Should Apple Open Up?

Sticking to its proprietary approach has succeeded wildly, at least in digital music. Even in computers, Steve Jobs's strategy has its advantages

Throughout Apple Computer's (AAPL) history, debates have raged over its refusal to share its technology. Fans say a go-it-alone strategy lets Apple keep cranking out high-quality, innovative products that merit a premium. Detractors consider Apple wares overpriced and say it should open up its code, letting partners create products based on Apple technology -- the way Microsoft's (MSFT) PC allies back Windows.

And while some have disagreed over just how big a niche Apple could gain through its top-shelf approach, the debate never centered on whether it could dominate markets, at least in the area of computers. After all, with scores of PC and software makers investing billions of research-and-development dollars and competing to push down prices, there was no way Apple could win the mother lode of customers -- regardless of how slick its products were.

But some management experts say it may be time to rethink that view -- at least in the realm of emerging digital consumer markets. While price and the ability to run a gazillion programs may be king when it comes to PCs, it takes something different to sway folks hungry for entertainment. There, it's about style, the right mix of killer features, and, most of all, a headache-free experience in which stuff just works.


  Exhibit A is Apple's soaring success in the digital music market. Ever since the iPod starting taking off in 2002, many experts felt it was only a matter of time before Microsoft, backed by dozens of hardware and software partners including Samsung, Napster (NAPS), and Wal-Mart (WMT), would take the lion's share of this emerging market. Well, there's no sign of that happening.

During his keynote speech at the annual Macworld show on Jan. 10, Chief Executive Steve Jobs said Apple sold 14 million iPods in the final quarter of 2005, blowing away most Wall Street expectations by 20%. Jobs pointed to a graph showing how iPod sales are not only rising but the pace of growth is accelerating. "The slope of this curve continues to get steeper," he said admiringly.

Apple is building its iPod empire with a model that's more akin to the traditional consumer-electronics approach than the path pursued by Microsoft in PCs. Products such as Nintendo's game consoles and more recently Sony's (SNE) Playstation, as well as Tivo's (TIVO) set-top boxes, are all based on proprietary technologies rather than wide-open industry standards, says Geoff Moore, author of Crossing the Chasm.


  That way, Apple can work out kinks so that products do their defined tasks with no hassle -- in a way that consumers are willing to pay a premium to get. When the job is to create a superior consumer experience, says Moore, "it's better to have closed systems, both for the supplier and for the consumer."

Harvard Business School professor David Yoffie agrees. "As digital technology companies begin invading the living room, it's not at all clear whether the iTunes approach or the PC approach will win," Yoffie says. "Consumers care about the quality of the experience."

Of course, not everyone see it that way. Yoffie's Harvard colleague, Clayton Christensen (see BW Online, 1/9/06, "How Apple Could Mess Up, Again"), thinks Apple will have to emulate Microsoft's approach at some point by licensing iTunes and related software to other companies that want to sell digital music. This includes Apple's Fairplay digital-rights-management software, which works only with iPod and iTunes. Otherwise, as the market matures and customers no longer hanker for Apple's latest innovations, those currently frustrated iPod rivals will eventually forge industry standards that allow them to get into the game with cheaper alternatives.

What's more, for all of Apple's runaway success, more than 90% of music is still distributed via CD rather than over the Net. Clearly, the market is young, and the war isn't over.


  But if that time is coming, it's certainly nowhere in sight. Indeed, many analysts interviewed at Macworld think Apple will have little trouble holding or even expanding its market share in digital music this year. Apple's huge quarter for iPod sales "puts a lot of pressure on Microsoft and its partners," says Jupiter Research analyst Michael Gartenberg.

That's especially true, given a lack of blockbuster new iPod rivals among the throng of digital music devices announced at the Consumer Electronics Show earlier in January. "I was very disappointed with the competitors to iPod," says Banc of America analyst Keith Bachman.

Indeed, some analysts think the Microsoft model that worked so well in PCs -- sign up lots of partners, and let them all go develop the market -- may in fact be hurting Redmond's efforts in digital media. "For two years now, Microsoft has been talking about how it has 60 hardware partners" that make music players that work with music services based on its Windows Media technologies, says Gartner G2 analyst Mike McGuire. "That's not an advantage. That's a disadvantage!" because consumers have learned that not all the devices work properly with the various music services, he says.


  All of this has at least some tech insiders thinking in new ways. One PC industry veteran says he's concerned that sooner or later, Microsoft will decide to develop its own digital media hardware that's hard-wired to work with its software to provide iPod-like ease-of-use -- much as the software king did in the game console market with the Xbox. So PC makers should get started developing their own proprietary systems, he says. "I think PC companies need to move, before Microsoft does," says the source.

What does all this mean for the Mac? Clearly, Apple is poised to continue to pick up share with its new Intel-equipped products, including the MacBook Pro laptop, which will ship in February, and the new iMac, which is already available. Still, the Mac still has a piddling 3% share of the $250 billion PC market, and these pricey products won't move the needle by more than a point or two, say analysts.

True to form, Jobs seems to be going for profits rather than market share by coming out with higher-price models first, rather than a lower-end replacement for the long-in-the-tooth iBook that many Apple watchers expected. Says Piper Jaffrey analyst Gene Munster: "Is Apple going for market share, or going for cool? Sure, they'll pick up some market share," as consumers snap up the new models. "But they have not put the hammer down."

That said, the Intel alliance opens up intriguing possibilities for a much bigger market-share offensive. For starters, Jobs said Apple plans to transition its entire product line to Intel chips in 2006. That will include the iBook and the Mac mini, both lower-price products, not to mention whatever new goods Apple might choose to unveil. "Jobs probably doesn't have the capacity to ramp up [to meet demand] anyway, so he's starting with the higher price points," says one insider.


  And Apple always has that age-old option of licensing the Mac OS to other PC makers. It has done this only once in its history, during the dismal days of the mid-1990s. Back then, only a handful of small companies and Motorola (MOT), which made the PowerPC processors used in Macs at the time, took the offer. Now it might be a different story, as PC makers might see the opportunity to jump on Apple's coattails and participate in one of the hottest segments of the PC market.

Nevertheless, few people think Jobs would ever consider this option, as Apple would have to contend with cut-rate cloners, rather than focus its attention on building its carefully crafted products. "I think they'd be afraid of corrupting something beautiful," Munster says.

But Apple has an intriguing new possibility now, as a result of the move to Intel chips: license Windows, and have it run in Macs alongside the Mac OS. That way, consumers could run their trusty Office applications such as Word and Excel using Windows and also have access to Apple's slick iLife programs -- whether it's for listening to music via iTunes, managing photos using iPhoto, or creating multimedia Web sites with music, videos, and podcasts using Apple's new iWeb program.


  "I think it would be a very smart move," says Mike Kwatinetz, a venture capitalist with Azure Partners who was a highly regarded PC industry analyst during the 1990s. "As it is, it would be very difficult for Apple to get double-digit market share. Having a dual-OS Mac might change that." Munster thinks Apple could even grab up to 20% market share if it priced such dual-OS products aggressively.

"There's that much interest in the Apple brand right now," he says. "But it all depends on what Apple wants to be. If it wants to gain market share, there are some pretty simple steps it could take to do so."

It's highly unlikely that Jobs is going to make any radical changes to a business plan that's working so well. He has said Apple has no plans to license Windows. But just the fact that it has the option is a testament to how far this company has come.

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