The Orange View (on hiatus) Because Apple is great but it isn't perfect


Apple’s four great strengths are also vulnerabilities

There have been a lot of posts lately arguing back and forth about the strength and future prospects of Apple's iOS market share, profit share, platform share, Windows and Mac historical share and so on. Too many have been filled with MBA gobbledygook, wonk talk and just plain nonsense. And there's been all too little thinking outside the box or consideration of what Don Rumsfeld might call tech's unknown unknowns.

Most typically, the downfall of a dominant market leader comes not from some incremental competition but from a true paradigm shift that turns a strength into a weakness. Here are four current Apple strengths that could turn round and undermine the whole enterprise.

1. Hardware monoculture

Unlike any other smart phone vendor, Apple creates both the hardware and software for the iPhone and iPad. That means everything just works, magic new features arrive regularly and there are no concerns about fragmentation. But that also means that there is little variety and the new product cycle is very long in smart phone terms (it looks like it's going to be 15 to 18 months between models for the iPhone right now). Apple also relies on a few key suppliers for critical parts like Samsung for screens and Qualcomm for communications chips.

I'm thinking here of a company like Kodak, that had technological leadership, economies of scale and end-to-end integration advantages much like Apple has today. But as picture taking quickly went digital, film and printing equipment became nearly irrelevant and low cost electronics manufacturing and design skills (plus deals with mass market retailers) were suddenly critical. Apple's hardware monoculture was one of its weaknesses in the middle of the PC wars, as well, when Intel chips started to outclass the PowerPC and competitors could source cheaper components. Apple itself buried the early smart phone players with its revolutionary touch screen format. Blackberry still doesn't have a decent touch screen model.

Perhaps some new form of mesh networking allows virtually free mobile calling and data plans but Apple can't update its iPhone for a year. Maybe Sony has a battery breakthrough it doesn't want to share. Maybe super-realistic three-dimensional displays become all the rage. Hard to say but Apple has put itself in a position where it might have a hard time capitalizing on breakthroughs invented elsewhere.

2. Business model monoculture

Apple's smart phone success has flourished amidst the dominant business model in the mobile phone world. Carriers pay full price upfront for phones at $600 or more a pop but sell them to customers for much less in return for lengthy service contracts at high monthly rates. That has made it very difficult for competitors to compete on price.

Broadcast television networks and station owners were once at the top of the entertainment ecosystem but the advent of cable and subscription-based pricing changed all that. Dual revenue streams are now the order of the day. Perhaps a new bundling of products or services hits the mobile market at much lower prices or a government spectrum auction empowers true open access wireless carriers. That could shake up consumer preferences. A phone with "free" lifetime mobile service backed by another revenue stream, following the Amazon Kindle business model, could be pretty compelling.

3. Status quo rights and regulations

Apple's iTunes ecosystem is currently a big beneficiary of the rules protecting digital copyrighted materials. Apple has struck deals with all the major record labels, book publishers and movie studios to get their output on iTunes' virtual shelves. And Apple under Jobs has been the most cunning, savviest and sharpest dealmaker around. Apple's hardware and software innovations themselves are also protected by high walls of patents, trademarks and copyrights.

But change happens all the time in the land of intellectual property rights. Biotech drug developers were largely immune from being undercut by generic drugs but all that is supposed to change now that the 2010 healthcare law included a plan for biologic generics. Or, on a smaller scale, look at how Apple's negotiations with book publishers to create so-called agency pricing for ebooks hit Amazon's Kindle ecosystem if not quite with a death blow with a very serious blow indeed. Consider mandatory licensing of digital content, a decision to abandon all forms of digital rights management or a pact among content makers to offer a different economic deal.

4. Brilliant, visionary leader

Without question, Steve Jobs is the greatest CEO working in tech-land today. His return to Apple in 1997 marked the beginning of the company's rise from near-bankruptcy to the overwhelming and dominating colossus we see today. And while it is certainly true that Jobs has surrounded himself with highly talented underlings like Tim Cook and Jonathan Ive, history shows the transition when the masterful CEO departs is fraught with risk. Whether it's Bill Gates or Lou Gerstner or Jack Welch, companies never make a smooth transition when the legend leaves the building.

No leader lasts forever. When Gerstner left IBM, the company's stock price stagnated for five years. Microsoft's stock price has done even worse in the decade since Gates handed over the reins to Steve Balmer. I left this one for last because it's the most predictable and previously discussed. But the impact of Jobs' departure still seems to be under-appreciated on a timescale of 5 or 10 years.

In sum

You'll notice at least one common element to all of these scenarios -- they're a ways off in the future. Only the leadership transition seems likely sooner rather than later. But even if Jobs left the company completely tomorrow, his legacy efforts would continue to bear fruit for a while. So it seems extraordinarily unlikely much could happen in the next six to twelve months to really knock Apple off its perch. At least until an unknown unknown arrives.

Posted by Aaron Pressman

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  1. To summarize: Apple is perfectly attuned to the world we live in, but in an alternate reality it would be in big trouble.

  2. I wonder how many kindles had Amazon sold…

  3. I have a few little quibbles with your thinking, but I don’t think they impact your premise all that much.

    I am unsure as to whether Apple _can’t_ do shorter product cycles, or simply has chosen not to. I believe the latter. Apple doesn’t really need to do a shorter cycle, but I have a hard time believing it couldn’t if needed. But I could be wrong. I think Apple has clearly demonstrated that coming late to the game is less important than coming to the game in a significant manner. iPod was not the first digital music player, iPhone wasn’t the first smart phone, iPad was not the first tablet. Speed is not everything.

    While I get the gist of your technology monoculture argument, I think Apple has shown it is in a much better, more adaptive position than it was back in the day. OS X and iOS have already been utilized across multiple chips. I feel pretty confident that if a newer, faster, smarter, meaningfully more capable processor of some kind came along, Apple is in a better position than most to introduce the new hardware with little affect, barring some new quantum form or completely different architecture that affects the whole industry, not just Apple.

    As for the carrier business model, I don’t think Apple has much to worry about. The original iPhone sold without subsidies at first and took off like gang busters. I think it completely scared ATT to death. I believe ATT just plain did not expect iPhone to be as monumental. When the thought of people buying an iPhone and not needing ATT to use it was realized, I am pretty sure ATT made Apple change the model. I have no proof, of course, but that is what I would have done if I were ATT.

    As for number 4, while I think Jobs has done a better job preparing Apple for a post-Jobs era than any other company, and I think Apple is actually Jobs’ best product, it is hard to imagine Apple without the vision of Jobs. I agree with you there.


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