Hardware

INDUSTRY ANALYSIS

The Rebirth of Apple as a Multimedia Company

We may be watching the demise of Apple as a PC company and its rebirth as a cross-platform multimedia company. This has been going on for some time, but it just became obvious to me when I had a chance to review Apple’s latest financials. The PC market grew at a good rate — at least compared with previous years — with 16 to 20 percent growth, depending on who provided the numbers. Apple grew its PC business at a near-flat 5 percent and lost share, again.

On the other hand, the MP3 player business grew an impressive 87 percent. Now this is a hot market. Apple grew its MP3 player business better than 900 percent. That’s a nine followed by two zeroes. I’d love to see anyone argue that Apple isn’t kicking the proverbial butts of the other player makers, including old stalwarts like Creative Labs and Sonic Blue as well as giants like Phillips, Thompson Electronics, GE and Samsung.

Next time you are watching an Apple ad or looking at an Apple billboard, see if you even can find a personal computer. The ads are almost all about the iPod or iTunes. Head-to-head comparisons between Apple and Napster, RealNetworks and MusicMatch almost always favor Apple as number one. And, clearly, the iPod has taken all comers, slapped them around and spit them out. While the new mini-iPod has had some initial issues, it remains one of the hottest retail products on the market as well, making kicking butt a new Apple tradition.

Decline of PCs

If you think about it, on the PC side, Apple really is little more than a brand and some nice shells. The company, like most other PC makers, has gone to offshore manufacturers for most of its products. Underneath, the hardware is mostly IBM now, and the software is based on an open-source version of Unix developed by others, called FreeBSD. The actual intellectual capital invested by Apple in the platform itself seems to be in decline, and, as much as I personally like FreeBSD, the hot alternative to Microsoft these days is Linux.

What I personally find fascinating is that the SCO-Linux-IBM fight hasn’t really benefited Windows as much as it has FreeBSD. I’m convinced there is a much stronger play here that could be made by Apple and others, but after seeing what IBM did to Linux, I’m not sure I even want to suggest that any company get more involved than it is today with FreeBSD for fear of spoiling that platform as well.

Apple did try a massive switcher campaign, but sales numbers didn’t move much, which suggests that if the company hadn’t done this campaign, its market-share decline would have been much more dramatic. Further, this lack of movement indicates a market that, outside of Apple loyalists who undoubtedly will be writing to disagree, is really no longer interested in Apple as a platform.

Not that I think this is a good thing. Apple has historically made design important to the PC industry, and it continues to build products the rest of us lust after, even though we increasingly can’t use them. It also has been the leader in effective marketing, but I have to admit this marketing failed badly when it came to growing PC market share, even though the company exceeded its wildest dreams when it came to the iPod.

Defining Apple’s Strengths and Weaknesses

In looking at Dell, which is once again the market leader in the PC business, you realize Dell’s strength isn’t really PCs. It is a technology follower and tends not to be first in much of anything. However, Dell is incredibly good at managing costs, logistics and sales channels, which works for the company across an ever-increasing group of products. Some industry observers are projecting that, at some point, Dell and companies like Amazon will become competitors as Dell slowly looks more and more like a channel in and of itself and less and less like a manufacturer.

Apple’s strength is design excellence and its innate grasp of the importance of well-funded, good-quality marketing. Its PC platform is actually a weakness right now, not because it isn’t well done but because the market likes standards and Apple isn’t one.

This has forced the company to build more and more of the applications that reside on its hardware because it has been increasingly hard to capture developers who want to develop on Apple. And, as the company builds more and more of the applications its customers use, software developers look at Apple more and more like a competitor and start to position themselves against both the Apple applications and the Apple platform.

Once on this slope, there are few successful ways I know of to get off.

Apple as an ODM

For years, I’ve pointed out that I think Apple could do very well in the Wintel market, but it wasn’t until the iPod was released that I could prove it. In that first holiday season, Apple sold out, and what was not widely known is that after the holiday season the company had more returns than I’ve ever seen before. These returns were from Windows users who had bought the iPod but hadn’t realized that it didn’t yet work on their PCs, which showcased a demand that Apple wouldn’t actually realize until months later.

Apple did have a belief that the iPod would pull Apple hardware sales. Unfortunately, that belief didn’t pan out, but, as I noted above, iPod sales have been phenomenal and mostly on Wintel hardware and against entrenched Wintel vendors like Creative Labs, which showcases just how powerful Apple’s advantages are in this market.

Recently, Apple even cut a deal with HP to rebrand the iPod, allowing HP to tie the device to the company’s Media Center PC line and make it part of the broader converged market that is emerging. This is Apple as a multimedia original device manufacturer (ODM) and clearly a new role for the company. The possibility that Apple could work with HP on PC design as well is likely on the table. Both companies clearly could benefit from a much broader collaboration focused on a future they apparently both can see.

The Future for Apple

I see Apple’s future role as more of a cross-platform vendor, moving from the Mac OS to Windows and possibly even to Linux as the company broadens its base for products that potentially could have a much larger audience, such as Final Cut Pro, GarageBand, iLife, iPhoto, Motion, Shake and Logic Pro. In fact, given the interest in Linux and the similarities between FreeBSD and Linux, an OS X user interface for Linux is a possibility and one that a large number of Linux users probably would like better than the mess they currently have.

How fast this happens depends on the Apple leadership and their willingness to step away from the crutches of a niche hardware-software platform and embrace the broader market with their solutions. The execs are getting daily wake-up calls that the general PC market wants to buy Apple stuff if the company will simply make it available to that market — and that their own PC market is in trouble.

This market is defined by companies that, like HP, take big risks like massive mergers and make them work. The market also is defined by companies like IBM, which failed to spin off its software, thereby avoiding risks but giving the related markets to others. Apple is on the cusp of an important decision that either will take it to a position of dominance or will doom it to the declining niche of companies that could have been contenders. The iPod has shown the way, and my bet is Apple will eventually follow.


Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.


9 Comments

  • You write:but after seeing what IBM did to Linux, I’m not sure I even want to suggest that any company get more involved than it is today with FreeBSD for fear of spoiling that platform as well.
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    So by that I suppose you mean to say that somehow, IBM ruined the Linux platform right?
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    Would you care to elaborate on that? How exactly did IBM "ruin" Linux? Are you refering to the SCO case where SCO, after claiming millions of lines, has now dropped all patent claims, and now has also made a point to drop all copyright claims against IBM contributions?
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    I mean, you drop this line in your article as if it was just an offhaded unimportant comment. But you’re in fact taking the position thet the fastest growing server operating system on the planet is "ruined".
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    As you probably know the definition of ruined means " destroyed physically or morally", " doomed to extinction".
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    Really now? You propose that Linux is Ruined???
    May I suggest that you mesure your words maybe? Because surely you didn’t mean to say that this whole worldwide trend is based on a ruined OS. That would just be a frivolous statement. And since writing is your living…you should REALLY concentrate on using proper words….unless you’re that bad at analysing trends…

    • You are right to a point, but the reality is that the horizontal model has some serious issues as well, and for most people it is far more satisfactory to overcome the issues related to the vertical model than the horizontal model. The trouble is not enough people get to try the vertical solution to appreciate the benefits. It also costs more in initial outlay but TCO is less with a Mac. Having both feet in both camps this is as clear to me as night and day, but most people will never know the joy of using a tight vertically integrated solution apart from using an iPod.

      • > the market has apparently voted with its feet.
        What does the market — or more specifically, the masses — really know of Apple? Right here and now, the masses have an excellent option to Windows — for those tired of living with a virus-ridden and hacked into bulls-eye on their backs, that is. Generally, the Mac platform is a great option for WAY MORE people than those people realize. And yet, they either know nothing about Macs, or believe misperceptions about Macs, or are told by the MSCE dudes at work (who have built their career on an OS that is NOT Mac OS) to not bother because "it’s a toy/there’s no software/they’re only good for video/Apple is going bankrupt/nobody uses a Mac" blah-blah-yada-yada-you’ve heard them all before. Apple’s biggest challenge these days is to try to dispel the misperceptions — and BTW, their "switch" ads were a poor solution to this. For heaven’s sake, I wish Apple would FIRE their ad agency. Now as for the corporate IT, that’s a more challenging ball of wax. Apple is trying to mend the bridges they burned in the pre-Jobs era. I have no prediction one way or the other on this. If they gain more traction, groovy. if they don’t I wouldn’t be surprised. As for that vertical integration though, to paraphrase Steve Jobs who paraphrased Clinton just last week, "It’s the OS, stupid." The economics of hardware alone are difficult for Apple to compete against — although, they’ve gotten a lot better in recent years — but there’s that old TOC to consider… and many corporations and individuals simply ignore that. To me, people scratching around for how much PC they can dump in their car’s trunk one day for how little money are missing the point that it’s THE OPERATING SYSTEM that they REALLY have to live with EVERY DAY FROM THEN ON. In daily use, they’ll long forget how cheap they got that system for, when their DLL library gets messed up or a nice little virus either trashes their hard drive or turns their computer into a hacker’s little zombie (DDOS attacks) and they probably just have to wipe the drive and reinstall Windows. people come to accept a sub-par user experience because that’s all they think there is. It’s a joke, Ron! And, is Microsoft REALLY that non-proprietary? I know you were referring to the hardware when talking vertical vs horizontal, but they will most likely b running Microsoft Windows on those PCs — and Windows AINT open-source, baby. They design their wares to be VERY vertical. So, I’m ending a little off-topic here, but I think Apple’s biggest challenge is to fight misperception. "Switch" tried it, but it wasn’t the right approach IMHO.
        One question, Rob: do you know of a resource of info past marketshare numbers and total userbase for persona computers? I’d sure like to know how Apple fared in the old days.

        • No way. I’d frankly be interested to see that happen, but Apple would not survive the shocking upheaval to their cash flow. I’m TOTALLY guessing, here, but their hardware sales would totally TANK if they allowed OS X to run on anything. In order for them to make a profit as an OS to the x86 platform, how much installed base would they need to prosper? I’d say 15%. FIFTEEN PERCENT!! But, they’d be bankrupt before they hit 10% — and can you imagine ANYTHING hauling off with 15% of Microsoft’s Windows marketshare?? I can’t. Linux might, but as it’s open-source, it has little lose in the risk. No, Apple going x86 is a well worn wish of many PC users, because they realize how great OS X is. But, once again, their fixation on their hardware clouds their objectivity. Meanwhile, I couldn’t care less about Apple’s hardware. Sure, it’s slick stuff, but if you put a Windows system inside the G5 tower (and some punk is alleged to have done this), I’d totally take a pass on it. I’d be happy using an ugly beige box, so long as it had Mac OS on it.

          • You are missing my point. Currently, if Apple sold a version of OSX for a white box PC very little of Apple’s hardware sales would be affected. Look at what Apple sells today. People who buy a laptop are not affected. Apple would not need to support PC laptops. Few people who today buy an iMac is not going to buy a white box PC – they are very different machines. One is super simple with ideal design the other is a computing box. If you really want to save money you get a PC, Macs cost too much if price is the deciding issue. The G5 is price-performance competative on the high-end, so it would not make much difference if low-end competition comes in. The only loser is the eMac – and even there you still will have a following for low-end all in one machines. I just think that given what Apple has done to encourage switching – everyone who might switch, has for the most part. So the downside is that current Mac owners buy PC instead of mac hardware. But I bet you that most Mac owners love Apple hardware enough that they would not want to move to a PC box even with OSX. On the upside you get all these geeks, who use linux, who are windows weenies but want to try soemthing else that is less painful. Lots of people that may want to use the iApps on their hardware. Think of the implications for those who develop on OSX. Or for game makers. The options for server administrators to use OSX rather than linux. Simpler administration, etc. Apple hardware sells itself. It is competative. You might find people who get their feet wet running OSX for x86 and later buy Apple hardware. You might not find the migration that you expect – if Apple can keep performance parity and maintain a design advantage.

  • The article is based on a faulty premise mixed with flawed conventional wisdom. The premise is this: since Apple is having so much success with the iPod, it must want to de-emphasize itself as a maker of computers. Ridiculous. The whole reason the iPod exists is as a direct consequence of Apple’s "digital hub" strategy. In turn, this strategy is made possible by Apple’s dreaded "vertical integration" as a company. Apple controls the whole widget, and therefore it can make hardware that dovetails into software. So here’s where the conventional wisdom comes in–vertical integration is supposed to be bad. Mind you, in Apple’s case vertical integration isn’t bad, but it’s *supposed* to be bad, and every business pundit in the country says it’s bad, so by-golly it is.
    Sure, you can make the iPod work with Windows. But Windows is just an ersatz Mac. Always has been. Don’t look for Jobs to say, "Well, I know we just spent all this time on Mac OS X–arguably the best GUI ever to sit on Unix–and Apple has written all this wonderful software to fit hand-in-glove with Mac OS X and our hardware–but screw it. We’d rather port all Apple’s software to the virus-infected playground which is Windows."
    Steve Jobs has been talking about Apple’s Digital Hub for a few years now. Certainly, if you write about technology, this is the big picture you shouldn’t be missing. If Apple does abandon the Mac and the digital hub, it will be because Apple found a better alternative, not because the company suddenly adopted acquiescence as a corporate strategy.

  • The truth is that Apple has been more successful at switching Windoze users than the creative pros still using OS9 and they are STILL not budging. OS9 was and is fantastic for pros working alone or in small groups. The cost of buying all new apps is just too prohibitive, and for what? Is moving to OS X going to improve the quality of output? For many people the answer is emphatically no; in fact, it could make things worse for a while at the very least. The other worrying thing is that with every OS X release, the culture gap between OS9 and OS X grows ever wider.

  • Seems like it would be better to port OSX to Intel than to spend a lot of time moving iApps (except for iTunes) to Linux and Windows.
    Apple can carve out the hardware areas they do the best: laptops, workstation class PCs and designer PCs but roll a version of OSX for the cheap PC market. Put in a good facility for copy protection and online payment and Apple would make back the investment purely on people buying it to kick the tires.

  • If Apple is getting into making toasters, then why do they have Final Cut Pro (Final Cut Express), DVD Studio Pro, Shake, Logic Audio and JUST released a competitor to Adobe After Effects, called "Motion"?
    I think that the iPod’s success and Jobs’ success with bringing legal music retailing to life has blinded your objectivity. Yes, G5 sales are not as high as expected, but there’s a couple of reasons: one is that it hasn’t had a speed bump yet, thanks to the problems IBM had at their East Fishkill plant that makes the G5 processor. Supplies were constrained. Number two is that the G5 Powermac IS a first edition design with many radical differences when compared to the G4’s architecture. Some people prefer to not buy the first version of anything, waiting until the "Rev. B" version comes out.
    The iPod phenomenon is also a temporary thing. it’ll probably last a few years, but eventually, the demand will level off. So, i don’t think that Apple is banking their future on gadgets — and neither should you.
    About Apple’s computer sales: although the market overall is increasing faster, Apple DID sell more CPUs last quarter than in previous quarters. More people ARE buying Apple computers. Everybody fixates on quarterly marketshare, and that is certainly an important factor, but so are Apple’s actual units sold numbers. Frankly, THAT number indicates more accurately the health off the platform, because it is specific to Apple’s own market. Is THEIR userbase expanding? It would seem so. How about the installed userbase? how is it doing? How big is it? I just spent CAN$1,500.00 upgrading my over four year old Mac to be pretty well as fast as any G4-based Powermac Apple ever made. I also spent CAN$800.00 on software upgrades — and yet, I haven’t bought A NEW MAC in years. Don’t I count for this in a developer’s eye?
    If people hear about low quarterly marketshare and see THAT as the only barometer, then Apple — in the perception of the masses (and apparently the pundits) — is doomed… for no good reason (how can one company with a unique platform ever be able to do the numbers equal to MANY companies selling on an open OS platform, anyway??). In this day and age, a Mac really is the BEST solution for the masses. They’re easy to use, virus free and way more securely designed than Windows. All the popular uses of a computer can be handled by a Mac. The only thing that keeps the masses from buying Macs more often is misperception… and quarterly marketshare figures do nothing but add to that misperception.
    One last thing about marketshare, and maybe you can help on this: At what point did Apple command the largest quarterly marketshare? I don’t now myself, but I’ll guess it might have been in the late 1980’s. Say, just for argument’s sake, their share was 15%. Now, here’s a question for you: what is bigger? 15% of the 1989 installed base of computers — when the internet was an obscure thing used by few and far less homes and businesses had computers than there are today… or, is 3% of 2004’s marketshare bigger? I wish i knew what the data was on this, because 2004 is NOT the same world as 1989.
    Anyway, the Mac platform has never been a better place to be than it is, today. More people need to know this, especially given the frustration that can occur with Windows, and the relative immaturity of Linux for the Desktop.

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