Steve Jobs is a genius not just for being an innovator, but for “the subtle, yet enticing ways his phonemes affect our cognition.” Apple has created, transformed, and is responsible for the creative destruction of music, movies, and mobile phones; traditional industries where Apple had minimal experience and these industries are characterized by tremendous competition and razor-thin (and decreasing) margins. Despite this, Apple has revived those industries while increasing market share of its core computing business. Apple is rarely first to market when introducing new products or technology, but is the undisputed champion in intimately understanding the user. They don’t focus on being the first, they focus on being the best. They control the user experience and create a platform for external innovation with iTunes and the App store. Apple’s singular focus of owning the customer experience differentiates Apple from their competitors. This business model was almost their downfall over ten years ago, when conventional wisdom of creating software and hardware was a no-no. Doing both was considered a surefire path to failure because you couldn’t capitalize on the economies of scale and they were almost always premium priced to competitors. Apple excels at creating a superior product and service design built upon user observation, research, and scenario planning. They generate substantial buzz every time Steve Jobs plans to hit the stage, and over time, their products are integrated into the ecology of our daily lives. Apple is more concerned with how the technology and design might be reused in the future, which encourages cross-pollination and a recycling of ideas, talent, and engineering.
Going against the grain and having a home run product in the iPod, has now transformed Apple into a $50 billion company (annualized from their quarterly earnings report). From the most recent quarterly report, they have posted revenue of $16 billion, on $3.5 billion profit, with gross margins up to 40.9% from 37.9% this time a year ago. The company has sold 8.7 million iPhones during the last quarter, a 100% growth over the year-ago quarter. The iPhone has cannibalized the iPod to an extent, with only 21 million iPods sold during the quarter, an 8% decline from the year ago quarter. But, the iTouch has had tremendous growth. During Steve Jobs’ iPad unveiling last week, he revealed Apple had sold 75 million iPhones and iPod touches so far. Apple sold 42.5 million iPhones through the end of 2009, which could have reached around 44 million by the end of January. This intimates iPod touch sales could be up to 31 million by the end of January.
Despite all of the success and the Apple resurgence, Apple deeply understands they do not have the monopoly of good ideas. They enabled third-party developers to create end-use applications for mobile computing and communication devices. What many people (and pundits) forget, Apple was very reluctant to open up to this development platform. They shifted the risk from their development teams, to third-parties who could narrowly focus on industry verticals and the needs of the end consumer. In many ways, they have been criticized for not being overwhelmingly “open” but unless a competitor forces them to alter their stance, there’s no reason to. Why open up to Google Voice when controlling end users’ contacts are extremely valuable?
With the launch of the iPad, a hybrid of an iPhone and a MacBook, the release is less about the hardware, and more about the software. What is key to this is the strengthening of Apple’s software distribution channel, which works on all of their platforms (MacBook, iPhone, and iPad), synchronized, and lightweight enough with an ecosystem of solutions to attack every imaginable industry vertical and use case. All of these apps represent a business risk to once size fits all software providers, which makes the consumer better off in the end, by substantially lowering barriers to entry. Why do I need all of these expensive (and clunky) desktop applications, when I could have all of my data in the cloud? This also puts Apple on a collision course with the Google Operating System (GoogleOS). Hidden in all of the stories/reports of Apple has created a new processor, the A4 (customized ARM A9 processor) which signifies Apple is in control of every aspect of the device, signaling it will be coming soon to the iPhone. This means a faster, more seamless experience, with extended battery life, which will make the software much more effective.
We must remember the iPod launched without a music store and the iPhone was born without the App store. Imagine the power of a product launch with these embedded switching costs, a ready-to-go iPad SDK, and an installed base of customers are familiar with using the iPhone/iTouch. The iPad will be the glue with all of their product lines. It will make it easier for the user to switch between Apple products and will influence how we use them. With cross-synching of applications and software across all Apple product lines, the switching costs are ever increasing with increased usage. The iPad is intended for leisure web browsing, listening to music, watching movies, reading books, creating simple documents on the go, with much more robustness and functionality you can find on your average Netbook. The added component is the ability for developers to create iPad-only applications which could mark the new era in mobile computing. What we may see is the emergence of a hybrid computing device combining the best of graphics and power, while in a compact, yet mobile device. When I first heard the news of a $499 initial price point and a 10-hour battery life, for something this robust, I knew it was a game changer (it was my first tweet about the iPad, minutes after the announcement).
With this launch, the iPad effectively:
- Transitioned a movement from a GUI and QWERTY keyboard (Touch is the new black)
- Increased convergence of Phone, Web, TV, applications, software (not bloated web or desktop apps)
- Enhanced opportunities for traditional publishers to adopt sustainable business models in a digital marketplace
Interestingly enough, Apple has transcended the innovation process from customer insight to Apple telling us how we should operate, again contradicting conventional wisdom. In business school, we are taught to learn from customer insights, focus groups, and trial runs, but the most innovative companies do the exact opposite. Steve Jobs has mentioned several times he doesn’t believe in market research the way we are taught in business school. Nintendo’s senior marketing director once stated (in regards to the Wii) “We don’t use consumer focus groups. We got a lot of feedback from developers in the industry.” Henry Ford once said “If I had given them what they wanted, it would have been a faster horse.” Imagine if Apple had applied conventional customer insight when developing an MP3 player. It may not have been a game changer. Helmut Krone once stated “I always give them what they want, but never what they expect.” What’s missing from this iPad launch, and what I expect to come shortly after the launch, is an innovative business model changing the incentive structure for content creators, content distributors, and consumers to alter their way of doing things. This behavioral change in the value chain is at the core of Apple’s strategy, and could be the underlying story as to whether the iPad is as successful as Apple projects.
Despite my overwhelming support, the iPad launch has been met with many skeptics asking why we need another device, why we need a large iPhone, and where is the innovation. This is very similar to some of the claims were made about the iPod back in 2001.
Here’s some quotes from different, leading pundits:
- “I still can’t believe this! All this hype for something so rediculous!….I want something new! I want them to think differently! Why oh why would they do this?! It’s so wrong! It’s so stupid!”
- “All that hype for an MP3 player? Break-thru digital device? The Reality Distortion Field is starting to warp Steve’s mind if he thinks for one second that this thing is gonna take off.
- “Not revolutionary. Big capacity MP3 players already exist. With Creative Labs’ entrance into the firewire arena, future nomads will have similar specs and better prices”
- “A bad fit. This product is outside Apple’s core competency-computing devices. When many are calling for a pda, they release an MP3 player”
- “Without a future. This Christmas you will see MP3 players be a commodity. The real money is in DRM and distribution. If Apple were smart they would be focusing on high gross revenue from services rather than a playback device.”
Other critics have slammed the launch because of the lack of additional features and functionality of the device, such as Flash, USB ports, HDMI support, AT&T connectivity, mutlitasking, cameras, touch keyboard, not widescreen (reported 4:3 ratio), and the name of the device. These are necessary features, but the goal for Apple was to target the lowest price point (and battery life). This was immediately reflective in their stock price immediately after Steve Jobs made the announcement. We must remember this first generation is targeted towards the 75 million iPhone/iTouch users who are familiar with the Apple touch interface, and don’t require a learning curve. They are early adopters, more price inelastic, and more than likely, own several other Apple products, so they can serve as evangelists of the opportunity to use multiple Apple devices. This is at the core of what Apple is selling with this opportunity. Expect the next generations to be lower priced (can we say $100 computer?), with many of the features and functionality Apple’s iPad critics want, as long as it doesn’t interfere with Apple’s ability to maximize revenue. Personally, I’ll wait another generation or two and let Apple fix the inevitable bugs, features, content distribution deals, e-ink display option, and price drops. Right now, the concept car looks good.
This is not a Kindle-killer, but will stunt the Kindle’s growth. Kindle does one thing very well, makes it easy to read books. Apple is more focused on the experience. Purists will appreciate the Kindle, but it represents a relative minority compared to Apple’s target market. The Kindle can’t compete with Apple by offering a robust app store, because the Kindle is far too slow at the moment, and foreseeable future. If you ever see a demo of the Kindle, the ease at which you could read magazines and newspapers pales in comparison to the iPad. The iPad will enable more interactivity with content, and will blur the line between what and how we read, see, and interact. In many ways, this could change how kids grow up.
At a price point of $100, can you imagine how many of these touchscreen devices will be in classrooms, homes, family trips, and in all of our businesses?
Note: I normally pride myself in not being an Apple or Google fanboy. I normally reserve judgment on the direct value of their products, and less on the potential to be a game changer. I wasn’t too fond of the MacBook Air when it was released, and I have continually had a lukewarn response to most of Google’s new products and services. Lately, my tone has changed, and I am starting to see an effective strategy coming from the tech titans. It’s encouraging and exciting. The iPad is the latest launch has generated more buzz than Tiger Woods’ affair. Within hours of the launch, there were several million links for a Google search, and for many early adopters, techies, and fanboys, we were frozen during Steve Jobs captivating release.