Introduction
In 1984, Apple and the Macintosh challenged the world with the dramatic portrayal of a revolutionary woman hurling a hammer at an image of the establishment. With the Twentieth Anniversary of that event approaching, now is a good time to take a look back at this revolution and take stock of the new revolution that the Mac OS X operating system offers.
Despite Time Magazine’s 80 Days That Changed The World, it would appear that Apple doesn’t get much credit for the revolution it sparked in personal computing. As the leading innovator in the computer market, and with a balance sheet holding of four billion in cash, neither its stock value nor its market share is very high. Every few months or so, a journalist reports on impending trouble for Apple Computer. Part of the reason for this negative press is that its main competitor has a 95% market share and billions more in cash. By any other standards, Apple would be judged to be an astonishing success, but a bigger question remains: Why is the Apple market share so small when it has a superior product? Blaming Microsoft for the “ills” of Apple really misses the point. Both companies were formed early in the computer age, both had product, innovation and opportunity at a critical time, but their history is vastly different. Apple’s small market share must be the result of its business model.
While the business model has failed the aspirations of the Macintosh Revolution, there is a New Revolution. The Macintosh has given birth to OS X and the Digital Age.
Structure of Current Business Model
The current Apple business model follows three broad industry categories: Software Engineering, Hardware Manufacturing, and Retail. In essence, Apple is a conglomeration of three successful but completely different company types: Microsoft, Dell and The Gap. It is the Software Manufacturing, the core of the Apple genius, which drives the Hardware and Retail categories.
To understand how this business model limits Apple’s market share, lets examine each leg of the business model individually.
Software Engineering. Clearly, Apple is the world leader both in quality and functionality. Software is extremely profitable too, as Microsoft, Intuit, Oracle, Adobe and many other companies demonstrate. Apple has set the technological pace for functionality and the end-user experience. With OS X, Apple will be developing faster and better software at a frantic pace for all of its general and niche markets: Education, Entertainment, Enterprise, Consumer. Apple is not always first to a market with an application, but when it focuses its developmental skills on a target, the final product is very impressive. Its best strength however is in the Operating System software, not the application products. There is no equal to the Mac OS.
Hardware Manufacturing. Apple design and creativity attracts and inspires copycats because of its technological prowess and innovative design. Cost of ownership is lower, built-in functionality is greater, and interoperability with the OS is tighter and easier. The hardware sales base has now extended into servers and mp3 players, and other tech appliances can not be far behind.
Retail. Despite superior product offerings, Apple has failed to capture a large market share, but not for lack of effort. Clone licensing failed to generate greater sales. When the multi-colored iMac was introduced, newly won retailers resisted stocking the various colors. In general, the large retailers’ salespeople knew PC’s and wanted to sell PC’s. The original store-within-a-store approach at Comp USA didn’t work, and now a direct Apple employee staffs each site to ensure that the technology is introduced properly. With this string of setbacks in mind, Apple has turned to the Apple Store in high traffic upscale malls to bring the product direct to the users.
So how is Apple doing? Does this business model work? The short answer is that despite journalistic prophesies of doom, Apple is profitable and should be supplying great solutions well into the future. The long answer is a bit more complex. If each of the three legs of Apple were operated independently, how would each division hold up against the competition? Imagine if Apple, instead of Microsoft, was broken into three independent divisions. How would this affect Apple’s market share?
Comparative Analysis of each Structural Leg
Software Engineering. The most successful software companies write product for both platforms. As an independent developer, Apple Software would want to sell as many copies of its Operating System and iApplications as possible, which means it would target Windows on White boxes. From the software perspective, the opportunity is not to put Intel chips in an Apple box, but rather to put Apple OS in an Intel White box. Apple OS running as an upgrade to many of the established PC installations generates a huge worldwide market share overnight. Instead of trying to get users to Switch when buying new equipment, users could instead Choose their OS, and use the equipment they already own. An approach like this would put Apple market share and profits through the roof.
Hardware Manufacturing. Even PC lovers love Apple hardware. Cool, sleek and innovative, Apple hardware anticipates both the user needs now and future technologies. But more often than not, Apple creates and abandons a new form factor far too quickly. The cube for example, was discontinued before many had a chance to buy one, and others still want the cool-looking clamshell iBook. If the grumblings of Mac users are any indication, PC users must be interested in buying Mac styled hardware running an Intel chip. Because Apple currently focuses on selling the whole package, it misses the opportunity to manufacturer more product. The success of the Windows iPod clearly shows the opportunity for profit and market penetration by creating PC based hardware. An independent hardware unit would push these advantages, and bring its style to both the PC and Mac worlds. Rather than competing strictly on price head-to-head with the Dells of the world, Apple could be offering a premium PC box, with all the elegance of an Apple. An iMac, an iBook and a PowerBook for PC users would all be huge sellers.
Retail. The Apple Stores are unlike any other computer store. Flashy, boutique-like, with trained staff and plenty of opportunity to touch, test and try. But do eight people in black t-shirts wandering around a boutique and giving free training presentations translate to market share? A computer store is more than just customer attention and sales of new hardware, it needs to be a resource and a solution for day to day computing problems. With high visibility, high rent, and few SKU’s, the Apple Store is hardly the formula for a franchise. More often than not, the need for a card, an adaptor, on-site network installation, custom configuration or programming will be referred to a local Apple reseller or a web warehouse. Without any value-added services, furniture, accessories, and full service solutions, the stores only meet the needs of the beginner users. The Apple Stores can only continue if the platform adoption rate continues to expand. With any bump in the road, the stores will take the first hit. Once the novelty wears off, it is unlikely that power users will be attracted to the Apple Store formula in the long run.
Obviously, Apple as a PC hardware vendor misses the whole point of the Macintosh Revolution. And nowhere in the last twenty years was there either a technological opportunity or a will to merge the software onto both platforms. Still, a market share of 5% after twenty years is hardly an electoral success. People have voted with their dollars consistently for the brute on the large TV screen. The hammer left only a ding.
Sales Strategy
Another component of the Apple business model is to never pre-announce a product, the strategy being that every new product release becomes a newsworthy event. This free press comes at an enormous cost. First, it positions the product as a spectator sport. Is it news or entertainment? For most, it appears as a futuristic scientific breakthrough, like living on Mars. It is product info about a product many have never seen, delivered in such a way that they cannot be expected to act upon it.
People want computing to be as complex as plugging in a toaster. Despite a software that delivers this plug and play simplicity, the newscycle advertising only whets the appetite of power Windows users, not potential buyers. The vast majority of computer owners and news watchers are not power users, and do not understand any significance of a product release, assuming any significant new features were mentioned at all. Free press is a poor substitute for advertising, and the efforts to keep things under wraps to serve this strategy is a waste of resources and goodwill. Computers are just the toasters of the information age. People expect to walk into the local store, buy a computer and take it home. While the Apple Store does deliver this much, they are too spread out to make much of a long-term impact either nationally or globally. And there is no reason at all for a large manufacturer to spend its time and resources in training low end users.
What’s Missing?
Given Apple’s assets of Software Engineering and Hardware Manufacturing, a dedicated customer base, and a development standard that the industry copies, what is it about this business model that it can only generate only 5% of the vote?
Have you noticed what is missing in this business model?
We have Apple.
Apple as Software Engineer.
Apple as Hardware Manufacturer.
Apple as Retailer.
We also have Apple as tech support via AppleCare.
Apple as Service Center for warranties and repairs.
Apple as direct seller to education and
Apple as direct seller to enterprise, entertainment, consumer
Apple as partner with big box retailers and web warehouses.
And soon we will have Apple as the local record store.
What is missing is the primary engine for the growth of the computer industry, namely, SMALL BUSINESSES. The backbone of the world economy is small businesses, and Apple is ignoring almost all of them.
Small Business
Small businesses are not a target market for Apple as either an end-user or as partner in their distribution method. There must be at least one hundred outlets for a PC buyer for every one Mac computer outlet. The hoards of white box computer builders will never leave Windows if there is no alternative to Choose. These resellers understand the superiority of the Mac OS, but since Apple locks them out they service their customers with the tools they can provide.
Likewise, small businesses owners will never tolerate consumer driven customer service when their livelihood is at stake. Small businesses want and need the services of a local reseller that is responsive and on-site. Despite the successes of Apple’s education sales, it is clear that local resellers would be better able to serve all the local market. As Tip O’Neil once said, “All politics is local,” so too is all business.
Copy Success
There is no industry in the world that sells using the Apple business model. Microsoft is successful not because their product is better, but because you can buy it anywhere, and it is sold everywhere. You can even buy it for your Macintosh. Microsoft supports and encourages its dealer network. Wherever there is an opportunity to sell, Microsoft takes it. The same can be said of HP, Compaq and Epson and many others in many industries. By ignoring small resellers, Apple has pinned all its hopes on large retailers, its own sales force, and now on itself as a large retailer. No matter how successful this strategy is, Apple will leave more money on the table than they can possibly pick up. Al Gore is a good choice to help manage a large growing organization, but no organization can be all things to all people. Retailers, by definition, are middlemen. Manufacturers sell to the wholesalers who sell to retailers. Black and Decker has no idea that I own one of their toasters, but when I call Apple, they instantly know the serial number of all my purchases for at least the last four years. Why? Of what value is this relationship to either me or Apple? As the PC market attests, a large percentage of services provided by Apple can be delivered better locally.
Relationships
Apple is profitable because of the sheer size of the computer industry that has grown up around them. Since business is primarily about relationships, and Apple has chosen to value the relationship with the end-user higher than their relationship with the distribution channel, Apple puts itself at a competitive disadvantage. Where most manufacturers can focus exclusively on their product and the distribution chain, Apple is trying to do all the work in the middle. Instead of a stable pyramid structure where the manufacturer is at the top point, with wholesalers, resellers, and end users in successive layers beneath them, Apple is at the bottom point of an inverted pyramid, trying to support and balance the enduser, the Hardware Manufacturing, Software Engineering, sales, support, repair, new products, new technologies, new innovations. This is too much to balance in an old static industry. It would require superhuman abilities in the fast paced technology world, and the Apple market share reflects this difficulty. Even a genius can not be all things to all people.
The open source community is a great asset to the Apple development cycle. But it is not the technological prowess that makes that community powerful; it is the critical mass achieved by the diversity of people. The Apple genius attracts a loyal following that allows this flawed business model to be profitable, but it fails to attract the diversity of buyers necessary to win a revolution. The Macintosh revolution has been lost, the Revolution of the Digital Age lies before us. The Apple business model, thus far, has excluded the very same people the revolution was aimed at: the average user, the small business, the middle-class. The lone runner still runs alone.
History
During the course of the Macintosh Revolution, Steve Jobs was forced out of Apple. It is no surprise that the Macintosh revolution started to fail rapidly with his departure, despite some attempts during his absence to alter the business model. With Steve Jobs back at the helm, and Mac OS X released, Apple’s future is very bright. The question is, does Apple have the courage to change its business model, or is it simply going to repeat the same mistakes?
Without altering the business model, Apple’s unfinished revolution is sure to repeat itself. It is this mixed history of technological achievements and market share failure that often leads journalists to comment negatively about Apple. All businesses and industries have cycles, but Apple is truly a unique entity, both in what it accomplishes and in how it is organized. The sales and market share effect of this business model can only be characterized as a complete failure, given the slow adoption rate of such a clearly superior product.
The Challenge
Apple has two problems. Not only is its sales and marketing structure less effective than it could be, but as it increases its success, it increases the burden on the support infrastructure that Apple provides for its users. At a time when even governments are outsourcing, Apple is providing ever more services directly to end users with .Mac, AppleCare, PowerSchool, a yet to be revealed Music Service and free in-store training. Even direct sales of Xserves to enterprise customers does not always make sense. Businesses operating at the cutting edge expect direct manufacturer support, but they don’t necessarily want or need sales exclusivity. Local resellers can provide more products, offer a broader unbiased view of the marketplace, and cover more physical ground than any one corporation can hope to accomplish. A manufacturer who cannot find success using resellers needs to look at itself to find the problem.
Resellers choose to support the manufacturers that support them and demonstrate a competence and understanding of reseller challenges. The more Apple goes it alone, the weaker its long-term success will be. Apple’s reseller strategy has revealed a desire to land big box retailers only. This is a strategy where one pursues hitting a grand slam, but never takes the time to load the bases. Big retailers and small resellers are in a constant tug-of-war between offering great service versus lower prices, competence versus convenience. I love the Apple Stores, but in many ways they combine the worst of both worlds. It would be a much better use of employees and financial resources to support dealers and resellers. The extra margin that is earned by selling direct is nothing compared to the multitude of lost opportunities at the local resellers store. Sales through a dedicated high rent vehicle like the mall stores simply transfers any extra direct sale profit margin through to the landlord. Trying to grow market share with the Apple Store comes at the expense of profits and simply antagonizes and stresses the existing small loyal reseller network.
All business is about relationships. Apple, to its credit, wants to keep a close relationship with its customers. Undoubtedly, these close relationships help it to understand the needs and wants of users. But in the long term, Apple must let go of the end users and support the resellers. That is in the best interest of both Apple and the end users. Distribution must be based on a pyramid. The world wide web is strong, and has changed the world in many ways, but the method of delivery for all goods, just like an assembly line, is through a pyramid shape distribution system. No revolution can challenge common sense.
Panther and Beyond
Very few people recognize how radically Mac OS X challenges computing. The Apple user base is comparatively small, the OS X converts is some sum less than that, and even the ones who use it everyday do not comprehend all the shifts that have occurred behind the Aqua interface. Chances are, only the developers realize what is truly occurring. If all the Windows lemmings were to suddenly come to their senses, Apple would be ill equipped to handle them. Developers need Apple’s whole-hearted support, and support of small businesses to open up the marketplace for their products.
Historic Parallels & Democratic Values
History is full of examples of geniuses whose inventions have changed the world for the better, but whose companies failed to take full advantage of their market position. The Digital Revolution will come, regardless of whether Apple software dominates the market. Robert Goddard launched the first rocket, but it was a different propulsion system that took men to the Moon. He refused to share his science, so others followed the vision using a different roadmap. In the fast-paced world of computers, the same scenario may well play out for Steve Jobs and Apple Computer if they continue under this business model.
There is another reason, more important than money, why Apple should adjust its business model. As the recent Justice Department case against Microsoft demonstrated, we live in a world where even the United States Government does not necessarily have the financial resources to engage a legal battle with this monopoly. This is a frightening historical development, and Apple provides the only marketplace challenge to this epic battle between democratization and centralization.
Computers of the modern world intersect at the crux of humanity, culture and freedom, more than any other product. With only Linux and Apple to provide an alternative to this unhealthy dominion by one company, the debate over which operating system is better is moot if one has a 95% market share. As the analysis of the three legs of Apple showed, breaking a conglomerate into separate divisions can actually make the company stronger.
When the oil company monopoly was broken up, the seven resulting companies were stronger for it. For this reason, Microsoft split off the Mac Business Unit, and it is clear with the recent sale of Connectix, that this strategy has paid off.
Given world events, it may seem odd to suggest that Apple and Steve Jobs are a bulwark for our freedom. If you look up at the stars, you see both our past and our future. Likewise, it you look at countries around the globe, you can see how our nation may evolve. Every society has strong economic powerhouses, but allowing Microsoft exclusivity in technology invites folly for all mankind. It is not that the Bill and Melinda Gates Foundation cannot do some good for the world, or that Steve Jobs does not already have more money than he can spend in his lifetime, but concentrations of power constitute risk. Apple is the accidental standard bearer of a cultural revolution, and should come to terms that it has more than a fiduciary responsibility to achieve success. The Board of Directors should reflect that commitment. Its affair with the consumer is more than just a strategic marketing mistake.
Heroic Virtue
Apple may well be guilty of the same heavy-handedness as Microsoft. Hopefully this is a reflection of stress caused by the business model. Writing software applications that compete with developers and opening stores to compete with resellers is also likely to shrink the developer base and marginalize the need for the platform at all.
It has been a long time since a killer application has been brought to the market for either platform. The most recent were the free internet browsers, and secondarily the personal audio and video applications of the digital age. By providing these tools for free, Apple walks at the edge of alienating developers to gain the end-user sale. Apple tries to control everything and at the same time expects to please everyone. This is not a reasonable compromise. As a Software Engineer and a Hardware Manufacturer, Apple should focus solely on supporting developers and resellers through its great operating system.
Resellers and developers represent honest and hard-working partners whose collaboration is of mutual benefit. By respecting relationships with both of these groups, the Apple market share will grow by itself. Apple’s ad campaign recently spotlighted fearless free thinkers who trusted in the love and good will of the average individual and of the community. Apple needs the courage to Think Different about itself, and to change its business model to include the entire computer marketplace community. The Apple Stores will eventually collapse of their own weight, horrific customer relations, and a dysfunctional business model. And while some obvious problems are easily fixed, the stores could be very valuable as the backbone of a new dealer/developer support network. The Steve Jobs / Apple business model reveals a petty side of human nature, “its all about me.” With the highest pay, the coolest stuff, and a string of successes, Wall Street affirms to Steve Jobs that his revolutionary delusion is real, all the while it protects the dominion of Microsoft. If this revolution is to be won, it can’t be won by repeating past strategies on a larger scale. Think Different is a great slogan, the heroic next step is to Act Different.
Steve Consilvio
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