at software. (Compared to LG, Samsung, Nokia — or Oracle or SAP).

BDHumbert said...

Joel,

Good thought provoking post - BUT - I think you have over simplified a couple of things and missed the big idea.

First, the tight integration of hardware and software provides both current advantage and significant barriers to entry. The iPod-iTunes model has prevented significant growth by anyone in the media player category. If it was easy Zune would be catching iPod in market share.

I have seen a number of feature comparisons putting the Zune up against equivalent iPods and they show a clear advantage to Zune - there is a reason for this.

The iPhone - Apps store extension of this will make it difficult to catch Apple if they do as planned and ship 40 million or so iPhones in the next 12-15 months. Getting to 5%+ of the market - particularly if you get the best 5% will create a long term ongoing relationship - upgrades and cross selling will make it tough to catch Apple.

Second - thinking of the iPhone as a phone misses the point - I have owned a lot of cell phones over the years and been a medium user of them - not heavy - but once I got my iPhone I immediately started using the phone less and email and web browser a lot more. I would love to see some actual data on usage and behavior changes.

Third - the retail side is under rated and under appreciated. I think that the expansion of retail and it's success is a huge story. When Apple announced it was getting into retail I wrote a brief article on why I thought it was a terrible idea - thank goodness no one picked it up.

The retail space provides a way for the full line of Apple products to get visibility. In the past Apple products were poorly served by their retail partners who tended to allocate space based on market share - or choose not to carry the product at all.

So what is the "Big Idea". I believe that Steve and his team have a strategic vision that is based on seeing the future as three "platforms"

- Server - hard for business - virtual [mobilme 2.0 for consumers]
- Prosumer - desktops [fewer] and laptops [more]
- Mobil - iPhone and the next generation of the touch - ipods will be pretty much extinct in 2-3 years.

For each of these they have an evolution plan that will include hardware, software, and services. Tightly integrated to provide a superior user experience [and yes, tight integration brings closedness - that is the price of stability and great experience]

I am excited to see what's next - and I am confident that the folks in Cupertino have a few trick up their sleeve to share with us - soon.

Net is that yes someone will get to where Apple is - but they won't be there any more - they will have sped ahead.

Joel West said...

BD,

Thanks for engaging the ideas. Of course the explanation is oversimplified, because in a few hundred words it's not possible to capture the hundreds of man-years that went into the iPhone.

The music store is unique, but everyone (including the record labels) is ganging up to commoditize that.

Once the Symbian buy is done, Nokia owns the end-to-end capabilities. RIM owns them today. Microsoft's desktop experience is not as compelling as OS X, but it still sells more, so it's plausible that Microsoft + Motorola/Sony Ericsson/HTC/HP/Toshiba can deliver a good enough phone experience.

I agree with you that the iPhone is as much a browser as a phone. As I've written before, WebKit is a big part of the iPhone’s success. But WebKit is open source and thus by definition open to (and already in use by) S60, the gPhone, etc. etc.

So far, I still think the key issue is whether or not the mobile phone companies "get" software. Some of them still think they're selling hardware, and clearly Apple's attitude towards software is different from the rest of the world.

But not all the good software people work for Apple. I think Apple is ahead, but technology and capabilities get commoditized and the previous source of competitive advantage becomes obsolete. That everyone knows that Apple is ahead and why it's ahead reduces the barriers to imitation: the barriers are not negligible, but they are not insurmountable.

KC said...

The fact that the readers at Seeking Alpha don't know you is a good thing. You are only as good as your last analysis. No resting on laurels or credentials. Past performance is no guarantee of future success.

One thing about your Apple background is that the vast majority is in Apple's first generation, before Steve Jobs return, before the last 10 years. As you paraphrase, past performance is no guarantee of future success. Just because you thought you knew Apple before, does not mean you know Apple know or how it will do in the future.

Third, labeling your naysayers, as iPhonatics or other diminutive is a classic example of an argument with little substance, thus the need to belittle the naysayers to distract from the substance.

You say, "OK, some wiseass thinks because I make a blanket statement "don't stand still or (fill in the blank) will catch up," I don't know what I'm talking about. " That's a strawman argument. No one said that. The fact is, your statement is blatantly obvious. Of course every B-school and non B-school student knows that standing on your laurels is a bad idea. Heck Satchel Paige knew that, and I don't think he graduated from high school. That's why people take issue. You make an obvious statement seem like you've found some holy grail of knowledge.

Okay, finally to the meat of your conjecture. You say Nokia is in denial, but MS and others are not. Well, MS seems to be in denial about how the Zune stacks up against the iPod? Palm dissed the iPhone when Colligan was asked about it. Ed Zander dissed the iPhone before he got tossed. The Blackberry Co-CEO dissed the iPhone. Are you sure they're not in denial?

Resources, okay, they've got money. Do they have the software or hardware chops? Look at MS, they had to get Toshiba to turn their Gigabeat into a Zune. Do you think they'd have to do that if they had the hardware chops? And, does Vista inspire you to think they have the software chops?

You do realize that the browser used by Nokia in its top smartphones, and Google's Android and Adobe's AIR all are based upon Safari's Webkit? Apple has given its Safari engine, Webkit, to the open-source community, so those other companies can make nice browsers now. You didn't think they could do it by themselves did you?

You also mention Samsung and LG, and noone doubts they make tons of neat devices, but they typically build on top of WinMo. Win Mobile is a dog, that's why they've been talking WinMo7, a touch-based interface that mimics the iPhone. Is that innovation? Or, just me-too? We know that MS's OS X copy, aka Vista, has been a flop. What makes you think WinMo7 will be better? It's a complete rewrite. They can't use XP or Vista code for it, like Apple can use Mac OS X to build the frameworks for iPhone OS X.

Your third point that MS could copy Apple's GUI and iPod, so why not an iPhone, is laughable because you assume Vista and the Zune are successful copies! Does anyone else believe that?

Procure the software expertise? Where? Sony has been trying for 10 years! OS X has been in development since it was called NEXT. Palm has had to scrap its OS to develop a new one based upon Linux. Nokia didn't use Symbian for its internet device N800s, but Linux. As I've already pointed out MS is feverishly working on WinMo7. Apple has already shown it has the ability to deliver a desktop-class OS onto a handheld device. They've shown its flexibility, by porting OS X to the Apple TV and iPods, in addition to the iPhone. They've put it on Intel chips as well as PowerPC chips and onto the iPhone's ARM chips as well. They've accomplished these things while your premise is supposition. If it were so easy to gain the software expertise, why hasn't anyone done it? The iPhone has been out over a year, and was announced in Jan 07. That's ages in cellphone years.

Apple's choice of exclusive with Cingular might have been "foolhardy", but if you think about a novice company breaking into an entrenched market like cellphones, with demands that carriers have never given in to, you can easily see why they had to go exclusive. Besides the fact that GMS is global, while CDMA is a technical dead-end.

I'm not sure what "global economies of scale" you are referring to. Two of the most expensive components in the iPhone are the flash ram and the touch screen. We know that Apple has probably the best pricing on flash ram in the market as they are one, if not the largest buyer in the world. Two, they are surely the largest buyer of capacitance touch screens, as well. With their favored nation status with Intel, they could get favorable pricing on Atom CPUs if they wanted. So, I'm not sure what economies of scale Apple is lacking.

Sure, nothing's a lock. That's OBVIOUS. And, yes, if Apple stays still, others have a chance. But we know, Apple skates to where the puck is going, not to where it's been. We've seen that with the iPod and Zune. The Zune mimics the last gen iPod.

Since you mention Steve's health, let me point out that Steve is at the 5-yr anniversary of his diagnosis for cancer. The general rule of thumb is if you survive to your 5th anniversary you are cured. Any future cancer would be unrelated.

Hedging one's bets is always a good idea, but tell us why the iPod's competitors were asleep at the wheel? Surely, they were not that stupid. They are even some of the same companies that are competing with Apple now. MS, Sony, Samsung, LG, Dell.

Joel West said...

KC,

(Sorry I’m in a hurry and can't reply fully to your long posting. Monday is the first day of classes and I still have two syllabi to write.)

I certainly agree that the ideas need to stand on their own. However, in the Mac community — particularly during the deep dark days of 1987-1997 — there was a circle-the-wagons mentality of "us" vs. "them". I'm no Nokia shill and I certainly understand where the Apple fans are coming from.

While I have followed Apple for nearly 25 years, you’re very perceptive to note that a) I'm heavily influenced by what happened during Jobs I and the interregnum (Sculley, Spindler, Amelio) b) things today are not what they were 15+ years ago while Sculley and Spindler doing their best CFIT. When challenged by a friend who’s an Apple veteran, I had come to the same conclusion.

I am not saying Microsoft has thus far done a better job than Apple, but the Zune is an utterly adequate MP3 player, with some features that the iPod doesn’t have and certainly a league ahead of most of the others.

Microsoft historically does a lousy 1.0, but (like the Terminator(R)), by around 3.0 they get much better. Embedded software is harder, as are interfaces for small screen consumer devices. So perhaps it takes 4.0 or 5.0 for a mobile phone to be good enough.

As for the rest of your points, you are looking at the same facts from a different angle and have reached a different conclusion. Nothing I’m going to say is going to win you over so (as with political and other ideological debates) there’s no point in continuing.

Apple is executing well, but for a variety of structural reasons it will never be able to exclude all its smartphone competitors in the US (let alone elsewhere).

Apple's enemy is not firms that will do better than it will — few if any have done so in the past decade — but firms that do “good enough.” Dell never ever made the best products, but they were usually cheap and good enough. Right now Dell can’t buy a clue in consumer electronics, but (by some accounts) RIM continues to grow US market share, post-iPhone. And Microsoft with HTC, Sony Ericsson or Motorola could be a powerful combination in building a “good enough” alternative.

One last place where we at least somewhat agree (I think).

You do realize that the browser used by Nokia in its top smartphones, and Google's Android and Adobe's AIR all are based upon Safari's Webkit? Apple has given its Safari engine, Webkit, to the open-source community, so those other companies can make nice browsers now.

Yes I’m aware of KHTML, WebKit, Safari and WebKit S60. I first wrote about Apple's open source browser strategy in 2004 and have written about WebKit several times since I started the blog (as listed in the right hand links). One of those articles 6 months ago noted that even if the jury is still out on the iPhone, WebKit has already won given its adoption by S60 and Android in addition to the iPhone.

Apple started from others’ code and really made it what it is today. However, giving away open source means others have access to your technology. They may not have as much know-how, or control over the future, but they have (in this case) a pretty good mobile phone rendering engine.