Both Microsoft and Apple belong to the Most Innovative Companies category, however, we rarely see anything original from MSFT, instead, they are widely accused of copying ideas from Apple. I guess the reason MSFT is in this category is because the Windows OS has an innovative meaning to the entire human being. And this type of innovation doesn't necessarily indicates creativity, which, on the other hand, is the exact characteristics that differentiates Apple from the rest.
On the other hand, Microsoft is the indisputable monopolist in the Operating System world, owning around 88% of the market, and Mac OS, around 10%. However, according to many users that had experience in Mac, the OS from Apple is so much cooler than Vista, and for years, there have been voices arguing that Apple should license the OS to the OEMs, the same way that Microsoft sells its flagship product.
Here are some thoughts on the rivalry.
1) Why is Microsoft less creative?
With such a dominating market share, you may think that the business operation environment for MSFT won't be that tough. But it is the opposite - MSFT is constantly under immense internal/external pressure, which exhausts its power to stay innovative.
First, internally, the Windows OS, if not the most complex software system in human history, is well qualified to be one of the most complex ones. Virtually it is like a platform of your daily life, somewhat matching the unlimited possibilities in real life. To develop and support such a system is a daunting task for any single company. Think about it, billions of dollars in budget, thousands of developers, hundreds of modules, dozens of versions, iterations, releases, integrations, testings, code bases, documents ... there is an endless task list. If you have the experience managing a one million dollar project, you know it only takes a few mistakes to see your process spin out of control. Then try to imagine this monster at MSFT's hand. I have no clue how MSFT manages the life-cycle of Windows, but for sure it is a process demanding rigor, consistency, cautious planning and solid implementation. I won't say these values prohibit creativity, but for sure, they won't encourage creativity.
Second, Windows is an OS independent of the hardware, and MSFT only specifies the minimum hardware requirements. We understand that this is required for MSFT to maximize its market share. And the result is, MSFT has to deal with the compatibility issue with hundreds of hardware variations. On the other hand, the OS is a platform, i.e., it opens its interface for thousands of other software companies to build upon, which creates another compatibility issue. Then adding the challenges created by rapid evolving technologies and backward compatibility, these could easily turn into a disaster that devours the company. Again this is the daily task of MSFT.
Third, Windows is estimated to have more than 1 billion users worldwide, which means it is open to unlimited possibilities/challenges/risks created by the immense brain power of a vast crowd, where exist countless usage patterns/habits, unbelievable stupidity and unimaginable brilliance, geeks, hackers, pirates, virus writers, Windows lovers, Microsoft haters..... As an indicator, MSFT never escaped from the criticism about the security flaws of Windows, even after spending billions of dollars year after year attempting to fix it. Here, code quality actually is only one side of the story, the other side, the enormous user base.
In summary, all these demanding tasks that fill the daily life of MSFT ultimately defined the overall operation atmosphere and corporate culture. Here, the top priority is about being solid, thorough, proactive and making less mistakes. Then how about creativity - stay original and novel? Sure it is nice to have, but it is fine to live without it. It is a shame to copy ideas invented by others. But business-wise, what is the big deal? As long as it is legal, it simply means less cost.
2) Why is Apple more innovative?
At first glance, it looks in the CPU market we have a similar competition pattern with Intel controlling the market and AMD as a challenger. Here, the dominating market share gives Intel extra power over AMD, because it may directly squeeze the margin of AMD by reducing the price of its own chips. You may think that in the OS world, MSFT would have the same leverage over Apple, but not really.
The secret lies in Apple's bundling strategy, i.e., it doesn't allow the Mas OS to be installed on any non-Apple branded hardware. In other words, Apple refuses to open its software to the open public. What does Apple gain from this? It avoids the full-blown competition, as well as the big headaches that MSFT has to deal with (listed above). Furthermore, from the space that the monopolist's power can't reach, Apple created itself a very stable niche market with a group of very loyal users.
First, through bundling, Apple has full control over the hardware platform its software runs on, virtually eliminating all hardware compatibility issues that MSFT has, and rendering the backward compatibility into a minor problem. This translates directly into a lean product management process and less cost. Second, Apple has full control over the look and feel of its product, thus retaining the leverage to consistently maintain the luxury and sleek style of its product, which caters well to its target customer. Third, fat margin. A Mac normally cost twice as a PC with similar processing power. And fourth, a small but friendly user base, characterized by higher income and education, which frees Apple from dealing with all sorts of malicious behaviors that are very common in the Windows world. As an example, the user doesn't even need an anti-virus software on their Mac. In summary, with MSFT taking on all the hatred and accusation, Apple operates under an environment with much less internal and external pressure, thus gaining the luxury to be internally focused, thus more innovative.
Two Topics I plan to cover, first, the competition pattern between MSFT and AAPL and second, Microsoft's chance against Google in the search market. Please visit my blog for the latest updates.
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Monday, March 30, 2009
Sunday, March 29, 2009
134th Edition of Festival of Stocks
About Individual Stocks
D4L presents Genuine Parts Co. (GPC) Stock Analysis posted at Dividends Value.
Zachary Scheidt presents Syniverse (SVR) - Recovering, Beating Expectations posted at ZachStocks, saying "Syniverse has solutions to support wireless providers. The company is adding new customers and although they experienced an important lost contract last year, the stock has recovered and the company is in growth mode."
About Overall Stock Market
Silicon Valley Blogger presents 1929 Stock Market Cycle: Are Technical Indicators, Stock Trends Repeating History? posted at The Digerati Life.
Dan presents If You Thought Americans Suffered This Year... posted at Everyday Finance, saying "This article highlights how much worse this financial crisis could have been if the nefarious plans that Wall Street had in mind actually came to be".
Michael Haltman presents Pop The Economic Pimple While The Cancer Runs Wild posted at The Political and Financial Markets Commentator, saying " I find the bonuses paid to the AIG executives and financial "geniuses" that created and sold the products that has helped to bring the economy of the United States and the world to its knees to be abhorrent and bordering on the immoral. If there is a way to abrogate them within the boundaries of contract law, then it must be done! But that is not the point of this post. That said, let's move on."
Ian Welsh presents How to Understand the March 23 Market Rally posted at Ian Welsh, saying "On March 23, the Dow went up almost 500 points in response to news that Treasure Secretary Geithner was promising private investors almost $1 trillion to gamble with. But instead of signaling economic recovery, the Dow rally points to the Japanification of the US economy, and that's very bad news."
About Stock Investing Methodologies
George presents Consistent Cash Creators with High Normalized Earnings Yield posted at Fat Pitch Financials, saying "These are the results of a stock screen that looks for companies that produce consistent free cash flows over the past seven years and are trading at low prices relative to their normalized earnings".
Pinyo presents Should You Own Individual Stocks? posted at Moolanomy.
Manshu presents Greater Fool Theory and Keynes Beauty Contest | OneMint posted at OneMint.
Fine-Tuned Finances presents Why Young People Will Benefit Greatly from the Recession | Fine-Tuned Finances posted at Fine-Tuned Finances.
Steve Alexander presents Are Greenblatt's Published Gains Achievable? posted at MagicDiligence - The Best Magic Formula Stocks, saying "In Joel Greenblatt's The Little Book that Beats the Market, the Magic Formula strategy returned over 30% a year. Is this result obtainable going forward or did the study's time period skew results unrealistically?"
Disciplined Investing presents Is Benjamin Graham Still Relevant? posted at Disciplined Approach to Investing, saying "A few years ago, Jason Zweig worked with the publisher of The Intelligent Investor in order to update the classic investment book. Zweig outlines some of the thoughts that went into the 2003 update of the Intelligent Investor in a paper titled, Equity Analysis Issues, Lessons, and Techniques."
The Financial Blogger presents What Does The Broker Do? (Besides taking your money away with fees!) posted at The Financial Blogger.
Ramis presents Asset Allocation-What it is and Why it’s Important posted at Financial Highway.
The Investor presents How stop loss investing can save you money posted at Monevator.
ChristianPF presents How to plan for your financial future posted at Christian Personal Finance Blog.
Investing School presents Realized and Unrealized Gains and Losses posted at Investing School.
Other
The Dividend Guy presents Do Precious Metals Belong in My Portfolio | The Dividend Guy Blog posted at The Dividend Guy Blog, saying "Asset Allocation is the most important aspect of portfolio planning. This post asks the question, "Do Precious Metals Belong in My Portfolio?) "
D4L presents Genuine Parts Co. (GPC) Stock Analysis posted at Dividends Value.
Zachary Scheidt presents Syniverse (SVR) - Recovering, Beating Expectations posted at ZachStocks, saying "Syniverse has solutions to support wireless providers. The company is adding new customers and although they experienced an important lost contract last year, the stock has recovered and the company is in growth mode."
About Overall Stock Market
Silicon Valley Blogger presents 1929 Stock Market Cycle: Are Technical Indicators, Stock Trends Repeating History? posted at The Digerati Life.
Dan presents If You Thought Americans Suffered This Year... posted at Everyday Finance, saying "This article highlights how much worse this financial crisis could have been if the nefarious plans that Wall Street had in mind actually came to be".
Michael Haltman presents Pop The Economic Pimple While The Cancer Runs Wild posted at The Political and Financial Markets Commentator, saying " I find the bonuses paid to the AIG executives and financial "geniuses" that created and sold the products that has helped to bring the economy of the United States and the world to its knees to be abhorrent and bordering on the immoral. If there is a way to abrogate them within the boundaries of contract law, then it must be done! But that is not the point of this post. That said, let's move on."
Ian Welsh presents How to Understand the March 23 Market Rally posted at Ian Welsh, saying "On March 23, the Dow went up almost 500 points in response to news that Treasure Secretary Geithner was promising private investors almost $1 trillion to gamble with. But instead of signaling economic recovery, the Dow rally points to the Japanification of the US economy, and that's very bad news."
About Stock Investing Methodologies
George presents Consistent Cash Creators with High Normalized Earnings Yield posted at Fat Pitch Financials, saying "These are the results of a stock screen that looks for companies that produce consistent free cash flows over the past seven years and are trading at low prices relative to their normalized earnings".
Pinyo presents Should You Own Individual Stocks? posted at Moolanomy.
Manshu presents Greater Fool Theory and Keynes Beauty Contest | OneMint posted at OneMint.
Fine-Tuned Finances presents Why Young People Will Benefit Greatly from the Recession | Fine-Tuned Finances posted at Fine-Tuned Finances.
Steve Alexander presents Are Greenblatt's Published Gains Achievable? posted at MagicDiligence - The Best Magic Formula Stocks, saying "In Joel Greenblatt's The Little Book that Beats the Market, the Magic Formula strategy returned over 30% a year. Is this result obtainable going forward or did the study's time period skew results unrealistically?"
Disciplined Investing presents Is Benjamin Graham Still Relevant? posted at Disciplined Approach to Investing, saying "A few years ago, Jason Zweig worked with the publisher of The Intelligent Investor in order to update the classic investment book. Zweig outlines some of the thoughts that went into the 2003 update of the Intelligent Investor in a paper titled, Equity Analysis Issues, Lessons, and Techniques."
The Financial Blogger presents What Does The Broker Do? (Besides taking your money away with fees!) posted at The Financial Blogger.
Ramis presents Asset Allocation-What it is and Why it’s Important posted at Financial Highway.
The Investor presents How stop loss investing can save you money posted at Monevator.
ChristianPF presents How to plan for your financial future posted at Christian Personal Finance Blog.
Investing School presents Realized and Unrealized Gains and Losses posted at Investing School.
Other
The Dividend Guy presents Do Precious Metals Belong in My Portfolio | The Dividend Guy Blog posted at The Dividend Guy Blog, saying "Asset Allocation is the most important aspect of portfolio planning. This post asks the question, "Do Precious Metals Belong in My Portfolio?) "
Sunday, March 22, 2009
Apple Will Be the Same Apple Even Without Steve Jobs
In my previous post, I expressed my concerns over Apple's innovation power in case that Steve Jobs won't return from his medical leave (read it here). From reading the comments on the article, I had the impression that some of the readers thought of me as a short of the Apple stock. Actually I am not. In the disclaimer, I stated that 'I am considering selling my AAPL shares', maybe the more accurate words would be 'reevaluating my positions'.
But is it even worth to reevaluate? Under normal market conditions, sure we should look into the uncertainties introduced by Steve's leave. But we are in this unprecedented bear market and there are a lot of solid companies out there with a stock price at a bargain level. In other words, we have investment options that may bring in similar returns, but with lower risks, then why bother with AAPL? For me, I seriously considered switching my holdings of AAPL to Nike (read the analysis of NKE here).
I admit it is the emotions that drove me to look deeper into Apple's situation - I don't feel ready to give up Apple and I like their products. I owned several versions of iPod, and I am managing my music library with iTunes. I am waiting for my Sprint contract to expire in April to get rid of their crappy service, then I am going to buy an iPhone. Good chance my year-end gift would be a Mac Book. So my starting point is like this, if Steve's leave is a big negative factor, are there any positive ones that would keep Apple on its old and glorious track? My answer is Yes, there are quite a few. Honestly, I was a little surprised by my conclusion.
1) This is a logical inference. Steve Jobs was at the helm of Apple for more than 10 years, had been continuously and aggressively driving Apple from one innovation to another. There has to be something got embedded into Apple's corporate culture and management system, which, somewhat should be self-sustainable even without the big man on the top. For example, Apple still retains the top-talented designer team that envisioned and sketched generations of their beloved gadgets; there should be some process that guarantees the original ideas and innovative efforts to receive proper attention and, some form of established routines to facilitate the interactions between the design team, the technical team and the management. I briefly touched this point in my old post, and as an outsider of Apple company, I can't provide any proof. But again, I believe these are valid inferences.
2) Under Steve Jobs, Apple is a company with clear focuses. It has a very limited and straightforward product line, basically iPod, iPhone and Mac. IPod and iPhone share the same design concepts, and both leverage the capabilities of the Mac OS. This allows AAPL to pool its resources to develop winner products, while at the same time retain a relatively simple and agile organization structure, thus creating an innovation-friendly environment at the macro level. I'd like to say this is a strategy deliberately maintained by Apple. An example, it started accumulating cash since Steve Jobs took the office, and for the time being, has around 30 billion cash in the pocket. It could have used it to expand into other territories, but it didn't. In other words, as long as Apple continues this strategy, maintains its focus and avoids impudent business moves, they should be able to keep their innovation power from endangered by unnecessary or unprepared market pressures.
3) This may be my most important finding. Through years of brilliant design and innovation, AAPL developed a certain form of 'Personal Attachment' between the customers and its products. This is rarely seen in the technology world. This solid and expanding 'Fan Base', to an extent, provides a buffer between the company and the external competition, thus offering Apple a very open and forgiving atmosphere and a very healthy mindset for innovation.
I always hear people say, 'Apple never competes in price', which I agree and behind this simple statement, actually lies its unmatchable brilliance. You may not agree with me that all gadgets Apple manufactures in nature are commodities, but the fact is there are load of companies selling them at only a fraction of Apple's price tag. Simply put, Apple managed to differentiate itself from others by unique design in look and feel (hardware), providing different (better) user experience (software), clever marketing (those easily memorable commercials) and in the personal computer field, it actually benefits from Microsoft's monopoly position, which creates the appetite to look for alternatives. (one extra comment here, actually something interesting and bewildering to me. I know to be creative in software is at a more sophisticated level, but in hardware design, just the look and feel, for me it is virtually all about paying good money to find the talented personnel, I don't understand why there is no match with Apple even here. Or is it because I brain-washed by Apple's commercials?) Apple's success created two far-reaching results, the popular cravings to its products, and the second, it obtains the tight hold of its target customer - actually a group of people with relatively higher income. In return, the pressures that normally link to the commodity player are pretty much taken off Apple's shoulder, such as maintaining the market share, the thin margin, the excessive marketing efforts, and the timing (be the first few to rush the products into the market). As a result, you see today's Apple, taking its time to be creative and elegant, which is a form of 'temperament' that I don't see with any other companies.
I'd like to say only the greatest strategist is capable of leading Apple into this position, and no doubt, Steve Jobs is the one. Personal opinion, this is the greatest contribution as well as most precious legacy from him. On the other hand, Steve's leave won't take Apple off this position, and more importantly it doesn't necessarily require a CEO as great as him to maintain this position. In summary, Apple is already there, a certain pattern between the innovation, the products and the market has been in place; even just relying on the momentum should be enough to keep it safe on the right track for several years.
One more comment to make, I don't sense anything revolutionary in Mr. Cook, instead, he was regarded as a 'business operation maestro'. I view this as a big positive. After all, what we need for Apple is not an unproven innovator, but rather an executor that is well qualified to continue Steve's path.
4) Apple already reached the end of its innovation. I know it is a bold statement, but think about it, the way Apple makes a digital music player is the way it makes a iPod Touch, the way it makes a wireless phone is the way it makes an iPhone, and the way it makes a personal computer is the way it makes a Mac Book. Do you think anybody, or any company (including Apple itself) is capable of topping that? Another perspective, once you hold your own iPod touch or iPhone in your hand, do you think it is even necessary for any companies to come up with anything that is 'Better'?
Let's take the controversy away and make some realistic points. Innovation comes at two different levels, the concept level and the implementation level. Using Microsoft as the example - it completed the innovation at the concept level in 1980s and 1990s with the introduction of the initial generations of Windows Operation System, and since then, the innovation is mostly at the implementation level, including architecture redesign, adding more functions, features, etc. Obviously, it requires a prophet type of person on the top during the concept stage. For MSFT, Bill Gates is the one. But once the company stepped into the second stage of innovation, he is not that critical anymore. For Apple, it already completed the innovation at the concept level for all three fields it plays in. What Steve Jobs accomplished is not just a few versions of MP3 player/wireless phone/computer, but a concept/package/platform of how these gadgets should be built. Without Steve Jobs, Apple is not today's Apple, but in this implementation stage, Tim Cook should do OK.
With all these said, I'd like to say the impact of Steve's leave is somewhat exaggerated. The great CEO already lifted Apple to one level where the company is self-sustainable. We all know that eventually he will leave, then is it really bad if it is now? For me, his mission is completed, excellently completed, and I'd like to see how his successors will continue. Steve left the legacy which may turn Apple into an all-time greatest company, and if the new management team holds it well, AAPL might simply become a stock of a life-time.
But is it even worth to reevaluate? Under normal market conditions, sure we should look into the uncertainties introduced by Steve's leave. But we are in this unprecedented bear market and there are a lot of solid companies out there with a stock price at a bargain level. In other words, we have investment options that may bring in similar returns, but with lower risks, then why bother with AAPL? For me, I seriously considered switching my holdings of AAPL to Nike (read the analysis of NKE here).
I admit it is the emotions that drove me to look deeper into Apple's situation - I don't feel ready to give up Apple and I like their products. I owned several versions of iPod, and I am managing my music library with iTunes. I am waiting for my Sprint contract to expire in April to get rid of their crappy service, then I am going to buy an iPhone. Good chance my year-end gift would be a Mac Book. So my starting point is like this, if Steve's leave is a big negative factor, are there any positive ones that would keep Apple on its old and glorious track? My answer is Yes, there are quite a few. Honestly, I was a little surprised by my conclusion.
1) This is a logical inference. Steve Jobs was at the helm of Apple for more than 10 years, had been continuously and aggressively driving Apple from one innovation to another. There has to be something got embedded into Apple's corporate culture and management system, which, somewhat should be self-sustainable even without the big man on the top. For example, Apple still retains the top-talented designer team that envisioned and sketched generations of their beloved gadgets; there should be some process that guarantees the original ideas and innovative efforts to receive proper attention and, some form of established routines to facilitate the interactions between the design team, the technical team and the management. I briefly touched this point in my old post, and as an outsider of Apple company, I can't provide any proof. But again, I believe these are valid inferences.
2) Under Steve Jobs, Apple is a company with clear focuses. It has a very limited and straightforward product line, basically iPod, iPhone and Mac. IPod and iPhone share the same design concepts, and both leverage the capabilities of the Mac OS. This allows AAPL to pool its resources to develop winner products, while at the same time retain a relatively simple and agile organization structure, thus creating an innovation-friendly environment at the macro level. I'd like to say this is a strategy deliberately maintained by Apple. An example, it started accumulating cash since Steve Jobs took the office, and for the time being, has around 30 billion cash in the pocket. It could have used it to expand into other territories, but it didn't. In other words, as long as Apple continues this strategy, maintains its focus and avoids impudent business moves, they should be able to keep their innovation power from endangered by unnecessary or unprepared market pressures.
3) This may be my most important finding. Through years of brilliant design and innovation, AAPL developed a certain form of 'Personal Attachment' between the customers and its products. This is rarely seen in the technology world. This solid and expanding 'Fan Base', to an extent, provides a buffer between the company and the external competition, thus offering Apple a very open and forgiving atmosphere and a very healthy mindset for innovation.
I always hear people say, 'Apple never competes in price', which I agree and behind this simple statement, actually lies its unmatchable brilliance. You may not agree with me that all gadgets Apple manufactures in nature are commodities, but the fact is there are load of companies selling them at only a fraction of Apple's price tag. Simply put, Apple managed to differentiate itself from others by unique design in look and feel (hardware), providing different (better) user experience (software), clever marketing (those easily memorable commercials) and in the personal computer field, it actually benefits from Microsoft's monopoly position, which creates the appetite to look for alternatives. (one extra comment here, actually something interesting and bewildering to me. I know to be creative in software is at a more sophisticated level, but in hardware design, just the look and feel, for me it is virtually all about paying good money to find the talented personnel, I don't understand why there is no match with Apple even here. Or is it because I brain-washed by Apple's commercials?) Apple's success created two far-reaching results, the popular cravings to its products, and the second, it obtains the tight hold of its target customer - actually a group of people with relatively higher income. In return, the pressures that normally link to the commodity player are pretty much taken off Apple's shoulder, such as maintaining the market share, the thin margin, the excessive marketing efforts, and the timing (be the first few to rush the products into the market). As a result, you see today's Apple, taking its time to be creative and elegant, which is a form of 'temperament' that I don't see with any other companies.
I'd like to say only the greatest strategist is capable of leading Apple into this position, and no doubt, Steve Jobs is the one. Personal opinion, this is the greatest contribution as well as most precious legacy from him. On the other hand, Steve's leave won't take Apple off this position, and more importantly it doesn't necessarily require a CEO as great as him to maintain this position. In summary, Apple is already there, a certain pattern between the innovation, the products and the market has been in place; even just relying on the momentum should be enough to keep it safe on the right track for several years.
One more comment to make, I don't sense anything revolutionary in Mr. Cook, instead, he was regarded as a 'business operation maestro'. I view this as a big positive. After all, what we need for Apple is not an unproven innovator, but rather an executor that is well qualified to continue Steve's path.
4) Apple already reached the end of its innovation. I know it is a bold statement, but think about it, the way Apple makes a digital music player is the way it makes a iPod Touch, the way it makes a wireless phone is the way it makes an iPhone, and the way it makes a personal computer is the way it makes a Mac Book. Do you think anybody, or any company (including Apple itself) is capable of topping that? Another perspective, once you hold your own iPod touch or iPhone in your hand, do you think it is even necessary for any companies to come up with anything that is 'Better'?
Let's take the controversy away and make some realistic points. Innovation comes at two different levels, the concept level and the implementation level. Using Microsoft as the example - it completed the innovation at the concept level in 1980s and 1990s with the introduction of the initial generations of Windows Operation System, and since then, the innovation is mostly at the implementation level, including architecture redesign, adding more functions, features, etc. Obviously, it requires a prophet type of person on the top during the concept stage. For MSFT, Bill Gates is the one. But once the company stepped into the second stage of innovation, he is not that critical anymore. For Apple, it already completed the innovation at the concept level for all three fields it plays in. What Steve Jobs accomplished is not just a few versions of MP3 player/wireless phone/computer, but a concept/package/platform of how these gadgets should be built. Without Steve Jobs, Apple is not today's Apple, but in this implementation stage, Tim Cook should do OK.
With all these said, I'd like to say the impact of Steve's leave is somewhat exaggerated. The great CEO already lifted Apple to one level where the company is self-sustainable. We all know that eventually he will leave, then is it really bad if it is now? For me, his mission is completed, excellently completed, and I'd like to see how his successors will continue. Steve left the legacy which may turn Apple into an all-time greatest company, and if the new management team holds it well, AAPL might simply become a stock of a life-time.
Silent Treasure Is To Host Festival of Stocks (Edition 134)
My pleasure to host the 134th edition of Festival of Stocks. Please click here to submit your blog.
The deadline of the submission is Eastern Time 11PM 03/28/2009, Saturday. I will have the new edition posted before Eastern Time 8AM 3/30/2009, Monday.
Drop me one email if you have any questions.
The deadline of the submission is Eastern Time 11PM 03/28/2009, Saturday. I will have the new edition posted before Eastern Time 8AM 3/30/2009, Monday.
Drop me one email if you have any questions.
Tuesday, March 17, 2009
Apple (AAPL): Still the Unique Innovator without Jobs?
As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.
I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just a MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).
So why it is Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance to return to the helm again - at least according to some analysts.
Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.
1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.
Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.
2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.
From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.
I'd like to say the Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.
As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.
Disclosure: I am holding a long position in AAPL, but am considering selling it.
I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just a MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).
So why it is Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance to return to the helm again - at least according to some analysts.
Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.
1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.
Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.
2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.
From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.
I'd like to say the Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.
As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.
Disclosure: I am holding a long position in AAPL, but am considering selling it.
Wednesday, March 11, 2009
What China Market Offers Nike(NKE) to Fight Recession?
In the deep dive analysis of Nike (NKE) (read it here), I covered its growth potential in Asian countries. Later, I had one discussion about NKE on a stock forum, which prompted me to think deeper about the opportunities that China market presents to NKE. We'd like to pick companies managing to grow despite the worldwide recession. But given today's situation, it is reasonable to assume that the overall economic activities may slow down to such an extent that growth becomes unattainable for most of the companies. Nonetheless, we know that almost every company has some numbers from 'Wall Street' to beat, which, for some, is the key of the entire stock game. So the question is, does China market present a chance for Nike to beat its numbers? My answer: very likely.
1. Aggressive expansion may offset flat or declining revenue from existing stores. In the F2Q09 earning call, NKE management described China market as, 'China remains a premiere growth opportunity for the Nike brand. Revenue there is up 27% and futures are up 25%. Nothing has softened our enthusiasm for this market, or the Chinese consumers and their passion for sports. We’ve lightened our lead in brand awareness in China and now with more than 4,000 stores in tier-1 and tier-2 cities, we are well-positioned to compete and capitalize on the consumer connections we have built there.' (http://seekingalpha.com/article/111314-nike-f2q09-qtr-end-11-30-08-earnings-call-transcript?page=3) 4000 stores, that sounds a lot; and tier-1 and tier-2 cities, what does this mean? China cities are commonly segmented into different tiers, normally 4, based on the economic importance. However, there are no definitive standards for how the cities should be categorized. If you google it, you should be able to find two basic versions, one of them categories around 30 top China cities as tier 1 & 2, but obviously, for our case, Nike’s potential market in China won’t be limited to these 30 cities. A second version, a broader one, ‘A common approach is to put the four municipalities (Beijing, Shanghai, Tianjing, Chongqing), 27 provincial capitals, and a handful prosperous prefecture cities such as Shenzhen, Dalian and Ningbo into Tier 1, the more than 300 prefecture cities into Tier 2, the 1,200 city associated districts & county-level cities into Tier 3, and 1,600 counties into Tier 4.’ (http://www.bain.com/bainweb/publications/publications_detail.asp?id=26847&menu_url=publications_results.asp). Let’s not talk about tier 3 and 4, as I don’t think Nike would have the resources to tap into these cities in the next few years. And for tier 1 and 2, estimated around 450 million [note 1] population, we are having 4000 stores, so roughly, we are talking about 12 stores per city, with each one serving around 110,000 people. While in the US, 'We estimate that we sell to more than 25,000 retail accounts in the United States' (2008 10K), which translates to 12000 people per store. Sure the average household income in America is significantly higher than China, but here the comparison is based on a 450 million population from big cities, with more than one billion from tier 3 & 4 cities, as well rural areas filtered out. So here, I see unbeatable growth opportunities for Nike. Maybe across all regions, the economic downturn will cut into people’s spending, and you will see the revenues generated per store flat or declining, but Nike may compensate and turn things around by simply opening more stores in more cities. I won’t be surprised to see Nike continue the growth streak.
2. Nike’s core customer base is affected by the recession not as much as perceived. As I mentioned in another blog, Nike actually has a higher price tag on their products in China than in the US. Using footwear as the example, in the US market, normally the prices are between $50 and $140, and you can easily find sale items below $50, or if you live close to a factor store, the deals may be even cheaper. While in China, most of the shoes are above $100, when on sale, you may see a few items drop to around $60, and factory store? Never heard of. Keep in mind that the average personal income in China is still below $3000, so it is hard to imagine anybody spend 3% of yearly income on a pair of athletic shoes. However, it is just at this price level that NKE sees its double-digit growth year after year. This tells us that the core customers of NKE are not those from tier 3 & 4 cities and rural areas, but the groups from medium or large cities with higher disposable incomes. The immediate question to follow is that how much is this group of consumers affected by the recession? We know that a significant portion of China’s growth was fueled by the export-oriented industries, which simply depend on the economy of the US and the Europe. You see in China the unemployment rate shoot up as American and European economy contracts, but the rate is sort of skewed by the disproportionately high number in these export-oriented industries, as they are labor intensive, hiring a huge number of ‘blue collar’ workers from rural areas. They are the low-income groups in China, might be the very groups that make Nike shoes, but not the group that could afford the shoes. On the other hand, the unemployment rate in organizations that NKE’s customers work for, such as the government, the government controlled enterprises, or privately/collectively owned enterprises, is much lower than the number we see on papers. Another important factor to keep in mind. The social stability is always the top priority for the Chinese government since it has to manage such a gigantic population, therefore it takes firm measures to contain the unemployment rate at an acceptable level, for example, it makes the enterprises reduce employee’s salaries instead of laying them off if cutting cost becomes a have-to. This offers another protection layer of the purchasing power of NKE customers.
3. The money management pattern of Chinese customers makes them not as vulnerable as the customers in the US under the economic pressure. We just witnessed the burst of the Chinese stock market bubble. In the year 2007, it looked like investing in stocks became the single theme of people’s daily life for the entire nation, which pushed the market index almost 5 fold higher in 12 months and eventually reached an unsustainable level. Setting aside all the market manipulations, one interesting yet important fact you can gather from this is the vast savings the Chinese people have in their bank accounts. Actually this reflects a Chinese tradition in money management: no debt, saving for the future. This concept evolved as China society is becoming more open, but is still the mainstream. As a matter of fact, credit cards just started getting acknowledged and gaining some momentum in the past 2 –3 years in a few cities. I won’t elaborate on this topic, as this is more like an indirect and habitual factor. The key is: since the customers, as a group, have descent savings, little or none debt, the pressure from the economic slowdown is much less compared to their counterparts in the US, who normally are constantly haunted by the fear to sell the house and the car once the job is lost. As a result, they may not scale back their spending as steeply as imagined. This is not unique to Nike’s customer, but definitely a positive factor.
So here are the conclusions. First, there is no doubt that China market offers NKE the golden opportunity to thrive through the recession. Then the rest of the story is about NIKE's execution. Up to today, things I read about NKE are pretty positive. Second, everything I described here actually is not unique to NKE, all companies that operates in this 'sub-luxury' consumer products sector may take advantage of China market as well, for example, Apple. We will talk more about it in the next few blogs.
Note 1: not rock solid science, it is my estimation. The same source mentions among the 300 tier-2 cities, 120 of them have populations over one million, so it is 120 millions. For the rest 180 cities, I assigned an arbitrary number, 100 millions (maybe too conservative), based on my readings of China related materials. Then we have the big 4 cities, around 80 millions total, then the 30 other tier-1 cities, 150 millions.
1. Aggressive expansion may offset flat or declining revenue from existing stores. In the F2Q09 earning call, NKE management described China market as, 'China remains a premiere growth opportunity for the Nike brand. Revenue there is up 27% and futures are up 25%. Nothing has softened our enthusiasm for this market, or the Chinese consumers and their passion for sports. We’ve lightened our lead in brand awareness in China and now with more than 4,000 stores in tier-1 and tier-2 cities, we are well-positioned to compete and capitalize on the consumer connections we have built there.' (http://seekingalpha.com/article/111314-nike-f2q09-qtr-end-11-30-08-earnings-call-transcript?page=3) 4000 stores, that sounds a lot; and tier-1 and tier-2 cities, what does this mean? China cities are commonly segmented into different tiers, normally 4, based on the economic importance. However, there are no definitive standards for how the cities should be categorized. If you google it, you should be able to find two basic versions, one of them categories around 30 top China cities as tier 1 & 2, but obviously, for our case, Nike’s potential market in China won’t be limited to these 30 cities. A second version, a broader one, ‘A common approach is to put the four municipalities (Beijing, Shanghai, Tianjing, Chongqing), 27 provincial capitals, and a handful prosperous prefecture cities such as Shenzhen, Dalian and Ningbo into Tier 1, the more than 300 prefecture cities into Tier 2, the 1,200 city associated districts & county-level cities into Tier 3, and 1,600 counties into Tier 4.’ (http://www.bain.com/bainweb/publications/publications_detail.asp?id=26847&menu_url=publications_results.asp). Let’s not talk about tier 3 and 4, as I don’t think Nike would have the resources to tap into these cities in the next few years. And for tier 1 and 2, estimated around 450 million [note 1] population, we are having 4000 stores, so roughly, we are talking about 12 stores per city, with each one serving around 110,000 people. While in the US, 'We estimate that we sell to more than 25,000 retail accounts in the United States' (2008 10K), which translates to 12000 people per store. Sure the average household income in America is significantly higher than China, but here the comparison is based on a 450 million population from big cities, with more than one billion from tier 3 & 4 cities, as well rural areas filtered out. So here, I see unbeatable growth opportunities for Nike. Maybe across all regions, the economic downturn will cut into people’s spending, and you will see the revenues generated per store flat or declining, but Nike may compensate and turn things around by simply opening more stores in more cities. I won’t be surprised to see Nike continue the growth streak.
2. Nike’s core customer base is affected by the recession not as much as perceived. As I mentioned in another blog, Nike actually has a higher price tag on their products in China than in the US. Using footwear as the example, in the US market, normally the prices are between $50 and $140, and you can easily find sale items below $50, or if you live close to a factor store, the deals may be even cheaper. While in China, most of the shoes are above $100, when on sale, you may see a few items drop to around $60, and factory store? Never heard of. Keep in mind that the average personal income in China is still below $3000, so it is hard to imagine anybody spend 3% of yearly income on a pair of athletic shoes. However, it is just at this price level that NKE sees its double-digit growth year after year. This tells us that the core customers of NKE are not those from tier 3 & 4 cities and rural areas, but the groups from medium or large cities with higher disposable incomes. The immediate question to follow is that how much is this group of consumers affected by the recession? We know that a significant portion of China’s growth was fueled by the export-oriented industries, which simply depend on the economy of the US and the Europe. You see in China the unemployment rate shoot up as American and European economy contracts, but the rate is sort of skewed by the disproportionately high number in these export-oriented industries, as they are labor intensive, hiring a huge number of ‘blue collar’ workers from rural areas. They are the low-income groups in China, might be the very groups that make Nike shoes, but not the group that could afford the shoes. On the other hand, the unemployment rate in organizations that NKE’s customers work for, such as the government, the government controlled enterprises, or privately/collectively owned enterprises, is much lower than the number we see on papers. Another important factor to keep in mind. The social stability is always the top priority for the Chinese government since it has to manage such a gigantic population, therefore it takes firm measures to contain the unemployment rate at an acceptable level, for example, it makes the enterprises reduce employee’s salaries instead of laying them off if cutting cost becomes a have-to. This offers another protection layer of the purchasing power of NKE customers.
3. The money management pattern of Chinese customers makes them not as vulnerable as the customers in the US under the economic pressure. We just witnessed the burst of the Chinese stock market bubble. In the year 2007, it looked like investing in stocks became the single theme of people’s daily life for the entire nation, which pushed the market index almost 5 fold higher in 12 months and eventually reached an unsustainable level. Setting aside all the market manipulations, one interesting yet important fact you can gather from this is the vast savings the Chinese people have in their bank accounts. Actually this reflects a Chinese tradition in money management: no debt, saving for the future. This concept evolved as China society is becoming more open, but is still the mainstream. As a matter of fact, credit cards just started getting acknowledged and gaining some momentum in the past 2 –3 years in a few cities. I won’t elaborate on this topic, as this is more like an indirect and habitual factor. The key is: since the customers, as a group, have descent savings, little or none debt, the pressure from the economic slowdown is much less compared to their counterparts in the US, who normally are constantly haunted by the fear to sell the house and the car once the job is lost. As a result, they may not scale back their spending as steeply as imagined. This is not unique to Nike’s customer, but definitely a positive factor.
So here are the conclusions. First, there is no doubt that China market offers NKE the golden opportunity to thrive through the recession. Then the rest of the story is about NIKE's execution. Up to today, things I read about NKE are pretty positive. Second, everything I described here actually is not unique to NKE, all companies that operates in this 'sub-luxury' consumer products sector may take advantage of China market as well, for example, Apple. We will talk more about it in the next few blogs.
Note 1: not rock solid science, it is my estimation. The same source mentions among the 300 tier-2 cities, 120 of them have populations over one million, so it is 120 millions. For the rest 180 cities, I assigned an arbitrary number, 100 millions (maybe too conservative), based on my readings of China related materials. Then we have the big 4 cities, around 80 millions total, then the 30 other tier-1 cities, 150 millions.
Wednesday, March 4, 2009
The Battle Against Psystar: What if Apple Lost?
People following Apple should be familiar with the legal battle it is engaged in with a small start-up company from Miami, Florida called Psystar, which, after Steve Jobs killed the Mac Clone program more than 10 years ago, became the first one openly selling a computer pre-installed with Mac OS but not branded as an Apple product - it is called 'OpenComputer' instead. Lawsuits from Apple soon followed after Psystar made the move. As of Feb 2009, both parties are locked deep in the battle where Apple claimed Psystar infringed the Mac OS copyright - the End User License Agreement (EULA) doesn't allow the system to be installed on any computer other than an Apple-branded machine, while Psystar countered with allegations that Apple's EULA is invalid, the same manner if Microsoft tries to force Windows to be installed on a Dell computer only.
This looks like a one-sided battle and the vast majority of the followers of the story also predict AAPL will win. Nonetheless, very few is bold enough to rule out the chance, though very very slim, that Psystar may emerge as the last one with a smile on the face. It seems to fit into people's logic if Psystar loses. After all, hundreds of companies of this type come and go on a daily basis. At least this one grabbed the headlines for quite a while before diminishing into oblivion. But what if, a giant if, Apple loses? what is the stake here? Actually I was pondering on the competitive advantage of Apple (I will post a new blog on this topic soon), which leads me into the analysis of its business model, then I found I was deep in this topic. I try not to exaggerate things but my conclusion for now is like this: this is a battle for AAPL to protect its business model as well as its competitive advantage; losing this one might turn out to be devastating.
Let's speculate what may happen assuming the verdict rules Psystar as the winner.
1)Now the Mac Clone is legal (actually I have a big question mark here. Maybe even Apple lost the case, it still has the leverage to put a hold to the situation before it spins out of control, similar to what Steve Jobs did in 1997 - killing the clone program by changing the software version number), and OEMs such as DELL and HP will start produce Mac computers with similar or better performance compared to those from Apple, but only a fraction of the price. AAPL sees the revenue from selling Apple branded computers nose dive.
2) Computer operating system development may be the business with the highest entry threshold in human history - the profit only starts flowing in after burning billions of dollars. Now Apple, with an OS that already cost it billions, sees the high margin from bundling it with the hardware vanish, the only option left is to sell more OS licenses, i.e., increase the market share, i.e., a face-off with Microsoft.
3) Nothing depicts the picture of the competition between MSFT and AAPL better than the TV commercials from Apple. Two friendly guys jump on the scene, greeting you with warm and breezy words, 'Hello I am a Mac', and 'Hello I am a PC'. You saw the PC guy got trashed every time but shrug it off and come back with a smile, a little dumb but sure with a big heart. It is wrong if you come to the conclusion that MSFT doesn't take AAPL seriously, the fact is that they play in two different market zones, with MSFT in a broad one and AAPL in a niche one. Now with AAPL forced out of its traditional zone and positioned to fight MSFT in its backyard, there is no reason to expect MSFT to be that big-hearted dude anymore. Remember how it crashed Netscape years ago? That is the exact MSFT that Apple has to fight.
4) AAPL is going to be squeezed from another side. In the sweet old times, their software engineers only need to make sure their code is compatible with a specified range of hardware, which, Apple has absolute control. Now the pressure to increase the market share will force Apple to consider compatibility issues with a range of hardware 10 times wider. Then adding the derivative support and maintenance issues, don't be surprised if you see the cost rocket.
5) You got used to see an Apple that is creative and elegant, but remember nothing comes without a cost. When AAPL has full control over its products and its market, it can afford the luxury to be creative and elegant. However, if it is constantly under the amounting pressure of the competition and the market, can it still sustain this elegance and innovation? I doubt it. More likely, the constant pressure will exhaust their energy and patience to be innovative, drive the change of the company culture, and eventually, lead to the disappearance of their competitive advantage.
It is scary, but no need to panic. What I am painting here is simply the worst of the worst scenario. First of all, you need Apple to lose the case to Psystar. Second of all, even Apple lost, it doesn't necessarily imply that Mac Clone will become legal. Third of all, even Mac Clone becomes legal, it doesn't necessarily mean that Apple has no way to kill it again. Fourth of all, even Apple can't kill it and has to face MSFT, it doesn't necessarily indicate it is going to lose that war. But if it really reaches this far, I will be worried. Honestly, I don't think Apple is ready, yet. So it is better not lose this case at all.
This looks like a one-sided battle and the vast majority of the followers of the story also predict AAPL will win. Nonetheless, very few is bold enough to rule out the chance, though very very slim, that Psystar may emerge as the last one with a smile on the face. It seems to fit into people's logic if Psystar loses. After all, hundreds of companies of this type come and go on a daily basis. At least this one grabbed the headlines for quite a while before diminishing into oblivion. But what if, a giant if, Apple loses? what is the stake here? Actually I was pondering on the competitive advantage of Apple (I will post a new blog on this topic soon), which leads me into the analysis of its business model, then I found I was deep in this topic. I try not to exaggerate things but my conclusion for now is like this: this is a battle for AAPL to protect its business model as well as its competitive advantage; losing this one might turn out to be devastating.
Let's speculate what may happen assuming the verdict rules Psystar as the winner.
1)Now the Mac Clone is legal (actually I have a big question mark here. Maybe even Apple lost the case, it still has the leverage to put a hold to the situation before it spins out of control, similar to what Steve Jobs did in 1997 - killing the clone program by changing the software version number), and OEMs such as DELL and HP will start produce Mac computers with similar or better performance compared to those from Apple, but only a fraction of the price. AAPL sees the revenue from selling Apple branded computers nose dive.
2) Computer operating system development may be the business with the highest entry threshold in human history - the profit only starts flowing in after burning billions of dollars. Now Apple, with an OS that already cost it billions, sees the high margin from bundling it with the hardware vanish, the only option left is to sell more OS licenses, i.e., increase the market share, i.e., a face-off with Microsoft.
3) Nothing depicts the picture of the competition between MSFT and AAPL better than the TV commercials from Apple. Two friendly guys jump on the scene, greeting you with warm and breezy words, 'Hello I am a Mac', and 'Hello I am a PC'. You saw the PC guy got trashed every time but shrug it off and come back with a smile, a little dumb but sure with a big heart. It is wrong if you come to the conclusion that MSFT doesn't take AAPL seriously, the fact is that they play in two different market zones, with MSFT in a broad one and AAPL in a niche one. Now with AAPL forced out of its traditional zone and positioned to fight MSFT in its backyard, there is no reason to expect MSFT to be that big-hearted dude anymore. Remember how it crashed Netscape years ago? That is the exact MSFT that Apple has to fight.
4) AAPL is going to be squeezed from another side. In the sweet old times, their software engineers only need to make sure their code is compatible with a specified range of hardware, which, Apple has absolute control. Now the pressure to increase the market share will force Apple to consider compatibility issues with a range of hardware 10 times wider. Then adding the derivative support and maintenance issues, don't be surprised if you see the cost rocket.
5) You got used to see an Apple that is creative and elegant, but remember nothing comes without a cost. When AAPL has full control over its products and its market, it can afford the luxury to be creative and elegant. However, if it is constantly under the amounting pressure of the competition and the market, can it still sustain this elegance and innovation? I doubt it. More likely, the constant pressure will exhaust their energy and patience to be innovative, drive the change of the company culture, and eventually, lead to the disappearance of their competitive advantage.
It is scary, but no need to panic. What I am painting here is simply the worst of the worst scenario. First of all, you need Apple to lose the case to Psystar. Second of all, even Apple lost, it doesn't necessarily imply that Mac Clone will become legal. Third of all, even Mac Clone becomes legal, it doesn't necessarily mean that Apple has no way to kill it again. Fourth of all, even Apple can't kill it and has to face MSFT, it doesn't necessarily indicate it is going to lose that war. But if it really reaches this far, I will be worried. Honestly, I don't think Apple is ready, yet. So it is better not lose this case at all.
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