With the price of Apple’s shares making it more valuable than Microsoft and the phenomenal sales success of the iPad, now might seem a strange time to examine the vulnerability of what now seems world’s most popular technology company. But it is a business whose strengths could also be its weaknesses.
Take that rise in Apple’s shares. The focus has all been on it overtaking Microsoft, but that is really to do with the media’s love of feuding personalities. Steve Jobs and Bill Gates are household names better known than anybody else in the technology industry.
But what seems to have been forgotten is that Gates has long pulled back from Microsoft and now spends his time giving away his billions to reduce world poverty. The company he founded still makes huge profits that dwarf those from his former competitor, $14.6 billion annually according to recent figures compared with $5.7 billion for Apple. A similar divide was seen in revenues with Microsoft bringing in $58.4 billion against Apple’s $36.5 billion.
But really the comparisons are pretty meaningless. The two companies have followed completely different paths. Microsoft has hundreds of product lines sold in both business and consumer markets. Apple’s focus is much tighter selling a very limited range of devices, mostly aimed at consumers.
It’s the strategy famously championed by Jobs since in 1997 he rode back on his white charger to rescue the company he founded from incipient bankruptcy. He ruthlessly cut all the less successful lines, leaving the lean mean machine that provided the foundation for today’s business. Without Jobs’ return it genuinely seems unlikely Apple would have survived.
When he came back as CEO it was still a computer company, although the first machines to appear after his return also marked the beginning of its transition to the consumer electronics business it is today. The all-in-one iMac with its confectionery-coloured case was a complete contrast to the beige boxes being churned out by other manufacturers. But it clearly wasn’t a business machine.
Then came the iPod in 2001 and revenues from consumer devices began to eclipse those from computers. It was a phenomenal success. There were other MP3 players on the market, but next to Apple’s device they seemed clumsy, geeky and hard to use. The iPod’s rise to dominance was an absolute victory for great design.
This was also the real start of what’s become known as the “halo effect”. Essentially this means the popularity of one product range has a positive effect on the rest. So the success of the iPod also boosted sales of Apple’s computers.
In 2007 the effect undoubtedly gave some of the initial impetus to the launch of the iPhone. Looking back it’s hard to remember what a huge gamble this seemed. Not only was Apple up against the closely-knit group of mobile phone manufacturers that had built up cosy relationships with the networks, but it was competing in the smartphone arena that was less than fashionable for consumers.
Multifunctional devices such as the BlackBerry were for business. The style-conscious consumers who bought other Apple products carried slim Motorola Razrs in their tight jeans. Many, including this writer, thought Apple had blundered. We were wrong.
The main thing we didn’t predict was the popularity of apps. The concept wasn’t new. Palm’s original dominance of the handheld computer market was partly driven by the numbers of little specialist programs that were available for it. (Palm was recently bought by HP.) But the App Store caught a wider public imagination.
It benefits Apple on two levels. First the store brings in cash from the 30 per cent cut it takes from each app sale. More importantly, it ties consumers in. They won’t want to throw away their apps when they get a new phone.
This makes sense of Apple’s highly-publicised spat with Adobe over Flash and Developer software. The official line from Jobs boils down to: “Flash is crap.” Some observers say this is just the grumpy old man of Silicon Valley responding to some simmering row from years ago, but there’s also a strong business case.
Adobe’s software makes it possible for developers to create apps independently of Apple. They’ll either run on a variation of Flash or they can easily be adapted using Developer to work on a variety of devices with operating systems from BlackBerry, Google Android, Microsoft, Palm WebOS, Nokia Symbian as well as Apple. But if consumers can get the same apps for a cheaper device, why would they buy an iPhone?
The monopoly doesn’t just help Apple. It benefits many developers too. A massive, uncontrolled app market will drive prices down towards zero. Quality might suffer, but it would be up to consumers to decide.
Again, this is not a new business model. It is remarkably similar to the one used by games console manufacturers. And there’s also a sign here of the dangers faced by Apple. Sony’s PS2 used to enjoy a similarly dominant position in the gaming world to the iPod. Like the iPhone the PS2 was caught in a virtuous circle. Consumers bought it because it had the best games while developers focused on it because it represented the biggest market.
It did not take Sony long to fall from grace. The PS3 launched at the end of 2006 was by no means a failure, but it was nowhere near as successful as the PS2. What surprised commentators was the competition. Many saw the battle for the console market being between the PS3 and the similarly powerful Microsoft Xbox. In fact, both were eclipsed by the lower-powered, relatively cheap and cheerful Nintendo Wii.
Apple faces a similar challenge when it launches its new fourth-generation iPhone almost certainly on Monday June 7. If it aims too high it’ll risk leaving behind the majority of its market that wants the iPhone style, but probably isn’t that bothered about increased power. It probably won’t go for the economy end of the market because many of the sales would be at the expense of higher-priced models.
Anyway, Apple doesn’t do cheap very well. The iPod Shuffle has been the equivalent of the over-priced carrier bags sold in Harrods which offer the brand association to people who can’t or won’t spend the money.
The continuing risk for Apple is that one high profile product failure will ripple through the company. The halo effect is a pyramid. The first successful product creates a pent-up demand that ensures the next will sell faster and so on.
At the moment consumers enjoy being associated with Apple. Perceptions can change. That’s one reason why it is working so hard to disassociate itself from the spate of suicides at the giant Foxconn plant in China where many of its products are assembled.
Apple probably is better than many western companies, but cheap manufacturing comes at a price. The image of 300,000 people working in military conditions where they’re not allowed to talk even during their short breaks is not what consumers want to think of when they go into a nice shiny Apple store.
Certainly the iPad wouldn’t have performed as well in terms of sales had the halo effect been tarnished. Its long-term success is, anyway, far from assured. Although much has been made of the way its sales have reached two million faster than any other Apple product, that was almost inevitable unless it had turned out to be a real lemon. It remains to be seen whether that success will continue when other devices come along which are cheaper and have more functions such as a camera, expandable memory not to mention the ability to display Flash video and games.
In the end, though, the challenge for Apple isn’t simply about technology. It’s in the fashion business, which creates its own delicate balancing act. Products fall out of fashion if they become too popular or if they’re not popular enough. It’s an equilibrium that’s almost impossible to sustain. At some point pulling out an Apple product will be seen as naff. The only question is when it becomes a victim of its own success.
The other threat to Apple is its leader, Steve Jobs. The company may not really be a one-man show, but that’s the way it’s perceived. The ill-health which led to his liver transplant led to company shares plummeting and there’s no clear line of succession.
Finally, it should be remembered this is not the first time Apple has been more highly valued than Microsoft. The last time was at the end of 1989 a few years before it almost went bankrupt. This is certainly not to say that history will repeat itself, but there is definitely the feeling of a stock market bubble when so much is invested in a company with so few products.