Analysis of IT news

Friday, October 26, 2007

The challenges it had to face: Apple

After Microsoft, it's now Apple's turn. Although the two companies want to sell systems, the culture is very different, almost opposite.

Note that we will actually more focus on Steve Jobs' companies than Apple itself. Indeed, Apple while being run by Steve Jobs has more in common with Pixar or NeXT than Apple while being run by professional CEOs (from John Sculley to Gil Amelio).

When Microsoft is primarily interested in selling (producing a product is merely a way but not an end), Steve Jobs has always been interested in coming up with products which are way out what is today. The Apple I and II, the Lisa, the Macintosh, the NeXT computer, Pixar, Mac OS X, the iPod, the iPhone. The products didn't always stay at the top, sometimes failed miserably, but they nevertheless often brought something that was beyond what was out there.

So a first challenge for Apple has been to come up with such products. Apple co-founder Steve Wozniak might have been a genius in electronics, the company had to come up with a strong technical team (both on hardware and software side) backed up by a culture that really encourages innovation.

The second challenge for Apple has been profits. Steve Jobs has indeed historically focused on the high end of the market he is tacking. The Apple II was considered the Rolls Royce of microcomputers of its time (both feature and price-wise). Later, the first Macintosh and the NeXT computers were everything but cheap. If the PC forced Apple to lower its prices on par with the PC's, Apple has nevertheless kept a taste for healthy profit margins. Steve Jobs will not approve a product with a profit margin below 20%, which is unheard of for personal computer manufacturers today.

To sustain such profits, Apple could have relied mostly on its core base of die hard fans, but you can only last so long this way. It can afford to charge higher price for its Macs than for PCs, touting its technical superiority, but here too one can only charge so much. One way Apple has been able to keep its cushy margins has been to be in hot new markets, like the MP3 player market (we'll talk about that some more later). The other way is to have users forget about the price by appealing to their emotional side. And Apple's been very good at that.

In particular, Apple has been spending a lot of efforts on the design, ease of use, style and "fashion" of its products. If the Apple II was a rather unattractive box, there's been a big emphasis on style later on, starting with the Macintosh in 1984, followed by the NeXT. Soon after his return at the helm of Apple, Steve Jobs launched a very successful line of eMac whose success was highly based on its "hip" and "fashion" factors, even letting users chose their colors. The focus has both been on the product case itself (the various Macintosh, the iPod, the iPhone) but also on the software. The Macintosh computer popularized proportional fonts at a time where all other microcomputers had 8x8 fonts. And the various versions of Mac OS X operating systems have all mixed cool feature with beautiful looks.

Like Microsoft, Apple is facing the risk of comoditization, especially for its Mac computers product line. This is why the company has been rolling out new versions of Mac OS X every other year to keep the awe alive. It has yet to be soon how long will Apple be able to keep such a high pace before tiring its customers.

Because his companies have had a "I do it on my own before anybody else" attitude and his lust for hefty margins, Steve Jobs has been successful in emerging markets (this has previously been discussed). This implies that partners aren't a focus nor a priority. In the 80's, Steve Jobs turned down a proposal from Bill Gates to license the Macintosh. And whereas Microsoft had to find a way to work with thousands of partners, Apple worked around the same problem by staying vertical and thus keeping the number of partners as low as possible. It sells the computer AND the operating system, so the software team knows exactly what to expect from the hardware. It even has its own stores so has less worries about training the personnel from other retail stores.

Obviously Apple has partners, but it seldom consider partnerships as key in its corporate strategy. It doesn't at least to pretend it cares about them as much as Microsoft does. For instance, Apple's legendary secrecy about upcoming products is a constant headache for iPod accessories manufacturers who often learn about the newest iPods in the news like everyone else (or have minimum information beforehand, and it's after signing a hell of a Non-Disclosure Agreement) and have to scramble to adapt their products accordingly.

Concerning top-level partnerships, Steve Jobs can actually be a big liability. Steve is not an easy person to deal with, and he wants to hold the pants in the relationship. His clash with then Disney CEO Michael Eisner led to a fallout between Pixar and Disney (until Eisner was forced out and Disney acquired Pixar).

Some might argue that Microsoft too wants to hold the pants in any relationship with its partners, but it is much more subtle about it. Redmond is ready to make short term sacrifices to lock partners in, even if it plans on exploiting them in the long term. The OEM agreement allowing PC manufacturers to preinstall Windows on their PCs is a prime example. Steve Jobs, on the other hand, just expects everyone to sing to his tune. Even though he struck some partnerships with music majors to release its online music store iTunes, he managed to upset them before he was in a position to lock them in. Where Microsoft agreed to give a cut of the sales of its MP3 player Zune to music majors to compensate for the loss of music sales due to piracy, Jobs angered the same majors by "convincing" them not to sell songs over $1. Not surprisingly, Universal recently refused to renew its contract with iTunes and started selling unprotected songs through other channels.

Last but not least, Apple's main asset (Steve Jobs) is also its biggest long term liability. Jobs won't indeed live forever. Unfortunately, highly charismatic CEOs very seldom work on a decent succession as they subconsciously don't want their successors to outclass them. And there is no evidence at this point that Steve Jobs is different.

Saturday, October 20, 2007

The challenges it had to face: Microsoft

In one of his books, Harvard Business School professor Clayton Christensen argues that a company strengths and weaknesses of a company mainly come from by the challenges its had to face. It will build skills and processes to cope with these challenges, but at the same time those same skills and processes might prevent it from dealing effectively with other types of challenges.

Given this, let's analyze a few companies, starting today with Microsoft.

Microsoft has always striven to sell software which is central to computers: Microsoft Basic, MS-DOS, Windows, etc. It's interesting to notice that the development has taken various forms. From building in-house, buying a product and renaming it (MS-DOS was purchased from a small Seattle software company), or a mix of both (Microsoft lured out of Digital a whole operating system development team led by Dave Cutler, the man who designed the VMS mainframe operating system).

But the challenge has been more from an organizational and product management standpoint. Indeed, since its very first program (Microsoft Basic), the company had to deal with numerous vendors as its software needs to work on a wide variety of hardware systems. Today, for any new release of Windows, Microsoft needs to interact with thousands of partners from all over the world. PC manufacturers need to have Windows preinstalled on their systems. Hardware and peripheral vendors want to release their device drivers on time, ideally shipped with that new version of Windows. Software editors want their applications to work smoothly on the new operating system. And millions of developers might be interested in taking advantage of the new features.

In order to cope with this challenge, Microsoft had to come up with several partnership programs. An OEM program allowing PC manufacturers to preinstall Windows on the computers they sell. The Microsoft Developer Network (MSDN), the Microsoft Certified System Engineer program (MCSE), various business partnership programs with other software companies, etc.

On the technical side, Microsoft had also to come up with several public programming interface to make sure 3rd party products know how to interact with Windows. The Windows API (Application Programming Interface) allows software companies and developers to know how to code applications on Windows. On the other end, the Windows HAL layer (Hardware Abstraction Layer) isolates the bulk of the Windows code from hardware, making it easier for Windows to support a wide variety of devices and peripherals.

As we see, Microsoft heavily relies on partners. But it knows all too well that today's partner can become tomorrow's enemy. After all, Microsoft was once IBM's partner for its Personal Computer and used that position to steal the control of the PC market. As Redmond doesn't want it to happen again, one of its problems has been to find a way to control its partners and make sure it gets the lion's share of the profits in the whole value chain.

This last goal is actually conflicting with the goal of working with partners. Indeed, providing an interface to work with its products is a necessity for Microsoft. But at the same time, a public interface can evolve into a standards that can escape from the control of its creator, just like IBM lost control over the interfaces defining its PC. The solution has been to provide a constantly evolving complex and rich set of interfaces. Windows programming has never been simple and will never be. For instance, even though Microsoft programming platform .NET is built on top of ActiveX technology, the knowledge required to develop ActiveX applications from 10 years ago is merely useless to develop a .NET application today. By contrast, a lot of the HTML or Java knowledge from 10 years ago is still valid today. In order to be up-to-date, developers need to keep learning constant changes. An application which is using the Windows API cannot be easily ported to another operating system. And even patents set aside, Linux or MacOS X can hardly replicate Windows' huge API set and thus make sure they will smoothly run Windows applications through emulation.

The other problem Microsoft is facing is the constant risk to see its two main cash cows (Windows and Office) become commodities. The best way to avoid that is to keep releasing new versions and adding new features to convince people to upgrade. This is why Microsoft products tend to consume more and more resources after each release, as Redmond keeps cramming new features in a hope to keep them sexy.

An outcome is that Microsoft has learnt to successfully manage large projects involving large teams and a lot of partners. Some might argue that all Windows releases have experienced significant deadlines and are full of technical glitches, but the company has done good enough a job to conquer multiple markets. And as far as partnership goes, Redmond has been extremely successful at gathering a lot of partners while keeping them under a tight leash.

Now, these skills can also be liabilities for Microsoft. In theory, its current business relationships would seem like a liability when trying to conquer a new market. Who wants to deal with Microsoft when you don't have to? But apparently Redmond has been very good at courting partners even in new markets.

The biggest liability is regarding its products. For instance, complexity is the name of the game at Microsoft. The company just cannot provide a simple product. It could have never come up with Google's simple front page. There needs to be a next version that will have more bells and whistles. Microsoft is thus prone to overshoot its customers, leaving the door open for new entrants who sell disruptive products. Also, a "big project" approach is less suited to the Internet where users are more used to the "release early, release often" model.