I was reading coverage of a recent Steve Ballmer talk, in which he recommended that Apple separate its hardware and the software businesses, much as Microsoft did with Windows if Apple wants to gain dominant market share. This is an interesting suggestion, and I think one that would be fun to explore for a number of reasons. Two of the biggest software players in the phone market (Google and Microsoft) are going down this separation path, and Apple, much like they were in the 80’s, is not.
But does history have to repeat itself? I’ll probably end up with a definite “maybe,” but follow along if you want to see how I get there.
Apple the Software Company
Apple sells a lot of software, but is more like the pre-1980’s IBM in that its software, and services like iTunes and MobileMe, are there to help sell hardware.
This means, at its heart, Apple only values software as a tool to sell hardware. This is hard-wired into the company’s DNA, and in this regard, it’s virtually the opposite of Microsoft. Currently, we have an example company in the market, Sun Microsystems, being run by a software guy who thinks he can change Sun, a hardware company, into a software company. If I were to say “it isn’t going well” I’d be making a huge understatement.
So, even before we start, I would argue that, were Apple to go down this software path, the most successful plan would probably be to spin the software unit out and sell it to a software company like Microsoft. Having tried to drive a similar effort at IBM a while ago, I can categorically say that path has very low probability of actually happening. Any other path hardware independence would simply not work, given the company’s focus and culture. So, even if Steve is right in general, this approach would not work for Apple.
However, being able to build on multiple hardware products does result in more market share, and assuming you can maintain adequate quality (that is a big assumption), Steve Ballmer is right that this is likely one of the faster paths to dominance in a market that is becoming PC-like.
On the other hand, if you can’t maintain quality, you can’t optimize profit. Apple has showcased the fact that with the right product, you can become one of the most, if not the single most, profitable vendor in the segment. In my world, profit is more important than market share, though it is important to have both if you want to protect the profitable position you have established.
This last point is increasingly being demonstrated as competitors like Nokia, Samsung, RIM, LG, and HTC continue to bring out products that nibble away at the iPhone’s market potential this year. If the Google or Microsoft platform can close the experience gap, the iPhone will be in deep trouble, because these companies can scale to bigger numbers very rapidly. And because they serve multiple vendors, they have more chances to hit specific customer needs than any one vendor, no matter how well-marketed.
With the MP3 market, Apple has demonstrated that a single vendor can dominate if it can scale large enough, and in other markets it generally is a hardware vendor (not a platform) that is dominant. But you have to be able to grow in capacity quickly – moving from a Volvo-sized company to a GM- or Toyota-sized company, or you are likely to be simply overwhelmed. The MP3 market is about an 100-million-unit market worldwide, while the cell phone market is estimated to be around 3.3 billion, or too large for any existing single vendor to embrace. Nokia probably comes the closest, and if you look at mega manufacturers like LG or Samsung who are in the market, if any ever hit the iPhone, Apple could be left with a niche.
One thing I think everyone misses, however, is that control of the market currently doesn’t lie with either the cell phone vendors or platform vendors: It lies with the carriers who typically define, with some regional exceptions, the products you get to purchase. Both Nokia and Apple have tried, with Apple having more success, to break this model. But as a result, Apple is actually locked out of some major markets, like China.
The carriers are king makers. If they, not the customers, get the biggest vote, than it doesn’t really matter how dominant you think you are. You don’t control your own product, nor do you control the user experience, and you’re just fooling yourself as to the market power you actually have.
If control is important – and I would argue it is, because happy customers come back and allow you to sustain the market share and profit you have – then the model that allows the greatest control is likely the best one in the long term. Unfortunately, this may mean you have to trade off market share for profit, because the carriers make this an either/or question, with no real ability to get both.
Wrapping Up: Ballmer is Right and Wrong
Steve Ballmer is clearly right that separating the OS from the platform could lead to greater volume and market dominance in terms of numbers. He is wrong that Apple could successfully do this, and he avoids the question of the most profitable path (which appears to be the one Apple is already on) while also ignoring the problem of control. I don’t think you can, or should, separate profitability from success, or control from dominance. And personally, I think profitability and control are the more important elements.
Google, once its Android platform matures, will be the more interesting test. It seems to be addressing the scale issue that Ballmer talks to, while also trying to address the control issue that makes the iPhone so popular. Google is a software-and-services company as well, so there is less transition risk (though still some, because they are more about services than software). The Google product will need to improve some, however, to see if its blend of Microsoft and Apple concepts is, in fact, the best path. In one to two years, we should know whether Google has surprised both vendors by picking the middle road.
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