Why Apple Wins? (Part 4)

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WHO INVENTED WHAT in the history of the graphical user interface is a well-worn debate. But Apple was clearly the first to successfully market a mainstream computer with windows and a mouse. Microsoft just happened to be around at the time and, as court rulings years later have decided, did not copy, steal or blatantly rip off the Mac OS in any way. Well, maybe a few ways.

Various reported conversations between Steve Jobs and Bill Gates have the latter making the point, in essence, that being first, working hardest and shipping the best product didn’t actually do Apple any good. Microsoft got wind of what Apple had learned from Xerox’s labs while the Mac was still in development, and was able to announce its own GUI a couple of months before Apple’s was available to the public. The fact that Windows 1 - which didn’t actually appear for another two years - was a clunky mess, featuring windows that didn’t even overlap and very little practical functionality, didn’t prevent it from starting to build up a user base across the burgeoning PC clone market (initiated by IBM, ironically, in response to Apple’s earlier personal computer launches). Had Apple rushed out a similarly basic product, maybe it could have got ahead. ‘But our stuff is cooler,’ protests Jobs at a 1983 meeting, as depicted in the movie Pirates of Silicon Valley. ‘You don’t get it, Steve,’ replies Gates. ‘That doesn’t matter.’

Description:  Steve Jobs and Bill Gates

 Steve Jobs and Bill Gates

For years, while Microsoft and its good-enough-but-not-cool software dominated the market, this argument was frustratingly plausible. Now, however, Apple looks like getting the last laugh. As technology has escaped from the IT manager’s domain into the home and the street, buyers increasingly familiar and comfortable with technology are making more autonomous choices based on look, feel and usability, not just price and lists of features. Suddenly having the coolest product does matter. It matters a lot.

If this is true on the desktop, it goes double for mobile. When Apple released the iPhone in 2007, running the adaptation of OS X (formerly Mac OS) that would later become known as iOS, nobody compared its specs to those of Windows. The iPhone was just an amazing new thing to hold and use, and the way its touchscreen interface worked felt absolutely right. Aspects of user experience (UX) that had never really been considered by Windows’ developers, such as inertial scrolling and the ‘bounce’ when a moving element reaches its limit, were central to the appeal of the device - the software, more than ever, working in harmony with the hardware.

After this, clunky but functional would never be good enough again.

IT MAY NOT have won the first round back in the 1980s, but by sticking to its principle of aiming for the best, not the fastest-selling, Apple has ended up a quarter-century later creating products that are the best and the fastest-selling. To date, as announced at WWDC last month, there are 400 million iOS accounts. The App Store hosts 650,000 apps (225,000 of them designed specifically for iPad), and 30 billion apps have been downloaded, from which Apple has paid out $5 billion to developers. These numbers would be impressive in any industry, and indeed Apple has raised its sights from merely beating every other tech company to beating every other corporation in existence.

Description: Apple's WWDC, June 2012

Apple's WWDC, June 2012

So not only is Apple winning, but it finds itself on the right side of history. Microsoft had years knowing that unless something radically changed in the IT landscape, it would continue to dominate. Perhaps that was its downfall: inertia began to seem like a good thing. Today, Apple knows it’s dominating precisely because the IT landscape is changing - in ways that favour Apple.

Even if the tide were somehow to be reversed, or a wrong turn left Apple beached, the enormous wealth it’s built up in recent years gives it the ability to keep spending to get itself back on track. The $45bn it’s giving back to shareholders through dividends over the next three years is likely to be exceeded by its profits, keeping its cash pile of around $100 billion intact. Microsoft, by comparison, holds some $59bn - and CEO Steve Ballmer’s tendency to make expensive and unhelpful acquisitions won’t grow that figure.

A year ago, when Microsoft bought the loss-making Skype, industry pundit (and former Apple executive) Jean-Louis Gassee wondered in a Guardian blog: “Why did Microsoft pay $8.5bn -10 times the company’s revenue - for a business that has changed hands so many times, never made money, and comes with substantial debt?’ This was after a year in which Microsoft’s online business had already lost $2.5bn.

APPLE DOESN’T FIND itself with so much cash merely because it got lucky. And it’s more than luck that gives it the ability to spend it wisely. The company has decisively pursued margin over unit sales, and once again aiming for the harder of two targets has resulted in it hitting both: it’s now selling very large numbers of devices and making more money from each one than its rivals.

While analysts disagree wildly about the market shares of Android and iOS, who’s currently ahead and which way things are moving, there’s no doubt that Apple is doing vastly better out of it all than any other manufacturer. The profits made by the iPhone alone account for 73% of the market, according to Asymco ( ‘Two years ago the vendors generated profits of $5.3bn in the first quarter, and last quarter they generated $14.4bn,’ notes Asymco’s Horace Dediu. ‘Seen this way, the story isn’t so much that Apple “took the profits from the incumbents”. Rather, it’s that Apple created a vast new pool of profits.’

Making huge amounts of money where there was none before isn’t likely to escape the notice of Wall Street, and Apple is something of a golden child to the stock market these days. While the dollar value of a share is fairly meaningless in isolation, it’s not uninstructive to compare Apple’s share price of $575 at the time of writing to IBM’s $192, Microsoft’s $29 and Nokia’s $2. As recently as 2004, Apple would have been at the bottom of that bunch. But in 2007 its market capitalisation (the total value of all its shares) rose above IBM’s for the first time, a lead it would establish firmly by 2009, and in 2010 it overtook Microsoft. By this measure, it’s currently the number one company in the world.

NOTHING SUCCEEDS LIKE success, and Apple’s riches allow it to invest to keep the ball rolling. Surprisingly, the company doesn’t spend a higher than usual proportion of its income on research and development. In the first quarter of 2012, for example, it reported an R&D spend of $758 million. That may sound a lot, but compared with the $46.3bn of sales in the same period it’s not enormous. Microsoft, whose quarterly profits Apple overtook a couple of years ago, spent $2.3bn in that quarter; Google $1.3bn. Even struggling RIM and Nokia spent more in proportion to their income.

Description: NOTHING SUCCEEDS LIKE success, and Apple’s riches allow it to invest to keep the ball rolling.

There, perhaps, is a clue to Apple’s thrift. It doesn’t need to spend a fortune developing products because it focuses narrowly on those it really needs to do. It may have the occasional flop - including, Jonathan Ive recently indicated, prototypes that never see the light of day - but by and large each of its relatively small number of products sells well and makes money, so little effort is wasted.

It’s when putting its designs into production that Apple is prepared to get its wallet out. The world only has so much capacity to build advanced components such as the latest type of screen. By planning ahead and buying up output for its next launch, Apple can maximise its economies of scale, guarantee sufficient deliveries to meet demand, and make it difficult for competitors to rush out ‘me too’ products with similar specifications, because the parts are spoken for.

It sounds a clever thing to do, but is Apple actually doing it? Although the company is notoriously cagey about its operations, when big money is involved a certain amount of information has to be disclosed. Last year, Apple announced in a quarterly earnings call that it would invest $3.9bn in ‘inventory component prepayment’. CFO Peter Oppenheimer explained: ‘During the September and December quarters, we executed long-term supply agreements with three vendors through which we expect to spend a total of approximately $3.9 billion in inventory component prepayment and capital expenditures over a two-year period.’

Whether that was for LCDs, flash memory or some other component, it’s the kind of investment that rivals would find very difficult to match. Not only that, but committing to that level of expenditure upfront means having a high level of confidence in the success of unreleased products and the ability of your supply chain to deliver them. It’s no coincidence that supply chain management is the speciality of Tim Cook, who had a massive impact on Apple’s manufacturing efficiency long before he rose to the head of the company.

Description: Bring the noise Apple Stores are beginning to pop up across China

Bring the noise Apple Stores are beginning to pop up across China

ANOTHER SPECIAL INTEREST of Cook’s is China. With hundreds of millions of potential customers among an increasingly affluent middle class, it’s a counter-argument to the gloomy observation that no company can grow like Apple forever. In a TIME cover story, ‘Made in China: Why Apple’s future depends on the world’s biggest market’, Hannah Beech wrote this month: ‘So far, much of Apple’s growth in China has been a lesson in how to prosper without really trying.’ You can’t yet buy an iPad 3 in China; the iTunes Store doesn’t work there, though it’s

just opened to 12 other Asian markets; and Apple is still negotiating to sell the iPhone through China Mobile, the biggest network operator, although the smaller China Telecom carries it. In January, stores had to be closed when scuffles broke out on the first day of sales of the iPhone 4S after overnight queueing - a familiar Apple phenomenon.

Things don’t always move quickly in the People’s Republic. Exactly two years ago, Apple said it planned to open 25 stores in the country within two years. So far, it has only six, points out Beech - but ‘four of those are its most profitable stores worldwide.’

The potential can hardly be overstated. Last quarter, Apple’s not-really-trying in China generated $7.9bn of sales. In 2009, just 2% of the company’s revenue came from the territory; in 2012 it will be 20%. Plans for India and Russia are also being drawn up. Whatever it is that sets Apple apart, the next few years will reveal just how universal its appeal may be.

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