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So Long Apple Nay Sayers

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Nicholas Carr reminds us that on October 6, 1997, Michael Dell proposed that Apple be shut down and the money given back to its shareholders. On Friday the 13th, Dell was lapped by Apple. Oops! Dell has a market cap of about $71.97 billion while Apple’s market capitalization is about $72.13 billion.

That’s not all, look at the profitability of the two companies. According to latest quarterly financial data, Apple had sales of $3.678 billion and net income of $430 million. – about 11.69% of sales. In comparison, Dell had a net income of $606 million on sales of $13.911 billion. That works out to be 4.36% of total sales. Its been the case for past one year. Over past four quarters Dell had sales of a whopping $54.2 billion and net income of $3.23 billion. In comparison, Apple had sales of $13.93 billion and a net income of $1.34 billion. Perhaps, the bigger doesn’t necessarily mean bigger profits.

The divergence in the direction of Dell and Apple shares, is pretty telling. Perhaps the “commoditized” technology trend is being slowly replaced by “using commoditized technology to create a compelling user experience” trend? HBS’s Clayton Christensen gave his prognosis about Apple and iPod’s future in an interview with Business Week, which is a splendid read, in which he says

“I’d be very surprised if three years from now, the proprietary architecture [in music players] is as dominant as it is now. Think about the PC. Apple dominated the market in 1983, but by 1987, the industry-standard companies, such as IBM and Compaq, had begun to take over.”

Carr, explains that Apple never really had a dominant position in PC business, like it has in the digital music business. But that’s not the only reason, why the esteemed professor might be off the mark. iPod, and Apple are part of the post “rapid commoditization” theory proposed by the esteemed professor. iPod is nothing but a shiny packaging for off the shelf chips, and a hard drive. At the very core, not much difference exists between a Creative Zen and an iPod.

The difference is the software that is being used to create a “user experience.” That user experience is what has helped iPod gain a mass market appeal. That user experience also stems from a tight marriage of the device, the music and the desktop software. Easy to buy, easy to load, easy to playback. The user experience is the new competitive advantage, not the chips etc. It is so ephemeral, that it is hard to pin down in a theory.

Why do people buy Diesel jeans or pay $150+ for a pair of Seven For All Mankind, when Gap and Levi’s do make perfectly acceptable pants? It is perception, and user experience. Peter Rojas, who edits Engadget was in town last week, and over a hot spicy dinner at Henry’s Hunan, he said something which is logged in my head – technology in the new porn, and iPod is the new rock star. As long as iPod can reinvent itself, like say Rolling Stones, then Apple has nothing to worry about. Apple stores are part of that experience as well. I think if you looked around in other industries, you could easily find the same parallels as Dell and Apple. Walmart and Target? Toyota & GM?

I find it amusing that most folks in retail and consumer good totally get the Apple renaissance while people who little or no grasp of the consumer, turn out to be Apple naysayers. Sun CEO Scott McNealy speaking at a panel discussion at the Computer History Museum recently quipped

“Your iPod is like your home answering machine. It’s a temporary thing,” McNealy said. “It’s going to be hard to sell a lot of iPods five years from now, when every cell phone is going to be able to automatically access your library wherever you are.”

I would like to point out, that many of us have home answering machines. “Automatically access your library wherever you are” bit reminds me a lot of their “consumer on demand computing business.” I find it strange that McNealy presumes that Apple will sit still, do nothing. (Okay, historically speaking Apple doesn’t have a great track record, but as Mark Twain once said, history doesn’t rhyme with repeat!) We have heard the on-again-off-again rumors of iPhone. When not if, but it will happen.

Sun folks should not be making predictions about anything, given their own state of affairs. Especially not about consumer markets, where they have, and never had any expertise! I do detect a smattering of jealousy in Scott’s words? His once high-flying company is now worth $16 billion and change, while Apple’s fortunes have reversed. And that they came close to buying Apple so many times. Bill Joy, another Sun co-founder at the same panel discussion hinted that Apple and Sun came together, nearly half a dozen times.

Irony would be that Apple could step-up and make a play for Sun, but then why!

31 Responses to “So Long Apple Nay Sayers”

  1. However, with the iPod, Apple at the top of its game decides to make a fundamental transition in its business. Other than moving from OS 9 to X, changing the cpu architecture is huge. Doing it at the top of its game is a sign of strength and points to its larger strategy.

  2. Interesting read. Although, being as nitpicky as I am, I couldn’t help but notice the multitude of grammatical and spelling errors in the article.

    Now, I don’t claim to be an expert of the language, but when you’re a “senior writer”, correct grammar and spelling should come to you as easily as taking the next breath of air.

    While pretty much every sentence is fragmented or has a comma splice, here are some examples:

    • ” Dell was lapped by Apple” – Did you mean to say lapped up by Apple? Apple ran laps around Dell?

    • “That’s not all, look…” – Fragmented sentence.

    • “Its been the case..” – Should be It’s

    • “Over past four quarters Dell had sales of a whopping $54.2 billion…” – Should be “Over the past four quarters, Dell has had a whopping $54.2 billion in sales…”

    • “Perhaps, the bigger doesn’t necessarily mean bigger profits.” – Maybe you’re trying to say “Perhaps a larger company doesn’t necessarily translate to higher profits”?

    • “The divergence in the direction of Dell and Apple shares, is pretty telling.” – Comma splice

    • “technology in the new porn, and iPod is the new rock star” – Should that entire sentence be in italics? Also, it’s technology is, not in. By the way, that phrase doesn’t even make sense as a relative comparison. “technology is the new porn, and iPod is the new Jenna Jameson”, would probably be a typical metaphor in this instance.

    • “I find it amusing that most folks in retail and consumer good totally get the Apple renaissance while people who little or no grasp of the consumer, turn out to be Apple naysayers” – This sentence is absolutely awful!

    I could go on and on, but am tired of pointing out the obvious. I am hoping you pawned this article off to a bumbling intern who had to type it up in a hurry, because if not, you certainly need to re-evaluate your title of “senior writer” with as prestigious a magazine as Business 2.0.

    Mr. Malik, I’d recommend you invest in the Bedford Handbook and think about getting one of the Business 2.0 Editors to proof-read your blogs before posting, starting with the title of the article, because even that is wrong.

  3. The shareholder argument, while very strong falters slightly when apple is concerned. This is because a strong part of Apple’s strength is its brand and focus on the consumer. If the consumer gets wind of the fact that Apple is looking after its shareholders and not its users, then the Apple brand is going to take a significant hit. Significant enough that the actual monetary value of the company will drop. Its not for no reason that it is one of the most valuable brands in the world, especially the tech world.

  4. sillyputty

    regarding iPod becoming commoditized..

    People have bought nearly a billion iTMS tracks. Those purchased tracks can be played in a few ways:

    1. PC’s and Macs running iTunes
    2. CD players after burning to CD
    3. iPods.

    If your iPod wears out and you want a new player, there is some built in “stickiness” that will push you towards a new iPod, if you have any of those billion purchased tracks to your name… this doesn’t apply to music ripped from CD or other sources of course.

  5. pwb and multy – platform hate blinds thy.

    true dat appl wants more money
    their computers need to sell more..they’re selling less than xBox and Playstation do in quarter (just comparision).
    iPod is a phenomenon (and a phenomenal success)

    deny the above, and you will see why appl needs to sell more computers to sustain growth, profitability & justify their stock price.

  6. To “Irwin Lazar”‘s comment on 3G/4G wireless etc., this is a dog and don’t count on it. Operator-involved wireless services are all hamstrung by the fears and the disease of indecision that are endemic to these service providers. A simple example: it was way back in ’96 that we did the FPGA prototype of a “3G” phone (for an unspecified telecom customer) which was by then already touted as a
    “third generation – 3G,” and everyone said they’ll roll it out in a year or two. We all know what happened/is happening. It’s now 8 years later and we still don’t have 3G “ubiquitous” wireless service, let alone any “winner.” There will be no “big winner” in this space. It took the industry all this time just to figure out the economics of the base-stations – which one scales well, macro, a micro, or a pico cell? – and the ARPU is always shrinking. I understand the euphoria and excitement one feels when one thinks of these gobs of multimedia data being streamed wirelessly over iPod-like devices, but believe me, it is largely a technologist’s dream, not a businessman’s reality. (I am not saying “Irwin Lazar” is a technologist, but you get the point). The only saving grace for wireless during the past six odd years has been WLAN. It thrived because there was no operator involvement on its way up. And another thing, in n age when we are getting used to 720p/1080i resolutions on the screen, multimedia over wireless will not fly, people won’t like the quality. One can argue for a small-screen you won’t need the high bandwidth, that then leaves the question of multipath channel interference. If anyone tells you they can give you the wire-like quality over multipath channel, then I suggest you run, don’t walk, AWAY. Cheers:-)


  7. FWIW, my best guess is that whoever figures out how to mate 3G/4G wireless services (e.g. Mobile WiMax, EDGE, EV-DO) with mobile media players will be the next big winner. It could be motorola, Apple, or even the wireless providers themselves. The next big thing will be an iPod like device capable of utilizing near megabit wireless services. The biggest flaw in current handheld devices is the need to plug them into a PC to get content.

    But on another note, the enterprise market is ripe for the pickings given concerns and frustration over WinTel security. If only Apple could team with either IBM or Dell, they’d finally be able to mount a real challenge to Windows dominance.

  8. Hmm, our man “dinesh” in the previous post has got it all wrong. Apple’s business is making money for their shareholders; it so happens that their mantra is that an integrated software/hardware combination provides a better overall user experience. They will likely make higher margins with Intel chips in their hardware. If people want to put Vista on top of their hardware, they are perfectly okay with it. Hell, they might actually encourage it if that enables more widespread adoption of their stuff in the enterprise market. No one says you can’t use a Ferrari as a commuter car, did they?
    Christensen’s theory generally applies to the mass market products; however in every industry at the higher end there were always two or three players who were able to extract better premiums due to branding/marketing and that intangible, “the better user experience”.

    1. apple’s business is hardware
    2. apple’s new hardware can run vista
    3. microsoft’s business is software
    4. vista will run on apple’s new hardware
    5. apple will sell OS-less hardware soon
    6. windows will always sell vista for apple’s wintel

    Apple will start running more wintel apps and more people will start using appwintel. Dell – wanna sell apple?

    peace to all platform haters.

  9. Your statement, “The difference is the software that is being used to create a “user experience.”” is what it all comes down to. Everything else, the who did what earlier and the licensing of OS, all that is peripheral (no pun intended) and after-the-fact analysis. The ease of use factor is, and has always been the difference between a mere technology-in-a-box and a real product. The fundamental difference between Apple and everybody else is, Apple is not afraid of the simplicity of this truth. As a semiconductor product manager, I can say, with years’ of experience behind me, that most technology companies that sell to their partners in value-chain (in other words, the business-to-business transactions) do not get this message. An entire sector called reconfigurable processors is still struggling to find market solely because of this lack of software to create user experience, the user here being a programmer. And oh, by the way, please, “The user experience is the new competitive advantage”? New competitive advantage? It has ALWAYS been a competitive advantage. Just because a few academics say it’s “new” doesn’t make it so. Curb the hype.

  10. Seems like the reason aapl switched to intel is that motorola couldn’t deliver a low power, low heat, G5 chip. No low power G5, no G5 laptops.

    As for aapl’s paternalistic tendancies, they are only paternalistic to the naive user who can easily screw stuff up. As soon as you launch a terminal window a user who knows what they are doing can do pretty much whatever they want. All my longtime hardcore unix friends switched to OSX. quite a while ago.

  11. Slashdoc beta wants to know what Apple has done in computers to capitalise on the iPod.

    He asks the perfect question. Apple has used the iPod to fund its transition in the PC business at a critical time in the PC business that comes only once a decade.

    If Apple didn’t have iPod, and were to make the transition to Intel, it would be seen as a sign of desperation.

    However, with the iPod, Apple at the top of its game decides to make a fundamental transition in its business. Other than moving from OS 9 to X, changing the cpu architecture is huge. Doing it at the top of its game is a sign of strength and points to its larger strategy.

    Many think the OS game was lost in the 80s, and so it was. However, whenever major transitions in hardware and/or software take place, they create opportunities for their competitors. Apple, has timed its latest transition to coordinate it with MS’s XP transition to Vista. In order to take full advantage of a mature Vista, many users will want to upgrade their hardware to faster cpus and gpus. Now that Apple has standardized on the same cpus and gpus, this is a major opportunity to win serious market share from MS.

    It’s the recognition that MS was making a major transition that’s truly significant. I’m just surprised that more commentators haven’t noted why Apple is making the transition beyond Apple’s annoyance with PowerPC chips.

  12. Comparing Apple’s decision not to license Mac OS back in the 80’s is not the same as comparing their decision not to license iTunes today. Apple today is in the same relative position as MSFT & INTC. I don’t see Christensen telling those 2 companies to license their technology? AAPL controls the “performance-defining subsystem” that the professor is talking about. I think the comparisons to IBM & Compaq are the wrong ones; Xerox and Kodak are better examples of companies that didn’t innovate & let technology take over their space and pass them by. But even then, it took a long time for those 2 venerable companies to go down…

  13. “As long as iPod can reinvent itself, like say Rolling Stones, then Apple has nothing to worry about.”

    If there is one thing that Apple can do it is reinvent itself. From the home/K-12 market of the Apple II to the Macintosh to the iPod; Apple has always managed to renew itself. Apple is approaching thirty years old and is growing faster than ever.

    And one of the reasons is Steve Jobs – the epitome of self-reinvention. From boy entrepeneur to workstation builder to Hollywood mogul to corporate CEO. He is one of those very few people who has managed to change just ahead of the times.

    I suspect that Apple will continue to grow if for no other reason, because it has the ability to reinvent itself.

  14. Is it because of apple or is it because of its competitors that the ipod is still a favorite?
    What has Apple done in its computer business to capitalise on the iPod?

    Apple treats its users like kids. And it is a very strict parent. When people start realising this… they will try to get out – I hope it won’t be too late then.