Wednesday, July 16, 2014

Upstream vs. downstream complementarities in Apple-IBM deal

Despite coverage to the contrary, Tuesday's announcement that IBM will help sell Apple products to enterprise customers is long overdue and merely the latest example of cooperation between the firms spanning more than two decades.

The new thing is that — unlike previous deals — the cooperation announced by Apple CEO Tim Cook and IBM CEO Virginia Rometty reflects downstream complementarities rather than upstream ones.

In their seminal book Co-opetition, Brandenburger and Nalebuff defined complementarity between products X and Y as meaning that if someone bought X, then Y would be more valuable (and vice versa). This basic principle is behind nearly any positive-sum (“win-win”) strategic alliance today.

Yes, Apple’s early successes began to fade when IBM introduced its PC in August 1981, and its 1984 Macintosh introduction was aimed squarely at Big Blue and its user-unfriendly DOS PC. But the two companies have been cooperating far longer than they competed, largely through their cooperation in upstream components.

The big cooperation surprise came not in July 2014 but October 1991. Then Apple CEO John Sculley and IBM President Jack Kuehler announced that Apple would be using PowerPC CPUs based on IBM's proprietary RISC chips (Motorola was the third partner in the alliance).

At the same time, Apple and IBM launched two Silicon Valley-based software joint ventures based on a common rivalry with Microsoft. Taligent nearly killed Apple (and thus helped me find a new career) by siphoning off Apple’s top engineers to work on an operating system that it never shipped. Kaleida was intended to solve CD-ROM scripting challenges, but was swept aside by the emergence of Java and the commercial Internet.

A few years later — at the depth of Apple’s self-inflicted slide towards irrelevance — IBM helped Apple with problems creating hardware in its fastest-growing and most profitable segment, laptop computers. It sold its unique laptop hard disk to Apple (but not to HP) and also built the 1997 PowerBook 2400c for Apple at its IBM Japan division.

Fast forward to the 21st century. IBM could have begun selling Apple's hardware at any point since it divested its PC division in 2005. This is exactly why the company exited the market segment that it had created 24 years earlier: to get rid of a low-margin commodity hardware business and give it more flexibility to sell higher-margin integration services to large corporations.

The question is: what took them so long? The iPad came out in April 2010 and Steve Jobs has been gone for nearly three years. Ever since the Macintosh (1984) and particularly the LaserWriter (1985), Apple has been making products that would appeal to large companies, but lacked the sales, support and integration capabilities needed to address their customer’s complete requirements. (Only us Mac graybeards remember the 1988 Apple/DEC alliance that was intended to address these problems.)

Today, the two companies are not just looking over their shoulders at Microsoft, but also Google as well. The iPhone and iPad have already been widely adopted in big companies — spawning the IT acronym BYOD — but the new alliance should (like other successful downstream complementaries) generate incremental revenue growth for both parties.

However, there was one glaring omission in the latest Apple-IBM collaboration announcement: cloud computing. Apple has a retail presence with its true believers that is central to its integration strategies, but lacks the scale to compete with the industry leaders, Amazon and Google. IBM is their major competitor as a wholesale supplier, but (unlike Amazon and Google) does not compete with Apple’s retail offerings.

In the long run, Apple will unable to go it alone in cloud computing. We’ve all seen the risks that companies take relying on Amazon (cf. Netflix) or Google (cf. Samsung) as a supplier who is also a competitor. As in the PowerPC days, Apple should not only be leveraging IBM’s scale but working to attract others to its platform as the last honest broker in cloud computing.

Sunday, July 13, 2014

Nation-states, city-states and the World Cup

Productivity the world over will improve starting tomorrow with the end of the 2014 World Cup. ESPN and Nike will celebrate the unprecedented interest by American TV viewers, buoyed in part by the unexpectedly long run by Team USA.

Within Europe (at least outside of Russia) national rivalries are fought on the football field and not the River Somme, Ardennes Forest, or Fulda Gap.

Unlike in the Olympics, success seems only imperfectly correlated to depth of talent or national resources. None of the world’s 10 largest countries made it into the championship, although Brazil (#5) earned 4th place and USA (#3) made it to the round of 16. The top country in Europe (Germany) was the largest, but the top country in South America was only the 3rd largest (Argentina, with 10% of the population vs. 49% for Brazil).

But before there were nation-states, Europe in the Middle and early Modern period of Europe was organized as city states. In many cases, they were small principalities organized around a capital (like Monaco and Liechtenstein today). Even in today's German republic, three of the 16 Länder are historic city-states (Berlin, Hamburg and Bremen).

Norman Jewison’s dystopian 1975 movie Rollerball imagined a world when nation-states were gone and rivalries were channeled through city-states. The hero (James Caan) and his Houston team have a violent match against Tokyo that leaves his best friend brain-dead, the brutal climax of the movie comes when Houston fights New York in a match that ends with only Caan left standing.

While the German players tonight are exulting and the Argentineans (and Brazilians and Belgians and Americans …) are heartbroken, for most of the next 47 months their allegiance will be to the city- rather than nation-state in their full-time (professional) sports careers.

Finals hero Mario Goetze and Golden Glove winner Manuel Neuer plays for Bayern München, but World Cup record holder Miroslav Klose plays for Lazio in the Italian Serie A league. Meanwhile, Mesut Ozil and Per Mertesacker play for Arsenal in the English Premier League. Arsenal also lists players for Belgium, Costa Rica, England, France, Spain and Switzerland. For archival Manchester United, Robin van Persie scored the winning goal for the Netherlands 3rd place finish, with other players playing for France, Mexico, Japan and Portugal. ManU also provided Team USA’s record-setting goalie, Tim Howard.

Despite (or because) of their common position in the English Premier League, Arsenal fans have no more love for ManU than American baseball fans outside NYC have for the Yankees. (Germans are similarly divided between those who love Bayern München and those who detest the team and its fans).

So for less than 5% of every four year cycle, European soccer fans are rabid nationalists, and the rest of the time they are loyal to their local city-state. In some ways, we are well along are way to Jewison’s vision (but hopefully not the dystopian part).

Note to readers: apologies for not blogging recently, but due to travels, office meetings and research deadlines (including WOIC 2014) I’ve been unable to finish several posts during the past month.