I ran across a rather interesting article on OSNews recently disputing the notion that Apple's recent success demonstrates the power of the "end to end" manufacturing model over the "component" model. The "end to end" model is one where both hardware and software are controlled by the hardware manufacturer. Apple is its most notable standard-bearer. The "component" model separates hardware from the software which runs on it, requiring hardware to be compatible with a third-party software product. Most of the desktop computer industry follows this model, and my employer is the source of the software to which most of that industry must conform.
Given the recent success of Apple, is it a sign that the days of the component model are limited? As the author notes, most of that success is due to the growth of the iPod, which now accounts for 40% of Apple's revenue. Furthermore, based on historical data, Apple's approach to desktop computer development isn't a recipe for success. Quoting the article:
Apple PC market share was 4% in 1999, then fell, with some ups and downs, to a bit over 2% currently. There seems to be a lower limit of around 2%, but the trend has been steadily down for the last 5 or 6 years. In summary, Apple is not growing in computers, and its market share is falling.
Of course, for a company with a small and shrinking desktop market share, Apple's computer segment is surprisingly profitable. The article explains that the soure of this profit is the "locked hardware / software" combination that sacrifices market share in exchange for easier profits due to customer dependency:
It has permitted higher prices and a higher lifetime profits for Apple. Over the years of owning an Apple, you pay Apple pretty much annually for software upgrades, and you pay a higher price initially for the hardware/software combination. Dell gets nothing from Service Packs. This adds up to an average percentage margin difference of around 15 points. Apple's margins are about 30%, Dell's are about 15%. Check out Morningstar to confirm this. It has also permitted Apple to milk the base. If you are locked into OSX, you have to pay the Apple price to get your next hardware. If you're running Windows, you can get your next machine from anyone you like.
All interesting stuff, and if you are a dyed-in-the-wool Apple fan, sure to send you into a frothing rage. That, however, is not the point of my post.
iPod isn't exactly a closed system. Granted, it runs Apple software, and the FairPlay DRM it uses is not widely licensed. However, how many iPod users really buy content from iTunes?
A decent number probably have purchased a handful of songs, at least if iTunes download numbers are any indication. iPods, however, support MP3, and I bet that upwards of 98% of the content most people play on their iPods is simple, unprotected MP3 music.
Imagine what would happen if Steve Jobs were to announce that the next generation iPod would ONLY play media protected using FairPlay DRM and purchased through iTunes? Spending a trillion dollars and turning the United States into one giant iPod advertisement wouldn't do a bit of good, because no one would buy the thing.
In other words, compatibility matters, even for "closed" systems, and that explains why Apple personal computers face ever diminishing market share, while the iPod market continues to blossom. The iPod is compatible with the media most people use on a regular basis. The Mac computer isn't compatible with the hardware and software most people use, and that makes it harder for Mac systems to compete.
That's why I think the best chance Apple has to reinvigorate its desktop computer business is for Apple to ship systems that run Windows, a proposition infinitely more plausible now that Apple has moved to the x86 architecture. I've said this before and I'll say it again - Apple makes great hardware. Other media players support MP3, yet they aren't taking the portable music world by storm. Apple has managed it by creating a VERY good media player, one that is simply better than the competition.
They can manage the same in desktop computers, provided they build the necessary level of compatibility. Apple computers that run Windows wouldn't be in direct competition with the Dell's of the world any more than the Bentleys and the BMWs of the world must compete with low-end cars from GM. Thorstein Veblen called the tendency for people to buy high end products the pursuit of "invidious distinction." iPod's are great products, technically speaking, but they are also fashion accessories, a status no company save Apple has achieved in the world of computing products.
There's no reason they can't manage the same thing with desktop computers. They just have to achieve the basics of compatibility, and the rest is left to the skills of Apple hardware designers.
Just as a pre-emptive roundhouse kick to the heads of "certain people," yes, I am a Microsoft employee. That has nothing to do with whether or not my analysis is correct. Gold is gold whether it comes out of the ground or from a poor man's mattress.