The Year Ahead: Apple

Apple needs to regain momentum in 2013

Apple needs to regain momentum in 2013

Apple did not enjoy usual warm coverage by the press this year with more negative pieces being churned out against what is usually the tech media’s darling. There’s no denying that Apple is maturing or as some would have you believe – already matured. The biggest question in mind is – what can Apple do next? Here’s what I think Apple needs to do in the next 11 months of 2013.

 

 

Relook the Business Model

Apple is an exciting company. It flies when there are new product categories. They don’t really invent new things. They reiterate on raw ideas already out in the market and then polish them into mainstream devices via their integrated approach. That is what Apple does best. At this point, one would question about the merits of such a model. No company, no matter how innovative, is going to be able to sustain growth and profits by shining only in brand new product categories. What is Apple going to do now? Wait till the post-mobile world? They need to be more ambitious and re-look their strategy.

 

Market share doesn’t mean great profit margins today. But it does mean sustained profits over longer term dominance and relevance.

 

Apple’s biggest competitors, then and now, are less exciting firms. From the days of IBM and Microsoft to Samsung, it has always been first out of the gates but faded as time went past. There is something to learn from its enemies. The 7 great years that Apple has had is tiny compared to the decades of profit madness by Microsoft. Apple needs a long term strategy of dominance. The old adage of going ‘Profit margins not market share’ has to go down the toilet. Yes, market share doesn’t mean great profit margins today. But it does mean sustained profits over longer term dominance.

To be fair to Apple, it has done that for iDevices a little more than its Mac lines. Apple is trying very hard to push into new markets with basically 2 devices – the iPhone and the iPad. It understands why OSX remains a minority – the lack of market share  Even with a hastened approach in getting into more markets, the market share of iDevices continue to fall. Android has taken the lion’s share of the phone market and the tablet space has seen Apple continually drop market share percentage points quarter after quarter consistently.

But they are making tons of revenue – you might say. I will urge you to look at their profit margins which have remained right about flat. Also, the value of market share is not encapsulated within a quarter’s worth of earnings. It can only be judged by decades of dominance. This is exactly what Tim Cook needs to do – increase flexibility with their business model. Think long term growth rather than short term miracles.

 

 

Drop the Hardware First Mentality

Hardware focus is limiting Apple's potential.

Hardware focus is limiting Apple’s potential. (Credit: Appstorm)

I’ll begin with saying that this “we’re a hardware company” has to go. There are huge profits in hardware when a new product line first launches. Over time, that margin becomes razor thin. Apple has been able to avoid that with the Macs by ensuring that OSX is Mac only. Mac + OSX gave Apple complete monopoly of such products but it lost out on market share because it wanted to protect its hardware.

On the other hand, HP, Dell, Acer and the many OEM hardware partners for Microsoft went on to slit each other’s throats till the profit margins became razor thin. Adam Smith would have been so proud of it. But this how hardware is like in the tech industry. You either:

  1. Bolt down software to protect hardware which results in a small market share (low profits), or
  2. Focus on hardware only which leaves you open for competition and result in even lower profits

Apple may have chosen the lesser of two evils but it shouldn’t even bother with hardware in the first place. The real profits are in software whether local or in the cloud. Software holds the unique position of having relatively zero marginal cost and being really easy to distribute and penetrate new markets – by several magnitudes.

 

Every single software component it owns is limited by the ‘hardware first’ focus.

 

Apple makes really beautiful hardware but hardware is easy to copy (legally) and the same goes for design and engineering. It is not as if Apple doesn’t have a strong software component to its business, it has a great many options but all of them – every single one – is being limited by the ‘hardware first’ focus. Apple needs to free itself from this short sighted constraint it has set for itself.

 

 

iOS

iOS 7 needs to do a lot more.

iOS 7 needs to do a lot more.

I don’t really know what Apple can do with OS X at the moment. Mac sales are falling and we are moving past traditional computers anyways. It would be prudent for Apple to take a long hard look at iOS. Why so? Because iOS has been right about the same since it was launched in 2007. It is a basic but fluid application launcher with a limited feature set. Applications can barely talk to each other. Sharing is confined to Facebook and Twitter. Single glance information is limited to numerical badges. And, for some puzzling reason, there has been almost no way you can customize the UI besides changing the wallpaper and dragging icons around.  All these has to change. In order to create a solid software operating system, Apple must learn from the less than perfect Microsoft Windows and Google’s often chaotic Android.

Locking down a new infant operating system makes sense but continuing to do so for a matured platform is ridiculous. iOS has matured to the point where the design language and core functionalities are very well understood by developers. Apple needs to release and open up some of iOS’s deep seated APIs so that these developers can truly push the operating system to its potential. An economist will wax lyrical about an open system but it is well managed open systems that last the longest and generate the highest profit margins over time. Would Windows consistently take a >90% market share for over 20-30 years if it was encased in iron bars? Would Android leapfrog iOS in the space of 2 years if it did the same? No. There’s no need to hand hold developers anymore. Open up iOS and let the developing community show the world what it can do.

 

Locking down a new infant operating system makes sense but continuing to do so for a matured platform is ridiculous.

 

The next WWDC is very important for Apple. iOS is a fundamental chunk of the software side of Apple’s business. It has a great ecosystem and it must allow that vibrant 3rd party app market evolve into something more independent and free. Stop treating iOS like a child that must be protected. After all, it is the grown ups with their freedom that actually make (and not bleed) the cash.

 

 

iTunes

iTunes has a massive potential even beyond the mainstream.

iTunes has a massive potential even beyond the mainstream.

There have been some rumors of a music streaming service from Apple. I think that is the second thing they should be looking at. Apple doesn’t just have iOS and in some way OS X when it comes to software. It has a less exciting but more powerful software ecosystem in the shape of iTunes. Most consumers would not bother with the fact that Apple made drastic changes to the music industry. We won’t be enjoying 99 cents tracks that are DRM free if not for bold moves by Steve Jobs. In doing so, the entertainment industry got disrupted and Apple took a giant slice of the digital entertainment market.

The competition in this market is very different and is harder to gauge. There’s Amazon as a direct competitor but there are also cable providers and other traditional forms of media delivery systems. Apple needs to set its sights on dominating this sector. In a sense, iTunes is probably its only branch where it is not hindered by the need to promote its own hardware. iTunes works on iDevices but they are also available on non Apple devices thanks to its DRM free approach. In order to push the envelope further, Apple needs to take a similar approach of putting iTunes on as many devices as possible. It may sound like a far fetched break from Apple’s tradition but only by doing so can it achieve complete dominance of the entertainment industry.

 

Apple needs to set its sights on dominating this sector.

 

The word is that Apple is working hard to make deals with content providers. As much as I have been critical of its approach in other areas of its product line up, it is making the right moves with iTunes and digital media distribution. iTunes must remain the front and center of this sector, not the Apple TV or the iTV or whatever TV that is being rumored. There is barely any margins in TV or making TV boxes. Own the content, perfect the delivery and distribution – then it can decide the best way forward to maximizing revenue streams. Software first, then maybe hardware.

 

 

Conclusion

2013 will be a very important year for Apple. It cannot rely on the launch of the iPhone 5S and the iPad 5 / iPad Mini 2. iOS must take a giant step up. It is time to allow it to do more. Looking at what Google has done with Android, it is not crazy to suggest that iOS can step it up without losing the polish and shine it is so deeply invested in.

The iTunes sphere will be Apple’s best bet going forward. They stand a real chance of being a persistent leader in this sector without being quickly hammered down as has happened with Windows and Android devices.

Tim Cook has difficult decisions to make. He was enjoying the fruits of Job’s favour when he smiled late in 2011 and early 2012 declaring he had the best job in the world. Contrast that to the last earning call and public appearances to reassure investors on Apple’s relevance and strategy.

Tim Cook has to be his own man with the key take away being long term dominance and profitability, not short term romantic growth miracles. He has every chance to be a better businessman than Jobs could ever dream of.
 

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