24 April 2006

Apple and Microsoft no longer really compete

I wrote in January that one of Apple's key challenges was to establish more partnerships with key companies, and observed how bad historically it had been at doing this. As I was considering some of the fall-out from the BootCamp announcement recently, it struck me that Apple has actually gone and done this. First it not only made peace with Intel, it made a strategic relationship that looks like it will be beneficial for both companies - Apple needed power (esp in laptop models) and got it, and Intel needed publicity for it's new products to fight back after being trounced by AMD. Of course, we knew about the Intel partnership before I wrote the January blog entry, but I've finally understood that the Intel relationship for Apple was not about performance per watt (though that was important) it was about burying once and for all the notion that it's raison d'ĂȘtre is to kill Microsoft. What Apple has done with the Intel switch is to turn not one but two very large and influential companies from being Apple foes into supporters. Am I going too far in describing Microsoft as a supporter? Perhaps, but bear with me.

Apple's position with PowerPC was always going to be as a small niche player with diminishing marketshare over time and the iPod "halo effect" was not going to turn this around except to provide temporary relief at best while the long term decline contiued. Yet for Apple to be a sustainable business it needs to have serious marketshare in the business it's in. What is that business? It's primarily hardware, and the primary competition is Dell, HP (at the PC end), Lenovo, Acer, Toshiba, Sony, Fujitsu, Gateway, etc. Apple fighting Microsoft doesn't help Apple's cause one bit. Neither did fighting x86. Steve Jobs has known this since before returning to Apple. In a Forbes interview in 1996, he said "The PC wars are over. Done. Microsoft won a long time ago.". Perhaps we didn't believe him, and perhaps that's not what the Mac faithful want to hear. The reality is that Apple is never going to displace Microsoft as the dominant OS. And fighting that battle (and the chip battle) only saps energy from the causes it needs. Apple is still fighting for long term survival in a cut-throat highly competitive business. It's resources must be focused on beating its direct competitors through a sustainable strategy. That strategy involves giving the end-user an unparalleled experience - simplicity, functionality, great design. It is sustainable because unlike most or all of it's competitors it is able to control the whole of that experience by virtue of having it's own OS and software. But it is sustainable in a mass market only if you are able to maintain a meaningful market share. I would suggest that the level of that marketshare for sustainability has to be among the top 5 suppliers, and possibly even in the top 3. That implies a global marketshare of >10%. Ignoring commercial markets (where it will have a harder time) and ignoring less-developed world markets, it will in fact need to have a marketshare in the consumer markets of the developed nations in the region of 15-25% if it is to be sustainable. The iPod halo effect for Apple will be about giving it enough revenue and profit headroom for a period of time to make the changes it needs to head towards this figure. Without this effect, Apple's current transition would have been impossible. It has but one chance left and it is taking it.

While Apple zealots (and a few MS ones too) like the constant talk of OS wars, the reality is that focusing on this was self-defeating (at least for Apple). Why have Microsoft against you when you can have them on your side? Sure, you can maintain a marketing war about which OS is better. It matters more to Apple perhaps that it gets more of the plaudits in this regard. We can even have a "battle" in the music player arena too - after all it seems easy to get Steve Ballmer wound up. But in the music market, it's never really been a battle of Apple vs Microsoft. Microsoft never saw this market appearing - Apple pretty much created it. Sure, Microsoft would now like a piece of it, though it doesn't stand to gain much as it doesn't have any (hardware) products. The biggest danger to Microsoft in the music arena comes from the possibility that Microsoft's standard - WMA - is toppled by Quicktime for dominant marketshare and makes Microsoft's plans for your living room more difficult to achieve. But even here, I think Apple has far more to lose by not getting a toehold than Microsoft has by not being the only choice. At this time, WMA is still dominant, though Quicktime is catching up (purely down to the iPod effect of course).

Even if you accept my argument that Apple has embraced Microsoft, you may argue that Microsoft will not embrace Apple and that will be a constant problem longer term for Apple. In a second post, I am going to look at Microsoft's competitive position and argue that in fact it's best interests are served by embracing Apple as well. I don't expect the war of (marketing) words to stop, nor the wars between the zealots on either side, but in terms of absolute strategy, Apple's success neither depends on Microsoft's destruction and nor does Microsoft's success depend on Apple failing.

In the meantime, Apple will be aiming to take small chunks of marketshare from the other major (and not so major) computer manufacturers. I would liken this scenario to the global car manufacturers. Currently Dell is Toyota, and Apple is perhaps (would like to be) BMW. Few would argue that BMW has a sustainable and profitable business (as does Toyota). Both companies can exist and be successful as long as a few of the others are failing or just middling along (GM, Ford, Fiat, even VW, etc). Unlike the car market which is pretty mature, the computer business is still growing at over 10% a year. So, there is plenty of opportunity for growth and profitability in this market for many companies.

Where Apple's strength now is that it, and only it, controls one aspect of the technology that it's competitors do not have - the OS. Back to the car market analogy (I know this isn't perfect, but it will make the point), there are perhaps 3 fundamental components of making a car work - the car itself, the engine powering it, and the fuel that is supplied. Let's consider the car design as the computer itself, the engine as the chip, and the OS as the "fuel". For a long time, Apple persisted in having it's own unique combination of these things - it's own designs, processors by Motorola/IBM and it's own fuel. The rest of the world had something else - x86, and Microsoft. Or perhaps Apple was driving on the left in a hydrogen-powered car, and everyone else on the right with petrol. The barriers to change for anyone were perceived as too high no matter how good the experience of driving on the left.

Apple has now overthrown that thinking. It now has the same engine type as everyone else, and it will let you use the same fuel if you like. But it has one ace that even BMW doesn't have. Only it's designs can run a different type of fuel that's a lot better than the one everyone else has. You can go faster and do better mileage with the Apple fuel. But if it runs out, if you can't get it, or you just plain want the other fuel, then that's fine too. And as long as Apple can make it's fuel better and better, while ensuring you can still use the fuel everyone else has, then their advantage can get stronger and stronger. So, it will ensure it's designs are the best they can be, and that it's OS is the best available. It will fight in a competitive market among other companies that it has the resources and ingenuity to beat. And it's success is much more in its own hands than it has been for the last 20 years or so. Success for Apple will be doubling in size, then tripling, while remaining decently profitable. It will be about moving from low down the order of computer manufacturers up into the top 5 and then into the top 3. As that market changes through convergence of devices in the home as well as for mobile devices, it will be about becoming THE leading consumer electronics company through providing devices that people want to use as they go about their daily work and play.

I don't see this as being very negative for Microsoft, and frankly if they dwelled on this competitive threat they would be missing the far more serious threats to their whole business coming from many other quarters (see subsequent post). Paul Taylor, technology correspondent for FT, wrote on Friday (subscription required):
"If, like me, you have quietly coveted an Apple Mac for years, but been put off by the lack of support for Microsoft Windows software, an answer may finally be at hand".
That's the type of view Apple wants people to have. I'm sorry if this seems obvious to you - a quick check of the more rabid mac news sites recently still shows that many seem to think that the overthrow of MS is still the critical success factor for Apple. That is never going to happen! While us Mac zealots may dream of such, we all know that Apple has no real chance of even moderate success in the business market - good design and iLife alone are not going to result in mass replacement of systems running various flavours of critical enterprise software. Don't get me wrong, there's a good part of the business market Apple would like and can indeed get. But that market is not in equipping a call centre with 1,000 machines, so it will be a niche player for the smaller enterprise and in situations where employees can pick their own machines. That is not going to lead to 20% marketshare let alone 50% - the only level at which you could really start to say that Apple has perhaps beaten Microsoft. Without a strategy that openly targets Microsoft as a competitor, Apple has the flexibility of using MS or at least being MS-agnostic to achieve it's aims.

The PC wars are over. Done. Microsoft won a long time ago. Move on.

My next entry will try to articulate why Microsoft is actually a willing accomplice to this strategy.

(Edited to add links between articles)


Anonymous said...

Your analysis is dead-on for the foreseeable future. But you should "never say never". As TCO keeps going up for Windows, and down for Mac, I think you will EVENTUALLY hit a tipping point where even dumb-a** CIO's buy into upgrading to Mac. But I don't expect it THIS decade. I am thinking 2015-ish.

Anonymous said...

I don't think Apple and Microsoft compete...Apple is a hardware company that makes a Jim-Dandy OS. MS is a sofware company.

Compare Apple to other Computer manufacturers.

Ian Hobson said...

Anonymous 1: thanks for stopping by. You're right of course. It could happen, (wouldn't that be amazing?). However my experience is that things change such a lot in that timeframe that it's not worth speculating about. And I guess I was also trying to make the point that RIGHT NOW, Steve is focused NOT on Microsoft as the enemy because he doesn't need them as the enemy when his fortunes are more intertwined with the Dells, HP's etc of the world.

Anonymous 2: I think you said in 28 words what took me 3 blog entries and probably 2,000 words or more and perhaps still didn't make! Sorry if my post was obvious - it's just that I see an unhealthy focus in the media and among the zealots that its all about Apple vs Microsoft. As you say, it most certainly isn't.