Apple’s Achilles Heel
Published by David Evans on January 18th, 2008
Filed Under:
Digital Media, Software, New Business Models, Technology, Digital Music, Internet TV, software platforms, consumers
Steve Jobs has taken a lot of flak since his speech at MacWorld on Tuesday. Of greatest concern is whether Apple’s streak of luck in the digital media space has run its course. The content providers that make its iTunes store valuable and get people to buy those pricey iPods have been bailing in the last year with some of them setting up camp at Amazon. Meanwhile Apple’s new announcement about its video download service has left some people scratching their heads.
The iTunes store was killer because people—especially young ones—liked listening to music through headphones attached to cool looking devices. The whole experience kind of worked. At the moment, at least most of America, even the FaceBook set, still likes curling up in front of a television that’s usually hooked to a cable or satellite provider. An episode of Lost on the iPod is one thing, the Bourne Ultimatum is another.
Jobs, as many have remarked, has stuck with the closed platform model that gave him complete control over the Mac and gave Microsoft pretty much complete control over the ecosystem. But as I’ve noted in my book Invisible Engines, Apple is not only around, but is growing two decades later whereas only old geeks know that the Commodore isn’t a singing group from the 1980s.
Here’s what Apple is doing and here’s why I think in the end it isn’t going to work.
Apple’s insight was that it could control the digital music ecosystem with that hunk of hardware, software, and design innovation called the iPod. With people lining up for the device (most of whom were going to use it for illegally downloaded MP3 files and songs ripped from CDs), it had an enormous captive demand for music. All those eager kids helped Jobs negotiate tough deals with music publishers. Apple essentially took the WalMart strategy—get people to the store with promises of low prices and then beat suppliers into dropping prices to rock bottom to get access to the customers. By tying iTunes and iPod together, the only way music publishers could sell music to the iPod generation—and have some hope of persuading some of them to actually pay for music—was to do a deal with Jobs. Apple got rock bottom prices for its iPod customers and along with that came disgruntled business partners. And, Apple’s strategy works so long as it is only an iPod that stands between a fan and her music.
And therein lies Apple’s Achilles heel.
Successful platforms create barriers to entry by making their business partners and customers so dependent on them that switching to a new platform is just too hard. Value buys loyalty. If anyone came up with a better music player and a way to transfer what’s on an iPod to its device, Apple would rapidly shrink. Apple doesn’t have the same sort of advantages that make it hard to for rivals to challenge the likes of Google, Microsoft, FaceBook, eBay and other modern platforms in their core specialties. Google, for example, benefits from tremendous network effects between advertisers and searchers and has accumulated a tremendous amount of data that enables it to target ads.
If Jobs asked me, which he hasn’t, Apple’s best strategy now is to become a true catalyst where it builds a rich ecosystem of players who really get value from the relationship. For all the criticism of Microsoft, it has a vast network of application developers who have made fortunes off of applications for Windows and appreciate Microsoft for the opportunities. For Apple, that means opening up the iPod/iTunes platform and creating valuable dependencies rather than hard feelings. That means letting other devices use iTunes, letting other media stores use the iPod, and giving the music publishers real incentives to be part of the Apple ecosystem.
That brings me to Apple’s video download strategy—which some people suggest precipitated an almost 10 percent drop in Apple’s share price after Jobs’ keynote. (Or was it the audacious announcement of the MacBook Air with only one USB port?) For now, this is like the iTunes store without the iPod. There were other music stores when iTunes opened and lots of ways of getting music. Apple’s video download service is just one of numerous ways that I can get videos—so why do I care that it is Apple who is supplying me with those videos? It sure isn’t the Apple TV—the box that hit the market with a thud; Apple’s design advantages don’t do much good for a set-top box. Some speculate that the other shoe hasn’t dropped—a snazzy Apple TV set. But that’s a lot less plausible than an iPod. People aren’t going to be ripping out their new flat panels even for a smart looking device from Apple. The basic problem is that the strategies that have worked so well for Apple–design great looking and functioning products and the world will beat a path to your door—don’t obviously work in the living room.
So, yes, Jobs’ announcements at MacWorld don’t instill confidence and suggest that perhaps Apple has lost its way in trying to own the digital media ecosystem.
I think there is a misunderstanding of what the Apple TV really is. You mentioned having to rip out your flat panel TV in order to use Apple TV. Apple TV enables the flat panel TV to present an enormous amount of video (and audio) content to the exact place where consumers want to see it - in their living room. So, the fact that Apple was able to get the buy in from the top movie producers is huge, and access to 125,000 podcasts without being tethered to a computer is also incredible. The Apple TV enhancements bring a whole new world of content to the living room in a simple and elegant manner. It justifies the purchase of a flat panel TV.
Thanks Rick. I know what Apple TV is–it’s the box that hardly anyone seems to want. Speaking now just as a consumer, I love my iPod, think downloading episodes of Lost from iTunes is great, and pine to have Apple in my living room. I’ve got a TiVo, just bought a SlingBox, and am thinking of a VuDu. I just don’t see what Apple has to offer. Maybe I’m missing something, but I don’t think Apple has cracked the code for the living room. But you are right to correct me. I misspoke—I meant to say “Apple TV set” above. And maybe Apple could load enough value into the box to excite consumers. Not for now though.
The reason apple will succeed
People like me who are in the position to buy a lot of computers and are following what comes down from the top. My CEO just made me order a macbook air and on my advice an imac mostly because he can do it all on one machine. The trickle down effect has started and he hasn’t even gotten it yet. I am ordering macbook air’s for the CIO and the CFO on tuesday. The new must have is now for the high and mighty of the executive world. and I am sure their wives will all want one when they get them home.
I am sure more women out there are looking at the new macbook and will probably buy one for themselves hell even my girlfriend who was anti mac a few weeks ago is now thinking of getting on…
written on a mac
not ashamed to say it either
Ease of use, ease of use, ease of use. Most people are not GEEKS! They just want to turn it on and go! This is what you are missing. The masses want products like the iPhone that don’t require a 250 page manual to use. You are so deep into computers and technology for so many years that you cannot see what has changed. It’s the consumer! The consumer wants a to USE the machine not figure it out, fix it, modify it, put batteries in it, hot rod it. My grandparents are now using a Mac. I’ll tell you what, you come back and revisit this post you wrote in 10 years when there are Apple stores in every prime retail location just like Macdonalds is and then tell me Apple and Steve Jobs don’t get what the consumer wants. What the consumer wants is something that they are not afraid of. Something that works. This all reminds me of the American automobile industry 25 years ago. Along comes Toyota and well the rest is history. No offense but I think you are completely wrong…
Somehow the image of Apple stores being as prolific as McDonald’s is a little disturbing, not just because they are oversaturated, but because of the cheap junkfood mentality they represent. PC stores are more like McDonald’s in that respect, though they are not of a united brand or image, but make a living selling cheap junk. I am joking in the latter, as there are quality PCs too, even Dell is getting better and starting to put some design into their products, though a bit too eager to copy the iMac design.
As for the comment of an Apple-branded TV, at first this might seem ludicrous, but considering how Apple admires Sony, well who knows, we might consider Apple consumer goods as natural as we do Sony, which is also a premium brand with an emphasis on great design.
But I don’t see that as probable in the near term.
The AppleTV, however, could be a much bigger deal than you think. It could be the start of a business model which has eluded Microsoft so far, convincing people to put a PC in the living room as an entertainment hub. There are numerous Multimedia PCs, even the XBox, but they are still big noisy boxes that don’t fit in the living room. A small, quiet, sleek box like the AppleTV, perhaps with a Blu-Ray player, is what people will want. The Blu-Ray and HD-DVD war is still being waged tough and not many titles exist, with the hardware being too pricey, but I can see a bigger brother to the existing AppleTV having one. That and being able to act as a PVR.
The AppleTV v2 in combination with the movie store may just be the catalyst to start this new platform off, where v1 was promising but lacking somewhat, with the need to sync with a regular Pc and having no downloadable movies. Whether the terms dictated by the studios will excite I don’t know, many have commented on the issue of only having 24hrs to finish after the movie is started. I also think rentals, especially HD, must be cheaper. If they can build up a big back catalog of old classic movies, which the physical stores typically don’t stock, it will be very tempting to someone like me.
It is early days, but I think you underestimate the potential of the combination of AppleTV v2 (or future revisions) and the movie store along with new indie media like vidcasts and Youtube.
I just looked up what the VuDu is and some reviews. An interesting box. And a lot like the AppleTV take two. It seems if you’re someone who’s in the market for a Vudu, you’d be equally in the market for an AppleTV. The movie rental prices and conditions are identical, dictated by the studios as they are. They both have a limited initial selection, probably the same catalog, and you can buy from both. A difference is you can back up purchased content on an AppleTV, it seems you can’t on Vudu.
Vudu has a very slick interface and featureset, which may be a clincher for some, the use of P2P is interesting even if it doesn’t affect the user, except that he’s uploading as well as downloading. It does require a cable modem, however, going by the reviews, regular DSL it seems isn’t good enough. Not a limitation of the Apple TV unless you want it instantly. And the Vudu is much larger and costs much more. Plus the AppleTV has a few more features besides movies, such as TV shows, music, pictures, podcasts and Youtube.
It seems they both have their pluses and minuses, but I don’t get why you don’t get Apple’s movie rental strategy without them going into the TV business (Vudu isn’t either), or see that the difference between their service and other online ones are instant gratification via the internet straight to you PC or AppleTV, much like the Vudu. Current-generation Multimedia PCs and XBoxes are not in the running.
http://gizmodo.com/gadgets/top/vudu-video-wonderbox-picture-walkthrough-and-review-just-short-of-wonderful-297309.php
http://www.nytimes.com/2007/09/06/technology/circuits/06pogue.html?_r=2&oref=slogin&oref=slogin
I just realised where you got your image of people ripping out their flat panel TVs for the sake of an AppleTV.
There was a story on Appleinsider of a Goldman Sachs report speculating that an update to the Apple TV “could include an LCD display”. That’s to say, a display on the unit akin to the display on a DVD player. Not a TV set. nobody’s gonna rip out their TV sets for that.
Although if Apple’s strategy pays off in the long run, I could see Apple making deals with manufacturers like LG or Phillips and others to incorporate AppleTV into some models, which would be really cool. Microsoft or Amazon would have to make similar deals to stay competitive. Only MS already has the OS and software, but currently lack the hardware, which shouldn’t be too difficult. Shares in the abovementioned Vudu would plummet, as I don’t see them having the clout to make similar deals. Apple is a global company with iTunes stores around the world, including Asia, whereas the former is US only.
http://www.appleinsider.com/articles/07/12/12/second_gen_iphone_in_final_phase_apple_tv_update_planned_report.html
Interesting take on things David. Was worth the deviation from Forbes (where I found your comment). I think you’re in the right ballpark about Apple’s business partners jumping ship, but I also think you’ve misunderstood why they’re doing it.
Apple has been forcing it’s partners to accept lower prices in favour of a flat-rate fee to the customer for a long time and for once the consumer is benefitting through a fair price for media (at least for music anyway) compared to the over-inflated CD album prices to date (especially compared to vinyl and the associated production costs). In reality though we’re still paying over the odds for what amounts to NO physical product, but this is less perceived than the difference between a 12″ album with a big cardboard sleeve and a tiny cheap plastic disc in a plastic case (CD).
I’m not sure how the video sales will pan out for Apple, although there’s no barrier stopping consumers choosing their download site(s) and then shifting those downloaded movies to their Apple-oriented digital media hub. It’s at most a simple format conversion and there are already plenty of freeware solutions available to do this quickly.
AppleTV (as it stands currently) is an easy to use device, but also big with the modders (many have jumped over from XBox Media Centre modding) being as it is just a stripped down Mac. I should imagine Apple will be watching the mod scene closely to see what’s most popular and may well integrate some of those ideas in future software updates (they’ve started to do this with the iPhone already). It’s a clever strategy that cuts down on development costs - you only need to add the apps that people are really using and can forget adding hundreds of never-used utils.
If you’re in the market for an Apple-based PVR, you could do much worse than considering the Mini as a media hub (I’ve just gone this route as my TV’s still a CRT until it dies and I replace with LCD - so the DVI out is better for me than just HDMI/Component). It has built-in digital video/audio output (just need a DVI-HDMI converter lead and an optical audio lead), but additional features such as multiple USB ports (additional storage, mouse/kbd etc) and it has the must haves such as the remote for Front Row. I’ve invested in a USB Elgato digital tuner and EyeTV software (ties in to Front Row/Media Central etc) for my PVR needs and the online programme guides are great for setting up recording whole series in advance. You can also use Applescripts attached to your recordings folder to perform actions such as ‘delete after X days’ or get more advanced and include options to move certain programmes to folders on another drive on the network - great little hub, AND it’s a full-blown Mac so you can always go surfing if you’re bored, or play a game (if it’s not too gfx heavy… it is only a mini!).
I think Don’s comment about ‘Ease of Use’ is an pertinent factor. Apple are shifting their brand away from just ‘computer company’ to be a mainstream home appliance manufacturer. This may explain their focus on this ease of use - after all, you don’t generally need much experience to use a washing machine or a stereo!
Perhaps this spreading of their customer base is less of an achilles heel and more a case of ‘fingers in as many pies as possible’. If one business area fails, the company is less likely to fail as a whole.
To have been through some of the rough times they have and yet come back fighting so hard that they have a share value at todays prices would suggest they’re market-savvy enough to be looking very long term at the strategies and planning for multiple eventualities.
Interesting piece though.
PS: There’s also the ‘fan’ factor to include with Apple (just as there was… er… still IS with Commodore - see the underground C64 and Amiga scenes still going all these years later). Even if a product fails and they hit a slump in sales, there’s a very loyal userbase in place who will continue to buy the products. They’ve been lucky to have such an established niche in the high-end media markets for design/advertising/film/music etc. This is almost a guaranteed money-maker for them even if the consumer divisions wane. No matter what the mass consumer market does, those of us in the Creative sectors will continue to buy Macs because they’re still the best and most stable machines for what we do (in such a hectic deadline oriented sector where you can’t afford downtime) and as such work out with a cheaper TOC than the average PC. I administer all the Macs/PCs in our studio and I have to say that even though the Macs outnumber the WinPCs 10:1, the 3 or 4 Win PCs around the office have had more downtime in the past couple of years than all of the Macs combined (past and present) have had over the past 15 years… without exaggeration. This to me is a huge selling point when it comes to buying a computer - how much time will I spend fixing it and how much time being productive? So I for one will continue buying their products whilst their products continue to get the job done more efficiently (and until there’s viable Linux alternatives for some of my applications, which is where I’ll start saving MORE money) - it’s simple economics for my scenario.
Anyway… I’ve gone on for far too long, Peace!