It's Time to Dredge Up the Old Licensing Question Again

Peter Burrows

First, the caveats: there's as much chance that Apple will license the MacOS as there is that Steve Jobs will show up to his next keynote wearing a dress instead of the usual attire. Secondly, he's probably right not to change course, because there's plenty of evidence that Apple's proprietary approach is the way to go to win the huge consumer electronics and digital media markets that are now opening up.

But humor me anyway, because it's actually an interesting time to consider the question. For thirty years now, many have bemoaned Apple's refusal to license its operating system back when it was the market leader. But on paper, at least, conditions right now may be as good as they'll ever be to make such a strategic about-face. This was the case even before Microsoft slipped its latest delivery date for Vista (Can you still call it a slip, if the delay is now going on year four from the original timetable?). With that Vista delay, the potential impact of licensing the Mac is even more fun to think about.

For starters, as has been broadly documented, the Mac is on a roll. Yes, there's concerns about the current quarter--but those are mostly related to constrained supplies, rather than a lack of demand. And while Apple is doing a remarkably quick job of converting to Intel, it has replaced only half of the product line so far. Most analysts I've spoken with think the Mac is destined for market share gains in the coming years, as it cranks up its supply chain and fills out that product line to address more price points and market segments. Citigroup's Richard Gardner thinks the Mac can gain a point of share a year just by doing what it's doing: making great-looking, easy-to-use products that have fewer malware problems than their Windows brethren.

That's without any major tweak in strategy to drive greater compatibility with Windows, which is now possible given the move to Intel. Needham & Co. analyst Charlie Wolf is convinced that by the end of the year, Mac users will be able to run their familiar Windows apps--either by making it possible to run Windows alongside the MacOS, or by enabling said applications to run from within the MacOS itself (perhaps via some new whiz-bang emulation technique, he suggests). If Wolf is right, the Mac would suddenly become a relatively risk-free alternative for millions more consumers.

Of course, these steps are by no means assured. Apple says it has no intention of supporting Windows on the Mac, even though it is now possible--though evidently not particularly fun--to get XP to run on Apple hardware. I tend to think if anything happens, it will be along the lines suggested by Robert Cringely in his predictions for 2006. He figures that Apple won't want all the hassles that come with being a Windows licensee (One reason the PC biz has been so awash in red ink for the last half-decade is that PC makers have to pay for the zillions of customer service calls that result from Windows-related problems.). But maybe it won't have to, Cringely argues:

Here's how I believe it will work. Apple won't offer versions of OS X for generic Intel hardware because the drivers and the support obligation would be too huge. But just as you can buy a shrink-wrapped copy of 10.4 for your iMac, they'll gladly sell you a shrink-wrapped Intel version intended for an Intel Mac, but of course YOU CAN PUT IT ON ANY MACHINE YOU LIKE. The key here is to offer no guarantees and only limited support, patterned on the kind you get for most Open Source packages -- a web site, forums, download section. and a wiki. Apple will help users help themselves. With two to three engineers and some outreach to hackers and hardware makers, Apple could put together an unofficial program that could easily attract two to three million Windows users per year to migrate their old machines to the new OS. Imagine the profit margins of three engineers effectively generating $300-plus million per year in sales.

But I digress. While Apple might be able to pick up market share by playing more nicely with Windows, what about trying to beat Microsoft at its own game? Now that Vista is slipping, imagine the effect if some PC bigwigs -- the dream team in this regard would be Michael Dell and HP's Mark Hurd -- stood up at the next Worldwide Developers Conference in August and announced they had inked a deal to sell MacIntels. Certainly, these PC giants are going to need something to sell this Christmas season, rather than another round of lame duck Windows XP machines.

In fact, in January Dell expressed a willingness to cut such a deal, according to Fortune's David Kirkpatrick. If true, Dell would be more motivated to do so now, given Vista's delay and Dell's own woes. Such a deal would certainly generate more buzz, and probably sales, than Dell's acquisition of Alienware is likely to bring.

What would licensing the Mac do for Apple? For starters, it would line up powerful allies to help bring the Mac to places it has yet to go--not only by hitting new price points and targetting new kinds of customers, but by expanding Apple's geographic reach. Says one PC industry exec: "Apple still offers the best user experience, but they can’t scale to meet the market opportunity. In many countries, they're not even present."

Then, there's the potential licensing payday. Longtime PC analyst Roger Kay, who runs Endpoint Technologies Associates, figures Apple could command, conservatively, $30 per OEM copy of the Mac. Just for illustration purposes, suppose Apple grabbed 10% share of the 200 million unit-a-year PC business. That's 20 million copies, or $600 million in extra annual revenues--at at syrupy-sweet 80%-plus margins, verus 25% or so for Apple's own Macs. (It sounds nuts to me, but some think 10% share would be easily surpassed. Piper Jaffrey analyst Gene Munster thinks 20% is doable.).

Then there's Apple's iLife suite. With consumers rapidly going digital with their music, photographs, and other forms of entertainment, the ease-of-use and integration of the programs that make up this offering are certanly in line with market trends. As such, PC makers would probably want to offer this software as well. If they didn't, many Mac clone buyers would buy the package themselves at the retail price, currently $80. Pretty quickly you're looking at annual software licensing revenues, and even profits, of $1 billion-plus. (Once it jumped on the Mac bandwagon, Dell might even want to distribute iPods as well, rather than continuing to hawk its DJ Ditty).

So why isn't this a slam dunk decision? Because there are just as many reasons for Jobs to stay the course. Numero Uno is that his Apple is above all else a maker of hardware systems. Sure, there's software in the products, but the code serves the purpose of making those "insanely great" products and superior "experiences". Running a licensing program would not only divert huge amounts of time and money from that higher calling, but would undoubtely result in a torrent of mediocre clones that would fall far short of Apple's quality. And remaking its software strategy while still working through the microprocessor transition may be asking for one mega-move too many.

Then there's the competition question. I think this concern may be overplayed by many. Apple has proven itself to be a very efficient operator, that could probably hold its own fairly well. Nonetheless, making a market for cloners would undoubtedly take a bite out of Apple's own PC sales.

Even on this point, though, the current conditions are interesting. That's because as of last quarter, Apple brought in nearly twice as much revenue from digital music (59% of sales) than it did from the Mac (30%). Since iPod sales are expected to stay in the stratosphere for at least another year or two, any temporary hit to Mac sales would be more easily absorbed. With sales of iPods and any as-yet-unreleased digital entertainment products keeping Wall Street happy, Apple could focus on making premium products for its most discriminating fans. “Apple could remain a hardware provider to the faithful, or gradually wander out of hardware altogether," says Endpoint's Kay.

To reiterate, neither I, nor Roger, nor any of my other sources think Apple is going to license the MacOS any time soon, if ever. Apple is doing just fine as it is, and the company has hordes of other strategic alternatives--most of which involve staying focused on creating great new products and experiences of its own. But someone had to keep the "Should Apple License?" parlor game going--especially since at this particular juncture, it might actually be a viable strategic option.

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