Legends die hard. In the pre-Web days, they got printed and reprinted, told and retold and so became official, like spinach being good for you because it held the iron your red cells needed. After decades of the disgusting veggie inflicted upon young kids – I remember, a scientist went back to the bench and found out there was no digestible iron whatsoever in spinach. You don’t get calcium by ingesting chalk, you need a calcium compound that’ll get through the sophisticated filters in the digestive system. Eating spinach gives you as much digestible iron as sucking nails.
The spread of legends gets worse with the Web. Stories, I’m avoiding the word “information”, travel fast, I’ll sidestep “light-speed”. Yarns bounce around a world-wide echo chamber. If I hear it from five sources, it must be true. Never mind the so-called sources heard it from one another in sequence. Worse indeed, as the Web never forgets, everything gets cached, archived and will be unearthed by search engines.
This creates a need and entrepreneurs pop out of the quantum vacuum ready to fill it: a Google search reveals at least three companies, reputationrestore.org, reputationrestorer.net and restore-reputation.com who promise to clean up your besmirched Web image. Actually, these three look like the same company and, at the risk of unfairly tarnishing their own rep, they look like one of these only too frequent scams purporting to protect you from scams. Ah well…
So it goes for a tenacious legend, the one that Apple “lost” the market because it failed to license the Mac operating system to “everyone” and thus get to own the market instead of losing it to the “obviously inferior” Microsoft product.
A few days ago, no less than über-blogger Henry Blodget, the Internet Bubble repentito now head of Business Insider blog hub fell for it. This industry observer who admitted he never set foot in an Apple Store, not a sin if your territory is the quick oil-change industry, chides Apple for “making the same mistake again”. In Dear Henry’s view, just like in the 80’s, Apple insists “on selling fully integrated hardware and software devices, instead of focusing on low-cost, widely distributed software”. As a result, Apple will lose to the Open Source Android, just like Apple lost to Microsoft.
I know we shouldn’t let facts get in the way of a good story, but let’s take a closer look at today’s as well as yesterday’s data.
Today, Android is free. This, in effect, sets the market price for smartphone licensing deals. Ask Microsoft. How do you tell Motorola or HTC they ought to fork $25, or $15 for a Windows Mobile license while Android is free (and arguably better…).
In this context, how does Apple charge for the iPhone OS? How do they replace the $400 or so they make per iPhone (approx. $600 they get in direct $199 plus $400 or so in carrier “revenue-share”, minus $180 in hardware costs)? As the joke goes, do they make it back in volume? Or in App Store revenue, an estimated net $500M in 18 months? Great but no match for the tens of billions (multiply 50 million iPhones and iPod touches by $400…) of hardware sales.
Apple could indeed end up “losing” the smartphone market to Android, just as it “loses” the PC market today, making more money than Dell and HP combined, they with a 33% market share and Apple with less than 10%. (More details in the November 1st, 2009 Monday Note.)
Ask GM how they feel about a “tiny” Bavarian automaker.
Of course, Apple can make an inferior product and lose for good. No customers, no market share, no margins.
Which isn’t too far from what actually happened with the original Macintosh. I know, I was there.
We’re back in 1981. IBM introduces the PC . At the time, it’s pretty much a clone of the Apple ][, slots, a cassette tape interface, game controls and all. The big difference is a 16-bit Intel processor, the 8086, whose four digits where used for the ending of Microsoft’s original corporate phone number, I’m not kidding. The then reigning Apple ][ has the 8-bit 6502 processor, a dead-end architecture, as the supplier, MOS Technology, can’t provide a credible transition to a 16 or 32-bit world, markitecture BS notwithstanding.
The PC evolves, gets faster with newer Intel CPUs, with the crucial inclusion of a head disk and the even more epoch-making advent of the first “killer app”: Lotus 1-2-3. Written in assembly language, lightning-fast, Lotus 1-2-3 is called an “integrated application”, the rage at the time, as it incorporated a spreadsheet, a word processor and a database. I know, because to some people’s chagrin, in a small cubicle behind my office at Apple, I maintain a PC.
When the Mac comes out in 1984, this is what it faces. The original Mac clearly shows great promise, its user interface is clearly superior and it builds on the lessons learned from Lisa’s failure. (Lisa was Apple’s first bit-mapped screen and mouse driven machine of 1983.)
But the first Mac, for all its promise and sexiness, is slow, buggy, with a small screen, no hard disk, no color and no application software that could compete with Lotus 1-2-3.
When Steve Jobs came back at Apple in 1997, he brought in a team of experienced engineers from NeXT, promptly killed the half-hearted licensing program that was siphoning off the company’s hardware margins – you can’t be in both the hardware and the licensing businesses at the same time. Over the years, a steadily improved product and a tight control of the layers of the user experience, including the Apple Stores, produced the revenue and profits we know.
But legends live on. How about that almost forgotten one? IBM licensed key parts of the original PC design and, for its reward, lost the PC market in spite of its effort to regain control with a new bus architecture, Micro Channel and a new software platform, OS/2, called “better DOS than DOS” and “better Windows than Windows”. —JLG@mondaynote.com
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19 Comments
Maybe we need a snopes.com for business development myths!
I came up with several other major reasons why Apple is succeeding now, while it did not succeed in 1984. The licensing issue is really just a red herring.
1. Apple is remaining price competitive with their products while reaping huge profits. ($600 per iPhone!)
2. Apple has already fostered a huge developer community with a best of class mobile SDK and a complete development, delivery, upgrade and billing system that is successful beyond anyone’s wildest fantasies.
3. Apple has become almost completely independent of the dopey middlemen like Sears, CompUSA, Circuit City, etc. who totally botched selling and marketing Mac hardware and software to the consumer.
4. Apple has some of the tightest logistics and supply chains of anyone in the industry whereas in the 80s and 90 they were legendarily bad in those areas.
5. Apple has an industrial class, UNIX -based, completely modern OS which scales across their entire product line-up, as opposed to Apple II OS vs. Mac OS vs. Newton OS vs. Pippin OS which were all incompatible.
6. Apple has a hugely profitable, strategically placed and growing network of retail stores where their products can shown be off in the best light to masses of well-heeled people who would otherwise never see Apple products.
7. Apple is completely independent of third party software in the mobile space like Office or Photoshop or even Flash, thank God! If one developer drops his app, a hundred more will take his place.
8. They make money off of every aspect of the iPhone, not just the hardware, including software, peripherals, music, movies, and TV shows. (Legend has it that MS made more off the Mac at one point than Apple by selling most of the critical software.)
9. The mobile space depends on selling to Joe & Jane average consumer and not IT departments who are convinced that IBM/Microsoft is their only salvation.
10. While Microsoft openly licensed the OS, it kept ironclad control over the OS and pushed the OS forwards in a unified manner. Google is already allowing the the OS to become fragmented. Huge difference. Nexus has Android 2.1 while Sony’s new flagship Xperia 10, not out yet, has Android 1.6.
11. Finally, Apple has an entire leadership team that actually has a clue, which was never really the case while Jobs was absent after 1984.
A few comments:
You compare Apple with it’s 10% to Dell and HP with their combined 33% and note that Apple makes more money than the two of them combined. While that’s an accurate statement, it’s debatable whether it’s important.
Because Apple “makes the whole widget” and Dell and HP do not, Apple would obviously make more money.
Microsoft’s revenue for the quarter ending September 1st, 2009, was $12.9 billion and it’s net income was $3.3 billion. Apple’s revenue was $9.9 billion but it’s net income was $1.67 billion–half of Microsoft’s.
> Apple “lost” the market because it failed to license the Mac operating system to “everyone”
Indeed, that is a myth.
As paper publishing is replaced by paperless publishing, the issue is not whether the operating system is licenced, but, as Jonathan Seybold pointed out in 1984 and again in 1992, whether the graphics primitives and graphics commands for the system software integrate with the graphics primitives and graphics commands for the fixed page format document description model.
The problem as between Apple and Microsoft today is that Distiller is a PostScript interpreter, and a PostScript interpreter ignores the tagged file format of ColorSync and the ICC Specification, and the tagged file format of TrueType and OpenType. Microsoft has had success because it has used the FSTYPE selector in the OS/2 table of the TrueType Specification to embed the intact intelligent font file and the intact source character string. Contrast the repurposeability/searchability that is possible through PostScript and PDF where the Type 42 Specification strips away the tables that specify the semantics (CMAP and MORX for Apple, CMAP and GSUB for Microsoft), leaving only the font program with the scalable spline shapes chopped into arrays of 256 shapes.
Best wishes,
Henrik Holmegaard
@Peter
‘You compare Apple with it’s 10% to Dell and HP with their combined 33% and note that Apple makes more money than the two of them combined. While that’s an accurate statement, it’s debatable whether it’s important.’
WTF How is making a profit in business debatable? or not important?
How else do you expand the company, fund R&D and marketing, compensate hard working staff, pay for healthcare, develop new products, fight-off takeovers or buy-up competitors, etc etc. without making profits? You can’t even borrow money to fund all these things unless you make profits.
A company that does not make healthy profits is just treading water without a lifejacket.
‘Microsoft’s revenue for the quarter ending September 1st, 2009, was $12.9 billion and it’s net income was $3.3 billion. Apple’s revenue was $9.9 billion but it’s net income was $1.67 billion–half of Microsoft’s.’
So?
This is just meaningless and simplistic juvenile twaddle without an ounce of comprehension.
Clue…. it’s what you do with your profits that matters. You could have, for instance, invested in other companys, funded more development, taken on more staff or a myriad of other ‘investments’ which look to the future, all within the last 12 months, which are directly reflected in the bottom line. In fact, making profits and doing nothing(except an abortive Yahoo take over), is doing nothing to ensure MS’s future.
@ Synthmeister good list, though you should note that the Pippin OS was mostly a stripped-down version of System 7.5.x not a separate OS.
I’m glad to see you pushing on this subject, Jean-Louis.
I agree with your comments, and want to build on them a bit. I think Steve learned three key lessons from the Mac-Windows experience, and he has corrected them with the iPhone. Those lessons have nothing to do with licensing…
1. Stake out a claim in a new market. DOS PCs were already the standard before Mac came out,and most users were incredibly resistant to switching. As soon as Microsoft had even a half-usable Windows environment (Windows 3.0), Mac share gains slowed dramatically. In contrast, there is no huge incumbent in smartphones. Apple is the one establishing the installed base, and they will be very hard to displace because…
2. Keep the developers barefoot and pregnant. Apple (including you and me personally) spent a ton of money and time promoting third party Mac software that was then ported to Windows. We didn’t realize it at the time, but we let other companies control our differentiation. In contrast, the iPhone app base depends on quantity, not individual apps. Apple’s ads are all about dozens of different apps, and they don’t let any of them grow to “killer app” status. In fact, the economics of the App Store prevent app companies from getting big. I can’t believe that is a complete accident.
3. Pick a battleground that favors you. Mobile devices are incredibly personal, so people respond to small increments in usability and hardware-software integration — the sort of design Apple excels at, and is very good at marketing. There’s still a huge amount of innovating to be done in smartphones, meaning that Apple has many years of running room to keep upping the stakes for its competitors, before the market commoditizes. Many of them (especially Google and Nokia) have fallen into the trap of trying to beat Apple at its own game, rather than trying to use their strengths to change the market in ways that will give them an advantage. Good luck with that.
To see a post and comments about the iPhone from both Jean Louis Gasee and Michael Mace is one of those important moments, IMHO. The two leaders of the Mac discussing if Apple has learned the lessons of their experience. Truly fascinating, and I would pay to hear this panel discussion at a business school forum somewhere.
As a previous commenter illustrated,us lay Apple fans have a different set of stories of why the Apple failed, Writers like John Gruber have proposed theories that sound very plausible, and yet none of these sound like Mace’s three lessons.
It would be great to know what you think of the following two factors:
1. The Parlay: Apple did not effectively leverage the Apple II, or other strengths, when launching the Mac, or other businesses (see Newton). MS wasaterful in their parlaying one strength to expand into new businesses. This one is from John Gruber.
2. The Price Umbrella: Apple has used this term recently. The isn’t just about market share vs margins, but also maintaining total control of the value equation and competing. The implication being that the Mac rested on it’s 7 year GUI headstart.
Folklore.org, which is where I first learned about the roles both of you played (speaking of online reputation!), also has more stories about what I would call logistics mistakes around the launch of the original mac.
Anyway, let us know if you do have that lessons learned talk!
great article… turns out google splits search revenue with the carriers and handset manufacturers… bill gurley is calling this the “less than free” business model. motorola is _making_ money using android!
on the mac… what can i say… i was a hardcore mac developer from 1987-1995, at which point i switched to windows 95 and Java development. the biggest failure imho was that the mac os completely stagnated after system 7 in 1991. so for example in the 1990s there was no 3D look and feel in the mac os, and every app developer invented their own 3D look and feel, resulting in an environment where on a Mac every app looked different, and on Windows 95, they all looked consistent!
peter
>> Apple could indeed end up “losing” the smartphone market to Android, just as it “loses” the PC market today, making more money than Dell and HP combined, they with a 33% market share and Apple with less than 10%.
Why the quotes on ‘loses’? The only reason I can think of is that Apple never had the PC market to lose. Yes Apple makes more money than Dell and HP, but it doesn’t make this on PCs – although I don’t have the figures I suspect that Apple’s PC business makes less than both Dell and HP (certainly not more than them combined). Apple made more money than Dell and HP but this was on PCs, media players, phones and app. store.
If your figures are to be believed, Apple’s current cash cow is the iPhone and iPod. If Apple “loses” the smartphone market to Android it could be be catastrophic for them – if they don’t manage to diversify again in time.
BTW, I would have been happy to accept this as an honest mistake if the author had compared HP and Dell’s total profit with Apple’s total profit – however the figure for HP is only for HP Personal System Group, not the whole of HP. The author obviously knew what he was doing.
If you license your OS, you foster mediocrity and then failure by dominating an ecosystem (your hardware maker licensees, who cannot innovate in what they don’t control, who fight competitors on freebies and worthless features and who then have no choice but to compete on price. FAIL to Blodget and other pro-license fans.
Apple makes serious money in computing. Dell HP, Acer, Sony et al, do not. Microsoft makes serious money because of legacy products. It is complacent about innovation and those high revenues will soon begin their decline. Apple can continue to thrive, making the whole widget if, and only if, it continues to struggle to impress ITSELF, not others, with its focus its smarts and above all its innovation. If it becomes complacent like MS, it too will decline.
While it’s true that Apple makes good money, I don’t think they’ll ever get above 10-15% market share. The reason for this is applications. While it’s true that you have Adobe, Microsoft and some other big names, most software companies don’t develop for the platform. Many major software packages like AutoCAD, ArcGIS, Project, etc. aren’t and probably never will be available for OSX (as well as the majority of games). This perpetuates, due to the fact that end-user companies buy in bulk and even a small percentage increase in cost (the so-called “Apple tax”) is substantial when dealing in 1000s of units. Software development firms don’t like expending the cost/effort of development for 10% of the market, so many don’t. And before you even start to think about virtualization or dual-boot, forget it. It’s significantly more expensive, and it adds complexity. This is analogous to a certain extent to the issues that Sony has had in the console market.
I had hoped for a $300 Mini/$500-$600 laptop during the days of XP/Vista, when there were some very compelling reasons to switch. Alas, with Windows 7, most of those reasons are gone. I think Apple missed a real window there for gaining not only “units sold” market share, but application software market share as well. BTW, this is coming from an OS “agnostic” who uses both Macs and PCs (hell, I started using OSX back when it was called “NeXTstep”)
JLG, I think as a former tech-CEO you are aware that there is no such thing as a free lunch. Android while free represents a real cost to handset manufacturers compared to WinMo. There is little support from Google and it is a very immature product.
Also you seem to imply that Apple has the smartphone market to lose. Nokia and RIM are by significant margins the market leaders. It is their market to “lose.”
Apple is as Apple has always done. Marketing a design aesthetic to the uninformed who confuse style with quality and are willing to pay a price premium for usability. What has shocked me personally is how much ISV have willingly agreed to become subcontractors for Apple donating such a huge portion of their revenue to Apple via the AppStore.
Apple is in effect forcing ISVs into a revenue sharing license of the iphone platform. Remember Apple is taking 30% off the top every purchase. And that in my opinion will be where Android and RIM will undermine the mindshare of Apple devotees. It seems like a no brainer to me at least to develop for RIM and Android (and Nokia outside of the US) first and IPhone last.
@Not2Sure
“Remember Apple is taking 30% off the top every purchase.”
Take a little time finding out what the dev split is on other platforms.
Hint: 70%, 3B downloads, and a lot of freedom (compared to most other platforms) is, by far, the best deal in town.
Do you think that Apple might get into licensing its iPad technology? If it sells the A4 chip, it would enable it to maybe be used as a co-processor in other systems? A HP slate for example, would be able to display iPad apps.
It costs about $15 to make the A4. Apple could give it away and make its money on the e-media that it delivers as i-media. While at the same time controlling the user experience…
mantapssss
Yeah, as an iPhone app developer whos done symbian and tried my hand at the Android (java yuck) the single target for iphone dev makes life a lot easier, and androids fragmentation is doing it more harm than whatever good comes out of proliferation.
@ Paul Smith
“Many major software packages like AutoCAD [...] aren’t and probably never will be available for OSX”
Oops. Not even a year later and you’re wrong about AutoCAD.
hey there, I would like ot thank you for posting such a wonderful outline
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