Tuesday, July 29, 2008

New Battlegrounds for Apple?

A previous post discussed the possibility that Apple might squander its margins lead over competitors by discarding the commodity hardware that ensures Apple greater profitable pricing range with the same OEM components used by hardware competitors.

Perhaps Apple plans taking advantage of Vista's weakness in the low-end, ultraportable hardware category in order to stake out a big piece of turf.

However, I think something bigger might be lurking.

Remember in the early years of the century when analysts told Apple on earnings conference calls that it should be building PDAs, and Steve Jobs said he thought that PDA makers were doing OK and that he didn't see how Apple would add value to that space, and that Apple expected a major collision between PDAs and cell phones in the near future? The unspoken conclusion that seemed to be offered was we're not interested in that market. Then, a few years and many rumors later, Apple turned up with this product? Folks said Apple was being coy or secretive.

And remember how Steve Jobs said the PC wars were over and that Microsoft had won? And that if he were in charge of Apple, Jobs would forget the Mac other than as a cash cow and get cracking on the next big thing? Following his return and the replacement of the Mac's operating system with the one he had built for Next Inc., Apple's turned in such market-beating growth in the U.S. PC market that Microsoft has launched a new defensive strategy aimed at competition from Apple.

(Maybe part of Microsoft's problem in selling its users on Vista upgrades are the result of Microsoft losing the battle rather than Apple winning it. In either case, the practical result is similar.)

But, think about Apple's share growth. Apple doesn't make a $500 subnotebook. Apple doesn't make any loss-leaders. Apple is taking share in the segment of the market where there's the most money to be made (or lost, depending where you sit). And I submit that Apple isn't making this money purely on the basis of its hardware; Apple is long-known to use a different operating system than other manufacturers, a fact that has historically maintained a barrier to entry for new adopters with investments in non-Mac software titles (or in non-Mac versions of software titles available on either platform).

Apple is taking share instead on the basis of its software. Already a possible world leader in Unix (HP, Sun and IBM, long-time big-iron Unix vendors, still occasionally claim to be the king), Apple is selling its operating system now on set-top boxes, phones, music players, and -- if you can believe this -- computers. The development environment on Apple's platform creates an international advantage on the basis of its software. The fact that small developers can get off the ground quickly using the Cocoa development environment, can deliver single-version applications with support for numerous local languages, can accept user-created language extensions for redistribution, and so forth make it an attractive single-image solution for worldwide operations.

The fact that Apple's future product is not the music player but the Mac platform may not yet be obvious to everyone, but it's clear to this author that Apple is pushing the platform and that various hardware on which it can run are just tools for advancing the whole. Just as Apple didn't really mean it wouldn't build a PDA or a phone -- but was biding its time for attack -- so too did Apple not really mean that the war for platform share was over. Maybe Apple viewed the desktop as old-fashioned and was willing to cede it largely to beige-box makers, but Apple's software strategy clearly calls for folks to run applications on desktops. And notebooks. And handhelds. And on the set top (and maybe soon inside the set itself).

The next battleground for Apple is the old one, sort of -- but also sort of not. Apple isn't setting a 1984-era operating system against something created by keen-witted DEC engineers; it's setting Unix with real-time support and a friendly user-interface against a pig so bloated it can't fit into its briefs.

Anyone want to take a bet when Microsoft ships Windows 7? And how it'll perform on subnotebooks? Or whether it'll run on handhelds? And what one needs to do to localize its native applications?

For the record, I expect that with most of the world not shelling out $1000+ for its computers, Apple will remain a tiny niche player as measured by global unit sales share. However, I expect Apple to release products that don't enter into the denominator of global PC share, and to continue gaining share in the segments of the market that are high-end enough to have profit worth chasing.

The question is, will hardware components become such cheap commodities that demanding users can be satisfied for $450, and if that day comes, what will Apple's competitive strategy be then? Taking the cream of the market over $1000 might not mean as much one day as it does now.

In the meantime, Apple's profit share is much greater than its unit share precisely because it targets the segments where profit exists. So long as commodity hardware can support Apple products, Apple's IP-based margins advantage should position Apple competitively against vendors obliged to pay third parties for their pre-installed operating systems and applications.

No comments: