Analysis of IT news

Tuesday, November 04, 2008

Apple should be sinking, except it's not

If one follows today's business conventional wisdom, Apple should be dead right now - or at least sinking. Just like Commodore, Atari, Sinclair, Texas Instruments and countless others, the PC should have made it bite the dust.

Why is that? Because once a market switches from a vertical to a horizontal model, it's very hard - almost impossible even - for old timers used to vertical integration to compete against hyper-specialized companies.

But guess what? Apple not only came back from a long spiraling downfall but has been doing very well since Steve Jobs came back on board. It's nowhere near toppling Windows PCs, but good enough to get its market share growing - as well as getting a lot of mind share. On top of that Apple enjoys profit margins that would have been thought as impossible in its industry.

So let's try to analyze this counter-intuitive outcome. Let's first look at the reasons (good or bad) why people choose a Mac over a PC: very sexy products, a better experience ("it just works") and a sense of higher security (less malware). That last advantage has however more to do with the fact that the Mac is a niche market. All the hackers focus on Windows because it's the main operating system used. If MacOS X was as popular as Windows it would have its share of viruses as well.

Now, let's explore the underlying reasons of the success of the Mac.

Reason #1: Luck, or how the Web changed the market.

If the Web hasn't replaced the desktop, it has decreased its importance. People nowadays do a lot on the Web. So for someone who doesn't require some specific applications that only exist on Windows, a Mac is much more of an option. This is why corporate users (who are using more client-side applications than their domestic counterparts) have been much more resistant to the Mac.

If there were no Web, would Mac OS X be that popular? If today's popular Web applications had to be ported to Mac, would people be that excited about Mac OS X? Not likely.

Reason #2: The PC industry (Microsoft included) has involuntarily helped Apple by making the PC a moving target.

The advantage of the horizontal model as followed by the PC industry is that it led to the birth of thousands of specialized vendors. Difficult to compete against the economies of scale of an Intel or an Ndivia. In the 80's and 90's, Compaq invested some money in developing its own motherboards, only to see the competition buying just as good motherboards from Intel without investing a single dollar in R&D.

Now, a horizontal model can only work well if there are clear standards between all components. That would have been the case long ago if the PC hadn't evolved as much. A lot of new standards have popped up over the years (USB followed by USB 2.0, PCI replaced by AGP, etc.) as well as countless new peripherals. All the more risks to break compatibility between components. For instance, the rise of Internet led to the rise of Webcams. There might be a day where Webcams drivers are standardized (like the TWAIN protocol for scanners), but that is not the case today. As a results, Webcams don't always work flawlessly with any available software on a PC.

Now, consider the Mac. Because Apple has complete control over the hardware that goes into its Macs it can limit the number of hardware possibilities MacOS has to deal with. For instance, all Macs now come with an integrated Webcam. So there is a limited, very precise list of Webcams the operating system has to recognize.

Another example is the operating system itself. After all, the Windows API *is* one of the standards of the PC world. And here, Windows Vista new security model broke compatibility with countless software and peripherals.

Reason #3: the Mac has moved closer to the vertical model.

In one of its ads the Mac claims it works much better than the PC because everything comes from the same vendor - Apple. But the Mac has nonetheless embraced the horizontal model in several ways. The Mac can use any printer (this hasn't always been the case), it is using the same graphic chips you find in PCs and has fully embraced USB to plug in peripherals. Apple has even forsaken Firewire, its own bus interface technology.

Last but not least, one of Apple's arguments for switching to Mac has been the ability to run Windows on a Mac using software such as VMware. But this is only possible because Macs are now using Intel CPUs. People might forget that, but this was a major psychological change for Mac fans - especially after having bashed Intel's CPU for years.

So while Apple is still using a vertical model on a few parts of its computers (the electronic boards, the computer case and the operating system), it has embraced the horizontal integration on pretty much everything else.

Reason #4: Sexy products

You have to give it to Steve Jobs: he has always been able to come up with very sexy products. Not only has he came up numerous times with a grand vision (whether he came up with it on his own or stole the idea) but he was also to lead a team of developers to transform that sexy vision into an actual sexy product. As a result, Apple products now generate a lot of buzz. PC manufacturers could come up with sexy products too - and they sometimes do. But they too often copy what's already out there. If you want to generate some buzz you need to come up with the idea first. HP or Dell might come up tomorrow with super-slim laptops, but it won't get much attention because it's already been done by the MacBook Air.

One might argue the reason is that PC manufacturers don't spend as much in R&D as Apple does. As a matter of fact, Dell is (or used to be) proud of its low R&D investment, claiming that R&D doesn't provide with a substantial competitive advantage. If this is true for the desktop (PC manufacturers just buy motherboards and graphic adapters from specialized vendors and slap them together inside a box), it's not as true for laptops and certainly not for netbooks where PC manufacturers cannot just assemble off-the-shelf components and have to design somewhat the electronics to fit everything in a small case. Besides, Dell and HP both have all-in-one desktop PCs that required some special design.

The biggest difference between Apple and most PC manufacturers is cultural. Apple (under Steve Jobs at least) has always been very focused on its products with a relentless attention to details. Aesthetics have always been one of Steve Job's big obsessions, and it transpired through the whole company. PC manufacturers on the other hand are in the commodity business. The compete on price, services or sales channels. Very rarely on the product.

Consider Dell. In the mid-80's, Michael Dell started his business from his college dorm. Because he was selling PCs he wasn't designing anything but instead assembling PCs from off-the-shelf components. His success didn't come from his products but from his business model: selling over the phone and later over the Internet. Now consider Apple. First of all, the Cupertino company is from a different generation than PC manufacturers. A generation where the only off-the-shelf components one could buy were processors. No motherboard graphic card or standards to have the components work together. A generation where the micro-computing market was still very fuzzy and uncertain. As a result, the home computer companies created in the 70's were founded by people who were innovative and much less business-aware than founders of PC manufacturers from the 80's. To top it off, Apple can arguably be considered the "best of breed" of its generation. Apple was indeed not only co-founded by a tech wiz (Steve Wozniak) but by a Steve Jobs who was both business savvy and had a vision for its products. It's Apple who showed IBM it had to have a presence on the microcomputing market. It's also Apple who popularized the modern graphical interface.

As a result, Apple cares much more to the ease of use of MacOS X than Microsoft ever does for Windows (if you're not convinced, consider Windows "file copy" feature which after all these years *still* does not accurately tell how long will the operation take). Where PC manufacturers *sometimes* consider that the computer case should dictate the electronics inside (most of the time it's the other way around), Apple *always* focuses on the overall look of its products. Figuring out how to cram the iPod nano components into such a tiny case didn't require massive R&D investment but a team dedicated to innovation.

To be fair, the PC manufacturers have come up with numerous innovations over the years - the laptop and more recently the netbook for instance. But considering the number of PC manufacturers, the number of innovation per company is pretty low. Apple, by contrast, is trying to innovate each time they release a new product.

The conclusion is that if a company cannot ignore horizontal integration it can sometimes fight it. In the present case of Apple it succeeded because:

1) It partly embraced the horizontal model to enjoy its economies of scale and partly kept a vertical integration on some components where that gave it a competitive advantage. There is no way the Mac could have been successful if it had to develop its own graphic chip, use an exotic CPU and ignore USB. But preventing Mac clones in the end allowed Apple to tightly control the Mac platform, making it much easier to develop MacOS X.

2) It is a greatly innovative company (Apple's obsessions with detail paid off). It has not only able to come up with great ideas but has also been able to implement them. Former Apple CEO John Sculley come up with the vision of the PDA but the implementation (the Newton) sucked.

3) Luck, because the Internet changed the market and made it easier to switch to Mac.

But it is still an uphill battle, and the buzz Apple is generating hasn't been enough to let Steve Job's company to break out of its niche market.


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