It’s only two months ago that I posted that these are Apple’s glory years and that it is likely too soon to bet against Apple’s stock. As it turns out I was wrong. When I wrote, the stock was at $650/share and now it is at $550/share, which is down 15% (and it is down over 20% from the top of about $700/share). One of the big drivers here is a decline in customer satisfaction and loyalty. I believe a lot of that is driven by software. A bunch of people I know have folders on their iPhones labeled something like “crap apps that Apple doesn’t let me uninstall” (I am paraphrasing).
The software problem for Apple goes further though as I discovered when I bought my new laptop. After some agonizing I caved and instead of buying a Linux laptop I went with a MacBook Air. I have been super swamped at work (as those waiting for email replies from me know) and I was nervous about how much time it might take to get a new machine to work flawlessly. So the good news for Apple is that once more I spent a lot of money with them.
But the bad news is probably more important. I got my new MacBook Air and I was up and running with it in sub 10 minutes because everything I have is in the cloud. My files are on DropBox and Google Drive, my email is in Gmail, my code sits at github. And I really only use two types of software on my Mac — three browsers and Terminal. I even put my various config files (.ssh, .vimrc, etc) on DropBox, so those were back in seconds as well. Bottom line is my MacBook Air is a beautiful piece of hardware but has no meaningful other ties to Apple.
It seems as if Microsoft can’t catch a break any more. On the day that all the Surface reviews come out, Apple hogs the news with the iPad Mini launch. Then again, given that the reviews for the Surface are decidedly mixed, maybe not such a bad thing after all. It doesn’t sound like the Surface will set the world on fire yet and Microsoft badly needs something that will.
Apple on the other hand has launched something that for the first time could turn out to be a hardware misstep (I have written about my issues with Apple software before). The potential misstep here is not the hardware itself but rather the price point. As Engadget’s handy comparison shows, the iPad Mini is considerably more expensive than comparable Android devices.
Now Apple has always commanded a premium but the folks willing to pay a premium in the tablet space would seem to be more likely to buy the iPad 4. Maybe my reaction here is simply a reflection that I am still on an old Kindle 3. Once I replace that with a 7” Kindle Fire or Nexus 7 it might be that I find religion on this form factor (Fred really likes his). Until then (or until Apple announces some amazing sales) I am skeptical on the iPad Mini at that high a price point.
It’s hard to be bearish on a company that has had a run as amazing as Apple and a hugely successful launch of a new product. But there are two reasons that lead me to question where things will go from here:
The first reason is Apple’s approach to software. I already blogged last Friday about how hard it is to maintain simplicity. But there is a bigger issue: Apple is only creating software for their own devices. Yes they have iTunes for Windows but I am talking primarily about mobile apps. I would be surprised if Google did not come out with a beautiful native maps app for the iPhone — it certainly didn’t take them very long to launch their own Youtube app. Conversely I would be similarly surprised if Apple extended their own maps app to Android. In that scenario I believe it won’t take long for Google’s app to be better and people to switch to it as their maps app (this is not just a programming issue but also a data issue). So what will an iPhone be when your photo app is from Facebook (Instagram), your video app and maps from Google, and so on.
Shiny hardware will go only so far in determining which phone people pick. If apps converge to apps that are non-Apple, then the price of the device will really start to matter. On that front, Apple has chosen a path of extreme vertical integration, even designing their own chips. As has been reported the iPhone 5 is powered by a custom Apple designed CPU. The history of vertical integration in other industries is one of great short term benefits followed by long term headaches. It is incredibly difficult to keep up with component innovation if you are the only buyer of those components. Years of excessive vertical integration are what accounted for many of the problems of US car companies. Now some people might argue that Samsung also makes their own parts (and in fact was a parts supplier to Apple). But Samsung is a conglomerate with individual divisions at scale and competing in the market.
There are two important potential counter points. First, Apple has unspeakable amounts of cash. A while back there was a rumor that they were buying Twitter. They could easily afford that and a bunch of other companies. It’s unclear though to me that Apple is good at buying companies. They haven’t done a lot of it and when they have they seem to have some trouble making it work (case in point: Quattro). On top of that Apple might use the cash to double down on vertical integration which could compound that problem.
Second, Apple has a huge number of credit cards connected to mobile phones. With Passbook they are taking a step towards a potentially larger payments play. To make that really count though they would have to go beyond being an Apple only solution. Payments is a broad horizontal opportunity and will not be restricted to devices from a single company.
I don’t have enough conviction on the timing of my bear case to short Apple but I am definitely not a buyer at the current stock price.
At the airport in London this morning just before getting on my flight back, I read John Batelle’s epic complaint about his usability problems with Apple software. That got me thinking about my 30 years of experience with a wide variety of software systems. And there seems to be an ironclad pattern: successful new systems start out simple and easy to use. Just two cases in point: the early web and the early iPhone (note that I am not saying “beautiful” or “elegant,” as the early web was anything but). The simplicity and ease of use of the new systems fuels adoption and growth. With that come many requests for additional features and capabilities each of which make sense individually. But cumulatively they wind up slowly burying the initial simplicity and as a result both usability and stability begin to decline.
It’s a really hard organizational challenge to stay simple. The temptation to add just one more feature to support a particular use case better is always there. Taking an old feature that did not get widely adopted out for the sake of simplicity is something that very few companies manage to do. Even startups are often afraid that they will wind up with user defections if they do so. As the organization grows taking features out becomes even harder: features are now created by people who feel more ownership for “their” feature than for the overall product or company. Growth also creates problems if it results in a proliferation of product lines. Even if you have leadership with a really strong design sense, eventually there are simply too many products for them to stay on top of.
Apple may have reached the point where all of that is true. The number of product lines has grown a lot, especially when you include software (which you have to!). And the organization has grown a lot also with Apple’s success. And Steve Jobs is no longer around to enforce simplicity by virtue of founder status and strength of personality. With Apple’s tight control over the system it will be more damaging if a loss of simplicity results in usability and stability problems as it will be harder or impossible for users to work around the problems (or substitute alternative solutions altogether). It will be fascinating to watch how this plays itself out.
It’s been about 3.5 years since I bought my current MacBook. That’s usually when I start thinking about what to buy next. I like to own the same machine for at least three and possibly four years and so historically I have spent a bit more money and then not a lot of time switching and fiddling. But as I think about the next laptop I am beginning to rethink my strategy for a number of reasons.
First, I am using less and less “desktop” software on my laptop. Really the only thing that I run consistently is a web browser (in fact I have Safari, Firefox and Chrome open all at the same time). I have happily stopped using Microsoft Office as we have gone towards Google Apps at the office. The only thing I find myself running occasionally is a local image editor but even that can increasingly be done in the browser.
Second, disk space is not as important to me as it used to be. I increasingly have files sitting in the cloud, especially when it comes to things that take up a lot of room such as photographs.
Third, one of the best parts of the switch to a Mac has been that I am on a Unix box locally. I am a fan of the command line and use vim for editing code. For the bit of hacking I do on the side I prefer Linux servers and so having a Unix locally is great. Running Linux does not require a super high powered machine.
So for the first time instead of “buying ahead” as Bijan just did, I am thinking about “buying behind” by going for a 13” MacBook Air. I love the form factor and weight of that machine and feel it can do anything I will need for years, although some people feel that having a Retina display will be a must.
But one thing is bugging me about this choice: the increasing iOS inspired control that Apple is bringing to MacOS. So a part of me is tempted to try a fairly radical experiment, which would be to find the nicest non Apple laptop and run Linux + Chrome/Firefox on it. If anyone out there has this as their setup I would love to hear what you are using how you like it.
How do you boil a frog? Slowly. Apparently the same is true for endusers and even software developers. That at least is what Apple seems to believe. And while this has been debunked for frogs (they do jump out as the water gets too warm), it’s not clear that the same is true for humans. We seem all too willing to trade off having a shiny device for accepting ever more restrictions on what we can do with that device.
I wonder how long it will take before people realize how much they are losing when instead of a general purpose computer they have a locked down device controlled by a central choke point. I am especially curious when developers like Marco will conclude that this is no longer in their interest. And I am fascinated to see Gruber write a long post arguing that Apple’s new ebook “standard” is not a classic case of embrace, extend and extinguish. What line of control does Apple have to cross for him to say it’s actually a step too far?
The latest tightening of control by Apple is making some APIs accessible only to applications sold through their store. I am not talking about apps for the iPhone or iPad here but applications for laptops and the Mac Mini. You can read more about it here. This whole direction is rather upsetting because I really like my MacBook. But I don’t enjoy being boiled, not even slowly.
It feels a bit strange now that I wrote a post yesterday morning about “Apple’s Glory Years,” not realizing that in the evening I would see the news that Steve Jobs had passed away. There have been many excellent tributes and I read a lot of them last night (collected here on delicious) with one of my favorites being Walt Mossberg’s piece. Like many others, I found myself deeply moved by the passing of someone I had never met in person. That is despite the fact that my feelings about Steve Jobs’ accomplishments are complicated.
I intensely admired Steve Jobs as an entrepreneur who managed to succeed repeatedly and spectacularly where others before him had failed or barely made a dent (music players, smart phones, tablets, animated movies). He did so by bringing beauty to products that had previously been ugly (great tweet by Matt Galligan on this) and by understanding like few others that design is about form *and* function. As Jobs said in a great Wired interview in 1996 “Some people think design means how it looks. But of course, if you dig deeper, it’s really how it works.” His commitment to that philosophy was singular. On top of that Steve Jobs excelled at marketing through an amazing focus on presentation and messaging (the “reveals” were better than the best magic act). Here too Jobs was truly exceptional in his attention to detail and iconography including his personal appearance.
But there are two aspects of Steve Jobs’ legacy that I struggle with. First is the idea that Jobs was a technology visionary. Personally, I feel that Jobs’ real genius was recognizing the product potential in the technology vision of others *and* making those products a reality. Jobs’ visit to Xerox Parc has been much cited here but there are more recent examples also, such as multi touch which had been kicking around labs for some time and even made it into a spectacular TED presentation. But Apple under Steve Jobs was the company to deliver multi-touch as a compelling consumer experience. So maybe the right thing here is to think of Jobs as a product visionary.
Second, is the issue of the high degrees of control and secrecy that accompanied Jobs’ approach to the integration of form and function and the “wow-the-world” marketing. My feelings here are considerably more personal. For several years as a teenager I literally slept below a poster of the wiring diagram of the Apple II which had shipped with the computer! The Apple II was the machine on which I fell in love with programming and computers. I ran additional wires on the motherboard to some jumpers that made the Apple II “hack ready.” While I enjoyed Apple’s software, I also used CP/M a lot on my Apple II. As it would later appear, much or all of this openness was due to Woz’s influence. In college, I did a ton of programming on a Macintosh which was pretty much the complete opposite of the Apple II: an attractive but hermetic box with only perfunctory OS documentation.
Winding the clock forward 25 years, the iPhone and the iPad represent the design-control dichotomy at its most extreme. They are gorgeous and easy-to-use consumer devices. The videos of toddlers using them are a testament to this. And they are highly programmable, as long as you stay within the confines of Apple’s controlled walled garden. This doesn’t represent a practical barrier for the vast majority of people using the devices and doesn’t even impact many development use cases. But it does represent a nearly insurmountable barrier to the kind of tinkering that spurred my original interest. It is possible that my feelings are simply nostalgia for an early period that similarly no longer exists in other areas of technology (e.g., cars), but it bothers me more here since I believe computing devices are so central to our progress. I have not given up on the potential for having personal devices that are beautiful, functional *and* open.
None of this implies that I am any less saddened by the news of Steve Jobs passing. We have lost someone of extraordinary influence on the history of personal and mobile computing. We will all be well served by internalizing the importance of design, the persistence and focus required to achieve it, and the passion that powers it all. Steve Jobs himself expressed that last part best in his inspiring 2005 Stanford commencement speech (which I will now watch annually on October 5).
These are without a doubt Apple’s glory years. The company has a stellar range of consumer products including the block busters: iPad2, iPhone4 (soon 4S), and MacBook Air. Our household alone has at least half a dozen pricey Apple devices. And still I don’t think it will last. By that I don’t mean that Apple will somehow run into trouble overnight but rather that it faces twin challenges that will likely significantly reduce its influence over time: price and software.
People writing about smartphones love to point out that two thirds of Americans don’t have one yet, as if that implies that two thirds of Americans are Apple’s addressable market for the iPhone 4S. That leaves out the fact that about half of those people (one third of the overall population) are in financial difficulty. They do need a mobile phone and most have one (a feature phone at the moment), but they are highly unlikely to replace those with iPhones. Instead they will replace them with Android phones. Every major carrier in the US is now offering at least some Android phone for FREE with a new plan. And FREE is powerful attractor. That is true throughout large parts of the rest of the world as well and is clearly visible in Gartner’s smartphone market stats. Apple is a high end brand and that’s deeply in the company’s DNA.
The second and even harder challenge for Apple is software. Endusers care about apps way more than they do about hardware. And yes, to-date there too Apple has been a leader. But as the number of Android devices surges, there are fewer and fewer companies that can afford to have only an iPhone version of their apps. Now for purely functional apps that’s maybe not an issue but many apps these days have a social or network component. Even if the experience of “Find My Friends” winds up being awesome, making it limited to iOs devices will ultimately be self defeating as at least some of my friends will be on Android. Cross-platform software from independent companies (that specialize in software) will win the day and that will significantly reduce the reasons to pay extra for an Apple device.
Now throughout this post I have only mentioned Android, but Microsoft cannot yet be counted out. Their latest mobile software is beautiful and they are aggressively courting developers. Plus with Nokia they now have a potent hardware partner and one that knows how to serve the complete mass market. And unlike RIM, Microsoft has separate profit engines that give them the ability to keep pushing.
None of this will happen overnight though and it would be foolish to try to call the top in Apple’s stock price (at least I am not prepared to do that as I am often surprised how much longer things last than I think). In the meantime I am pretty sure that I will get myself an iPhone 4S and participate in celebrating Apple’s glory years.
Google buying Motorola is a strong defensive move against both Microsoft and Apple on two fronts: patents and user experience. Apple is vertically integrated and Microsoft controls Nokia (without having had to buy it). Between that and having filed or acquired a lot of patents, these two pose formidable threats to Android. Buying Motorola lets Google fight both of these threats in one go. As Larry Page’s blog post makes clear, Motorola has a huge trove of mobile IP, having invented the first portable handset and also the then smallest feature phone. Having hardware design capabilities inhouse will let Google more easily develop some reference phones that provide as well rounded a user experience as the iPhone and Windows Mobile 7 (although this will require as much if not more software UX discipline).
Nonetheless, there are many negatives to being in the hardware business, such as margin compression (caused ironically by Android) and real COGS (other than servers and bandwidth this is an unfamiliar concept to Google). Most of all, for Android to succeed it must be widely adopted by many handset makers and the last thing Google should want is for this acquisition to scare off the likes of Samsung and HTC. I therefore predict that Google will only retain parts of Motorola - the patents and the hardware design capabilities, but close down or sell off much if not all actual manufacturing and handset distribution (to the extent that Motorola still has any of these in-house to begin with). That is of course assuming that Google is not tempted to go overboard once they have this done and get into the carrier business as well as Jean-Louis Gassée suggested for Apple. Being vertically integrated would be a terrible idea.
Fred’s blog post today is about how new and powerful HTML5 apps are emerging, giving the new Kindle Cloud Reader as an example. The Cloud Reader is also an example of something else: if you tax a system too much people will find ways to work around it. This is highly relevant to anyone running or starting a marketplace. You can’t be greedy! (Sorry, Gordon).
I had written a while back — in the context of eBook pricing — how Apple’s take rate of 30% was significantly too high. The Kindle Cloud Reader demonstrates just that. Instead of collecting say 10%, Apple will now be collecting nothing for books sold via Cloud Reader. I believe that the sustainable take rate for marketplaces will be somewhere in the 5-15% range but not above.
I have run into a number of people recently starting new marketplaces and have provided them all the same advice. Launch from Day 1 with the longterm sustainable pricing even if that means that you will have less in initial revenues. The reason is that you will be more disruptive, grow faster and be more sustainable by not opening the door for people to try to circumvent your marketplace.
On a related note, I continue to believe that this will ultimately turn out to be Google’s biggest weakness. Search can be thought of as a marketplace and Google is currently keeping close to 100% of the revenues that marketplace generates. There is no way that’s sustainable in the longrun.