Aug 26, 2011

Why Apple Worked The Second Time

Why did Apple 1.0 fail but Apple 2.0 succeed? That, of course, is the $350B question.

1. Economics. Although Apple is now known for introducing premium priced products, at the time the iMac was introduced, it delivered incredible value for the price point. The iPad has put web surfing, applications, and media consumption in the hands of millions for well under $1,000. Apple 1.0 had to foot all the manufacturing costs, costs which nearly bankrupted the company. Apple 2.0 focused on the design, but created an incredible cash machine by outsourcing the manufacturing.

2. Founder. Soon after Apple got its founder back, Microsoft lost its founder at the helm. As investors have learned time and again, there is simply no substitute for a founder’s product vision. While Apple, the company, faced intense competition, there were few founder visionaries at the helm who could compete with Steve Jobs.

3. Accessibility/design. In the early to mid 80’s, personal computers were a completely new market. The Mac, with its graphical interface, beautiful fonts, and then high resolution display, was way ahead of its time.  Users were looking for function over form.

The second time around, the personal computing market was established. The mass market shifted and was looking for form over function. Over the past decade, design and style moved to the forefront. With consumer machines relatively equal in underlying hardware performance, it was more important to have the best user experience than the one with the most features.

4. Channel. Although Apple did ground-breaking and incredibly disruptive marketing with its 1984 commercial, IBM (and Compaq) owned the channel. They owned the path to businesses and consumers.  It was still very much an era of “you can’t get fired for buying IBM.” With the iPhone, Apple truly changed the game of reaching the consumer. No longer are carriers in control; now they compete for Apple’s latest products.

5. Integration/disruption. In periods of massive disruption, integrated solutions win. In non-disruptive markets, horizontal solutions win. In the last 15 years we have witnessed widespread adoption of broadband; digital media going mainstream; and, of course, the mobile revolution.

Although there were MP3 players well before the iPhone, no other company successfully negotiated the media deals and delivered the end to end experience necessary to make paid media consumption not only the realistic alternative – but the preferred one. In mobile, Apple delivered a smartphone form factor others had failed to achieve. The iPad enabled consumers to consume, quickly, and easily.

6. Lack of a focused competitor. Apple 2.0 lacked a competitor that was purely focused on the consumer. True, there was incredible competition. But there was no other best of breed, integrated product in the market.

The Wintel based product offerings competed on price and performance. The companies who built those products were not focused purely on building great consumer products. The hardware vendors, like Microsoft, were selling to enterprises and consumers, and trying to do so across multiple product lines, from desktop and mobile computing to storage and services.

7. Market share. Windows not only got to take share from the DOS market, but benefited from new market opportunity as well. Apple 1.0 never got to take market share. In contrast, Apple 2.0 took the existing MP3 market, then took share from the existing desktop market, through iPads and iPhones. That in turn has had the added bonus of driving adoption of Macs on the desktop.

8. Applications. Apple 1.0 could not compete with the third party ecosystem created by Microsoft around Windows, not to mention Office itself. With the iPhone and iPad, Apple 2.0 re-energized the application ecosystem. Apple 2.0 won the hearts and minds of developers.

Conclusion
There are numerous lessons from the success of Apple 2.0: how to create new markets while stealing share from existing ones; the virtues of integrated offerings during periods of disruption; the importance of distribution to every business, large or small; and the broad appeal of great design.

No one knows for sure what the future holds for Apple 3.0. But one thing is certain: Steve Jobs and Apple 2.0 will be missed.

2 Comments

  • Dave, excellent, succinct piece.

    I think there is a theme that interconnects a number of the points you mention that is at times at risk in many technology organizations – particularly those that have frequent releases. That is, the drive to excel. Jobs, at times to his detriment, would not compromise on demanding excellence and developed and organization that thrives on it. This, unfortunately, is not a requirement for success – I could list of number of household names that compromise on excellence for feature turn around or have their paying customers perform the function of a QA team. But I do believe it is what separates the good from the great (even if the good are worth billions, too).

  • Dave – great piece – I am in awe over Apple’s courage to cleverly redefine the company as a mobile platform provider and draft a smart manufacturing plan to monopolize the supply chain on critical parts. Beautiful how their integrated solution, yielding so few third party dependencies, makes it possible for them to shorten and control their release cycles and deliver optimized product performance. No partner-based business model can compete with the speed with which Apple can turn a release. No mix and matching of off-the-shelf CPU and components will yield the performance and battery life that Apple can optimize around their integrated design ownership (CPU/OS/UI/Cloud). The ground swell of ISP motivation they generate through guaranteed payment and simplified distribution is every software developers dream: a new sandbox with no piracy. Jobs’ relentless passion for humanizing technology and design simplicity finally found its mark. PCs, even at $300, are clearly too complex and immobile for what consumers need and value on a daily basis. Apple’s integrated solution is a piercing sword in the side of the PC market model. Let’s not forget attribution to Jobs’ vision and tenacity to revolutionize the entertainment industry and the asset of employee loyalty/commitment to secrecy. All are amazing assets that build a competitively immune foundation that even I am envious of. ;-)

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