Where We Could Really Use the "Next Steve Jobs"

A lot of people focus on the smartphone market, and complain with each new Apple product that... Steve Jobs would have done something different, or better, or both. Steve Jobs brought something unusual to Apple, specifically a willingness to make huge gambles on theoretical technology, and to release products that could turn out to be failures. Apple seems to have become exceedingly cautious, but I'm not sure that is so much the result of a change in the company's philosophy as it is a change in consumer expectations. The iPhone 4 antenna issue, and the Apple Maps brouhaha, suggest that consumers want nothing less than perfect and, rather than launching risky products that might inspire a mixed reaction or turn out to be the next Newton (or Zune), caution has spread across the industry.

The real story behind the focus on portable electronics is not so much that a life-changing innovation is just around the corner. It's much more that there is profit in the upper end of the market, the mass market having already been commoditized. Smartphone advances reflect the importance of competition as, even though Apple sees the rise and fall of Nokia as a cautionary tale, history suggests that product development in a commoditized market tends to be slow. Most companies see little to no point in spending hundreds of millions of dollars to marginally improve a product that will likely sell at the same price point as before. That's the sort of context in which a short-sighted CEO of a company like Hewlett-Packard might decide that it no longer makes sense to fund research that is not directly aimed at turning a profit, or why a similarly short-sighted company's products might go from excellent to "good enough" in order to increase margins by decreasing production costs. (Am I talking about the same company?)

One might argue that televisions have seen marked advances in technology despite being a largely commoditized market, but that has been driven in no small part by the introduction of HDTV and the money poured into the development of new displays for computer users and commercial settings. Even in that context, major players like Panasonic have a very difficult time turning a profit, and the pool of companies that produce television displays and sets is not expanding.

One area that has seen a surprising lack of innovation is the desktop computer market. That's in part because it's a tough nut to crack - computers do pretty much what we want them to do, there are no obvious ways to dramatically improve the user interface, and the technologies for interacting with computers other than through a mouse and keyboard tend to focus on niche users or turn out to be largely impractical. It may be that one day we'll have displays and "no touch" gesture controls as shown in the film, "Minority Report", but that's not on the horizon. Basically, the desktop computer market seems a lot like the television market. To the extent that incremental improvements are seen, they're in no small part the result of R&D in the mobile marketplace. The biggest "innovation" we've seen in a desktop operating system was Microsoft's annoying, clumsy interference with the user experience by putting a "smart tile" display between the computer user and the desktop - that is, they tried to make the desktop experience more like mobile, never mind whether that makes sense. Apple has made similar, albeit less in-your-face changes to its desktop operating system, with its Launchpad and App store, but they're really not part of the ordinary desktop experience.

Somebody commented to me recently that Apple seemed to be "giving up" on the competition for desktop computers. I responded that they're chasing money and market share, and that right now they can find both in the mobile space while there is little incentive to try to claw out a greater market share in the desktop market. The cost of significantly expanding their desktop presence would be significant, and there's really not much money to be made in that market. Were Apple to start producing $300 - $600 portable computers it might find a market, but it would have to make the quality cuts that are readily apparent in computers in that price range, potentially costing it brand loyalty over the long run in the same manner that the low quality Apple products of the Sculley era damaged Apple's reputation and competitiveness. Why mass produce low-cost computers that have to be sold at tiny margins and that would likely have an impaired user experience, when you can continue to sell $1000+ computers that people enjoy using, and sell millions of highly profitable iPads to the sub-$1,000 market?

Really, though, the desktop industry needs to be woken from its complacency, much in the manner that Google and Apple rebooted then-stagnant browser development with Chrome and Safari. The problem being, you either need a company that sees a long-term gain in developing new technology at a significant short-term cost, the way Xerox PARC laid the foundation for the computer mouse and windows-driven displays, or because they don't want to be indentured to a competitor's product. And if you take the HP Labs / Xerox PARC approach, you also need a visionary who can see how a new idea can be improved and put into widespread use - after all it was Apple, not Xerox, that turned the mouse and menu/windows-driven interface from an impractical lab-based demo to the desktop standard.

The manner in which the world, and Apple, has changed is perhaps best illustrated by today's quiet announcement that the iMac has been updated. You can go to the Apple Store and buy one today - but the new version isn't even flagged as "new". A secondary illustration comes from the Mac Pro, the high-end computer Apple develops for the professional market, which is soon to be released in an innovative new case. But that's innovation in the same sense as the Mac Mini was an innovation - great design and packaging, but nothing you couldn't have accomplished in a traditional mini tower case. Apple did promote the redesigned Mac Pro, some months back, but when will it actually come to market? Later this year. There's no sense of urgency, as there is in the highly competitive mobile marketplace.

An argument can be made that when a technology reaches a certain point of maturity, all new developments will be incremental. Perhaps the keyboard and mouse-driven desktop computer are pretty much it - and unless the entire concept is reinvented (much as the iPhone reinvented the smartphone market) this is it. People seem disappointed when the new "state of the art" smartphone looks like the old one - as if there's a great deal you can do to differentiate the hardware of a typical smartphone in ways that are obvious or exciting. Even in that market, unless a new, disruptive technology comes along the biggest future changes will come through software. In fifteen years, today's typical smartphone and tablet apps are likely to look about as sophisticated as Pong. But still, it would be nice to have a sense that somebody out there - somebody positioned to disrupt the market - was looking at "impractical, unworkable" new ideas from a different angle, and asking, "What if...."

The Not-So-Cheap, but Colorful, iPhone

With Apple releasing a "cheap" iPhone that's $100 less expensive than its flagship model, and with the price gap being even smaller in China, the Wall Street Journal opines that the new iPhone may not be cheap enough for China.

With the cheaper phone, Apple will no doubt gain sales and market share. But it will still fail to reach the majority of city dwellers, according to a projection from the Wall Street Journal based on income distribution data from research firm CEIC Data.

The projection, developed in consultation with analysts, assumes that a working, urban family would be willing to spend, at most, half of its total monthly income on a single smartphone. Working on that assumption, around 260 million Chinese urban residents could potentially be willing to buy the iPhone 5c. That means cheaper iPhone effectively doubles Apple’s addressable market from the 125 million who would be willing to shell out for the more expensive handset.

My guess? Apple will sell iPhone 5c's as fast as it can make them, rendering moot the idea that it would sell more at a lower price. You can only sell your product as fast as you can make it. The new design is visually striking, and I think that's about more than just giving people a variety of colors to choose from. I think Apple designed the 5c with the goal of letting its customers in nations like China telegraph to their peers, "I can afford an iPhone." Given how status-conscious and luxury brand-focused Chinese consumers are reported to be, that's no small consideration.

It also means that an Apple phone is still too pricey to appeal to roughly 430 million people, or 62% of the country’s urban population.

So... only 263 million prospective customers, who happen to be the more affluent members of Chinese society. Apple sold 31.2 million iPhones last quarter, worldwide.

I appreciate the article's assertion that most Chinese consumers are looking for a phone that costs less than half of the price of a new iPhone, with many wanting to pay less than a quarter. But that's not a market that Apple is presently willing to serve, nor would it make sense for Apple to abandon its traditional business model and to start producing iPhones that could be sold at that price level. Will that give Android an advantage among bargain hunters? Yes, as will the array of larger-screened Android phones. But you don't make profits by selling low-quality merchandise at razor-thin margins, which is why Apple and Samsung are the only mobile phone manufacturers who are presently earning a significant profit from phone sales.

Smartphones will eventually become commoditized, a process that is accelerating with the release of attractive Android phones from several of Samsung's competitors. Apple won't be able to sustain its margins forever, although it is positioned to be the last man standing. The trick then becomes, how to leverage your platform into continued, significant profits. Apple has a number of advantages in that respect, including the fact that it has been careful to maintain backward compatibility in its devices. With most iPhones running the latest version of iOS, and with every iPhone built to Apple's standards, third party manufacturers can develop products and services that connect with the iPhone much more easily than they can with Android devices. It can only help Apple if, while Android remains the operating system of choice for bargain hunters, it holds its position as a phone of choice for affluent consumers around the world.

Even as the WSJ article suggests that Apple needs to make cheaper phones, it acknowledges the problem with that position:

Ma Tao, who owns a shop on the second-story of the electronics mall, echoed concerns that have already been voiced by some analysts: that the new phone would lead to a short-term spike in sales, but that it would erode Apple’s reputation as a maker of luxury high-end phones in the long run.

Meanwhile, the phone vendor they interviewed suggests that Samsung sales in China will suffer as customers opt instead for a considerably cheaper, Chinese "equivalent". It may turn out that Chinese consumers opt for the flagship iPhone, in silver, graphite or tacky gold, and those products are also designed to telegraph, "This is an iPhone". I'm taking a "wait and see" position on whether keeping the price "that close" will turn out to be a mistake, but I'm suspecting that for now it's a good move to maintain luxury pricing and to appeal to brand-conscious Chinese consumers, giving them a discount but also a brightly colored excuse to argue, "I picked this one because it's my favorite color, not because I wanted to save money".

I think that the article glosses over one of Apple's significant problems in the Chinese market - the size of its displays. The concept of a phone that you can operate with one hand is great, and Apple should continue to offer the standard sized iPhone. But if you've ever squinted at a small screen, consider what it would by like to read Chinese or Thai characters on an iPhone screen, or to enter text in an Asian script. Then consider the population that wants a bigger screen because it's better for videos and games. Or because they only want one device, and are attracted to the phablet.

If I were Apple... and I admit an uncanny knack for being incorrect in my Apple-related predictions... I would be thinking about releasing a larger-format iPhone no later than a year from now, and ideally in the spring.

Apple and the Decline of Microsoft

If the take-away is that big companies can sometimes lose track of how to compete effectively with smaller, nimbler, more innovative successors, there's nothing new to that story - it bears repeating, it's something companies should try to remember as they get big, and it's something most companies seem to forget given enough time, success, and/or an unfortunate choice of leadership. Paul Krugman argues that Apple could follow Microsoft into decline, and that it's situation could potentially be worse as it sells consumer products and thus isn't as insulated from market forces as Microsoft, which benefits from having lazy IT departments refuse to support Apple products. But that makes Apple more like Hewlett-Packard, a once great and innovative company that produced quality products, then lost its way under incompetent, bean-counting management that slashed its research budget and didn't care about quality. For that matter, you could compare the future theoretical decline of Apple to the past, actual decline of Apple, where bad decisions by Steve Jobs and his successor all-but-destroyed the company before Steve Jobs returned from NeXT with a much improved vision for the company. But for Apple's reinvention of itself, odds are that we wouldn't be fretting over whether the next iPhone will be only incrementally improved over the prior model and that Android would still be a Blackberry clone. Let's recall, Apple's big profits come not from software, but from hardware.

Krugman writes,

The story of how that state of affairs arose is tangled, but I don’t think it’s too unfair to say that Apple mistakenly believed that ordinary buyers would value its superior quality as much as its own people did. So it charged premium prices, and by the time it realized how many people were choosing cheaper machines that weren’t insanely great but did the job, Microsoft’s dominance was locked in.

On the contrary, I think Apple is painfully aware of the fact that many consumers, particularly those at the low end of the market, are choosing Android devices. Although Apple still suffers more than a bit from the Steve Jobs attitude of, "We know what you want better than you do" (an attitude Krugman notes in a blog entry on the subject) - and in fairness to Steve Jobs, at least during his second tenure at Apple he was often correct - they don't market their most profitable products in the manner that Krugman suggests. They're not trying to convince you to buy a $599 iPhone versus a bottom-of-the-market $100 Android phone. They're trying to get you to sign up for a two year contract with your phone carrier, with much of the purchase price being built into your service contract and your nominal purchase price being not much different from a low-end phone.

In terms of quality and pricing, for quite some time Apple's computers have stacked up quite well, feature-for-feature, with the diminishing pool of well-constructed PC's. But it has been my impression from the lack of development of their desktop market that they aren't interested in trying to make a huge - or even a modest - push for market share within that diminishing market. Not surprisingly, they like to manufacture products that are profitable, something that very few cell phone manufacturers do. They and Samsung presently sell cellular phones at a profit. Thanks to the increased quality of competing products, I suspect that Samsung will soon find itself facing a commoditized market for higher-end cell phones and Apple will be the last cell phone company that makes a significant profit from its hardware. Then, barring the unlikely event that we get something as disruptive to the industry as another iPhone, Apple will no longer be able to sell its cell phones for an appreciable premium over the commodity price - and the entire industry will have to glean its profits elsewhere. Apple is trying to establish a reliable ecosystem - hardware and software that work well together, allow most products that remain in service to be upgradable to the current operating system, and are easy and reliable platforms upon which third party software and hardware developers can manufacture apps and iOS-compatible products. Despite Android's quality, the fragmentation of its operating system and the fact that many phone manufacturers don't care if a two-year-old handset can be upgraded will impair its ability to offer the same opportunities. Apple intends to make money, even in a commoditized market, from app sales and licensing fees.

Krugman appears to be focusing on major disruption rather than modest innovation, even as he brings Yahoo! and Marisa Mayer into the discussion. If the resurgence of Yahoo! is a story to be believed... and I'm a skeptic... its resurgence will be the result of improvements at the margins. And that story would not be atypical. The biggest fortunes tend to be made not by the person who comes up with a concept or invents the early version, but with the person who comes up with an upgraded version of the product - something that ships better, something that's easier to manufacture, something that's easier to use. When Steve Jobs saw early versions of a window-based operating system and mouse at HP's then-famous labs, he saw the potential to transform them and turn them into products for a mass market. Jobs wasn't the inventor of the cell phone, display panel or touch screen - but he and his company came up with an innovative way to combine them.

Microsoft committed some odd, oversized errors over the past couple of decades that have contributed to its downward slide. As Krugman notes, they didn't see the potential of the iPhone, but more than that they didn't see the potential of the Internet. As Krugman noted, a lot of Microsoft's past success was built on its monopoly power, but its best and most profitable products were not major innovations. Windows built upon work that Microsoft performed for Apple, in developing the operating system for the Macintosh. It's office suite built upon software products that offered similar functionality, perhaps with modest improvement (but often without, or with 'innovative' features that you couldn't wait to turn off), and became dominant through bundling. Its browser became dominant through bundling, leading to the decline of Netscape, but it lost interest in developing a cutting edge browser pretty much the moment it no longer perceived Netscape as a threat.

Contrary to Krugman's inferences, having never been a user of Apple products, Apple did not always have a quality advantage over Microsoft or its associated hardware developers. Windows 95 incorporated some features that it took Apple years to emulate, and after Jobs left Apple's hardware quality plummeted. For that matter, for all of its innovative features, the early Macintosh suffered from having too few programs and too little RAM, as well as the odd design compromises that came from Steve Jobs' disdain for internal fans. Microsoft's present plight emerges from its failure to effectively enter new markets as the old ones faded - as operating systems became "good enough" that companies felt no need to upgrade every year or two, and as its Office suite became "good enough" that any changes it made from year-to-year were not likely to bring new sales, and as its customers tired of its game of modifying Word files such that you had to jump through hoops to save a document that would open on an older version of its software. In that sense we're back to the legitimate fear for Apple as a hardware company - that unless it comes up with a remarkable hardware innovation it's looking at a future where its products are commoditized and while, despite some people sticking with the company due to their library of iOS apps, many customers come to see little reason not to change platforms. Apple is trying to look beyond that day, and Google is struggling to convince Android developers to follow standards that will allow it to keep up.

Apple's biggest problems seem to come from copyright law, and entrenched monopolies and oligopolies. It is having difficulty coming up with a television product because of the difficulty of licensing content from media companies. Its products rely on Internet bandwidth, with many customers obtaining that bandwidth from cable monopolies. The iPhone demonstrated how you can create a breakthrough, profitable product in a tired, commoditized market, but without content there's no apparent room for a similar move in television. Also, most televisions these days would qualify as reasonably powerful computers, so it's not clear that Apple could offer a disruptive product that would not quickly be emulated, perhaps less artfully, by its competitors. People talk about an iWatch, and I think it is inevitable that Apple will produce a wearable device of some sort... although I don't think it is likely to be a watch in the sense that we have traditionally used that word, either in how it's worn or what it does, but all we can do at this point is speculate.

Google is, in a sense, playing Microsoft to Apple's iOS, offering a version of highly similar software for free, Microsoft Internet Exploder vs. Netscape's browser. I sometimes wonder if Google will continue to provide free operating system development for the world, or at least if it will be as quick to make its greatest innovations part of the core as opposed to part of a proprietary add-on, particularly as it attempts to spin Motorola up into a dominant manufacturer of Android phones. As with all of this stuff, time will tell.

What if the Facebook Phone... Isn't a Phone

What if it's a takeover?

You'll find lots of explanations about why it would be a bad idea for Facebook to develop and market its own cellular phones. And it's hard to argue with that. But what if Facebook has a different plan in mind? An Amazon-style plan, forking Android, pushing its own app store to the forefront, then cutting deals with cellular phone manufacturers to use Facebook's flavor of Android instead of Google's version on their already-compatible hardware? The change could be made pretty much invisible to the average consumer, but with Facebook driving traffic through its own browser, pushing out more of its own display ads, baking in new features like its camera and perhaps instant discounts, "buy with Facebook" allowing you to use your phone as a charge card, and the like?

If Google ever gets tired of carrying the weight of its competitors and changes the way it licenses Android, Amazon and Facebook will still have its latest edition of Android as a foundation for their own cellular operating systems.