Monday, September 18, 2006

The Apple effect

It's been a few days since my last post. Things have been a bit hectic - yes, yes...I really do have a job. I'm going to deviate a bit from this incessant wrangling on whether AMD or Intel will secure world domination first. Instead, I'm going to take a look at where Apple is heading, it's impact on Intel and more importantly how it changes the landscape for companies like Dell, HP & even Microsoft.

Clearly, Apple is on a path to become the Sony of the Digital World. The key difference is Sony could never string together their different businesses to feed one another and Apple is making that their operating model. Let's examine the pieces Apple has:

1. Hardware - while the iPod is their claim to fame, they have used this small device to open the doors to Apple computers again. That coupled w/ their adoption of Intel allowing Windows to operate on their systems is a powerful way to gain trial of Apple's hardware and more importantly software (inc OS). When Apple ran the Switch campaign couple of years ago, they didn't have the substance but I have to say now they do. With designs like the Mac Mini and the new set top box, Apple is beginning to address the convergence of PC & CE.

2. Software - undoubtedly Apple's OS and software are miles ahead compared to the Window's franchise...specially in terms of realiability and usability. And now with the ability to run Windows they are a phenomenal solution for consumers.

3. Content services - with iTunes and Jobs' ability to negotiate with Hollywood and the music industry, Apple will soon become the largest distributor/re-seller/retailer of content in the world. It's just a matter of time.

When you start to string these pieces together, what you get is a picture of the digital home - h/w, s/w and content along with peripherals through the iPod brand. While Rahul Sood in his blog obliquely refers to how Michael Dell didn't understand Apple's strategy with the iPod but didn't clarify, I'm going to lay out what I believe it is even though Steve and I are not on first name terms.

Apple's strategy is exactly the same as Gillette's razor/blade strategy. Their long term goal is to get a razor into every house so that they can make a ton of money on the constant replacement of blades. This is also HP's strategy for their printer and cartridges. It is every mobile phone operators strategy around the world where they subsidise hardware to earn recurring revenue on service.

The key question here is once my brand enters your existence, how do I continue to monetize that relationship. And for Apple "it's not the hardware stoopid - it's the content". Apple's goal is to become the largest distributor of digital content in the world. They will become the Walmart of digital music & movies & perhaps even games over time. As Apple's user base grows, Steve's ability to command pricing and content will grow. The key difference between Apple and Walmart will be that content unlike household groceries cannot be commodotized because every piece of content is unique.

The path to this is to make the Apple hardware ubiquitous. Which means expect more and more devices of every kind to serve every need over time. From PC's, to set top boxes and at some point even ultra-mobile PCs. If it's a way to experience connected content, Apple hardware will get there.

The impact of this on Dell and HP and every other hardware supplier is that they now risk getting further commoditized and as a result marginalized in the mind of the consumer. The hardware becomes a little more (not completely) irrelevant since all you really want anyways is the content. When was the last time you worried about what the configuration of your set top box was? The one chance the OEM boys do have is if people want to take that connected content and experience or manipulate it offline. Because to do that you need hardware capabilities. However, many non techie consumers will probably be happy to experience the content on demand and be able to transfer it to a device easily.

So if Michael Dell didn't get it, I hope he does now. As for Microsoft, boy oh boy are they in trouble yet again. If Apple owns the content experience and the hardware to deliver it, they have the opportunity to own everything behind it over time including...all the other software. Of course, Google knocking on the other side giving away free software for ad space isn't helping.

So ladies and gentlemen - kiss your stock price good bye to any technology player who doesn't have a long term strategy to earn revenue from service. And this includes AMD and Intel. Having said that, in this world of connected content, Intel has a key piece of their strategy called Wimax. And this is an opportunity for them to earn service revenue. Because people care about the brands they carry and starting Q107 the Centrino brand has a Wimax product. I'm hypothesizing but we could see a replication or version of the cellphone model where Intel works with service providers to take a share of revenue to enable their service directly onto the hardware...or variations thereof.

So for the dudes stuck on the "my micro-processor is better than your's" argument, welcome to a place where hardware is a commodity, content & services are king and Apple defines the future of the consumer technology industry. And will they dump Intel. Nope - not any time soon = the next 10 years. Because Intel is bending so far backward for Apple they can kiss their own ass. And Steve has an ego...and that ego means he doesn't give a damn if AMD offers him cheaper prices like Dell does. Because Intel probably has a thousand engineers helping him customize their products for his super cool machines.

(P.S. - I made a few comments bold so that the folks who don't get it hopefully will find it easier to see the big picture I'm talking about. I'm hoping to keep this discussion strategic)


Randy said...

Liked the new post, but I think you underestimate MS and the Window's user base(or overestimate them depending on your perspective) when you say Apple could supplant MS h/w and s/w by using their strength in the content market. While I believe Itunes store may become the largest provider of content, online or otherwise, only 20% of Ipod users are themselves regular Itunes patrons. I'm sure that number goes down for other mp3 and media player owners.

Microsoft on the other hand can continue to follow others with features, services, and content delivery. Apple has beat them to the punch on almost everything since OSX was released. MS doesn't have to be first, it just has to go their eventually. And yet, even with the ability to run Windows on a Mac, OSX global share of the market has seemed to have stopped growing or even started to decrease. I'd hate to think people are buying Mac's for their style and running Xp on them. I'd much rather buy an AMD machine and run OSX on it, hey that's exactly what I'm doing. Shhh... don't tell Steve.

Nietojo said...

Hmmm.... good article but a better article would of been discussing Apple as an unchecked monopoly.

180 Sharikou said...

I agree - I don't think this is going to be a walk over for Apple...Microsoft may be big and slow but they are far from dead. Apart from which the hardware guys are not just going to roll over and play dead once they understand what's really going on.

However, I think Apple's edge over Microsoft (apart from being first) and everyone else is:

1. Perception of usability (and to some extent style) - for the average Joe, ease of use is a big deal and Microsoft along with everyone else is a follower in the mind of the consumer.'s not just how easy is it to use the hardware - it's things like can I get and move the content around easily, etc. Look at the MP3 biz - it's not like Creative or Sandisk suck. Yet their market shares are marginal compared to Apple. Because no matter what happens, Apple owns usability. Let's see if Zune can make a dent.

2. Entry point advantage - Apple is entering the user base from a hardware/content perspective. Microsoft's entry point is through software. It is far easier for Apple to propogate because their entry point is the part they want to monetize. For Microsoft, they are asking their user to now adapt a new service which is completey unrelated to their previous experience with the brand and pay for it. Now the one place there is an exception is the Xbox. Should Microsoft want to sell content, that would be a much more logical entry point.

3. Giving consumers what they want - for some reason Steve and his boys seem to have a much better pulse on delivering technology consumers want. Call it his Midas touch but I don't think there are many people inside Microsoft who get it - and can deliver it. And as long as Steve is around this is a key differentiator.

The question I think you raise is once Microsoft gets there, can they overwhelm Apple with their size. I think the answer is no - that's not enough. If that was the case, Google would be a word you could only find on MSN search and Microsoft would not be scared that Google is giving software away for free. Apple has phenomenal brand cachet that has helped them weather incredibly tough times. That brand is growing if you look at the latest Interbrand/Businessweek study. There's going to be a fight and in the mind of the consumer, Apple is the incumbent and Microsoft is the challenger.

180 Sharikou said...

Nietojo - if you have some thoughts, mail them to me and I'll see if something develops out of there.


Randy said...

Not to get too off-topic here, but MS can't kill Google mostly because of the DOJ. Right now its just deciding how much s/w it wants to give away to keep Google in its place. Its easier to kill a single app maker(Netscape) than the maker of a whole suite of s/w. And its illegal for MS to give away a large # of apps for free to squash its competition. But MS has smartly gotten around that with its Live suite of apps, which as we've already seen in Vista, will be as near to bundled as possible.

This brings me around to Apple again, Gates was right, the h/w doesn't matter. As long as Windows is a killer on shipments, MS can find a way to give s/w for free. They'll try to supplant the lost revenue with new service fees. As long as OSX doesn't gain significant market share, Apple will only make good profit on those purdy flash drives that cost half as much to make as they sell them for. Their's not alot of profit margin in the content business, well unless your the RIAA or MPAA.

Scientia from AMDZone said...

Well, I pointed out in anther post that you are very biased toward Apple. That does not appear to have changed. I'm sorry, but I don't see iPods leveraging sales of Apple computers. What would really help Apple is if Apple could sell their operating system as a standalone install or sell it to other hardware OEM's. Unfortunately, that is what they can't do.

Apple already has competition for music downloads so I don't think they'll become a huge monopoly. BTW, the current Apple tv ads show how lopsided their thinking is. The coffee house neo-hippy does not appeal to most people. Further, many people know enough to see through the technical errors about PC's. For example, suggesting that Macs are ready to go right out of the box whereas PC's are not is nonsense. Also suggesting that PC's are scattered among three different boxes is also silly. You have one box for the monitor and one for the computer. The only extra items are keyboard, mouse, and speakers which Macs need also. You can have integrated speakers but it sounds better with woofer. Because of USB it is far easier to set up a PC than it has ever been.

Eddie said...

Hi. I am a fellow blogger who covers the AMD/Apple/Dell/Intel issues. (my blog is chicagrafo)

Very good analysis. One of these days I'll write an article commenting yours.

180 Sharikou said...

Eddie - I already read your blog and am a fan!

180 Sharikou said...

Scientia - your problem is two fold:

1. Your thought process is limited to the PC industry as it is today and seeing beyond that seems difficult. Perhaps that's your comfort zone.

2. You think there is only one right answer and it's your's.

First - Apple computer unit volumes are already growing. Inside the industry it's called the "Halo effect" where the iPod casts a marketing halo across Apple's other h/w product lines. So you're already off track there.

Second - I'm talking about ubiquitous Apple hardware of various forms...way past just the computer. Set top boxes, phones, ultra mobile PCs, etc.

Third - Apple advertising is not meant to be taken seriously. Which is why they're a cult brand.

Anonymous said...

The trend now is delivered content. Intel does get this to some extent - hence the Viiv brand. Intel is trying to get the PC universe to catch up with the Apple universe in terms of seamless content delivery.

To the poster above, an iMac is a hell of a lot cleaner "out of the box" than any retail PC where you have to spend 30 minutes just cleaning out all the trial offers/fee-ware. With all the apps you need in OSX to make/edit/view/sync content, Apple knows where the PC is going. Intel is pushing that way also, but they've also got Wimax. Wimax will be the medium of wireless broadband content in the future.