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.