It’s war. Full out war. Savage your former allies war. To the victor go the spoils war. To the death war.It’s Google (GOOG) against Hewlett Packard (HPQ) against Microsoft (MSFT) against Dell (DELL) against Lenovo (LNYGY) against HTC against Amazon.Com (AMZN)—and, of course everybody against Apple (AAPL).
Apple hasn’t left competitors any choice. Its iPod and iPhone and iPad have completely disrupted the Windows/Intel model that once ruled the computer world. The disruption has been so thorough that Apple has replaced the old model with its own. Now it’s compete on Apple’s terms or become irrelevant.
Need some proof? On April 28 Hewlett Packard bought wireless phone pioneer Palm (PALM) for $1.2 billion—a premium of 23% to the share price. For its money Hewlett Packard got a phone maker headed to bankruptcy with a revamped product line that no one was buying—and what is by all accounts a really good operating system, webOS.
For all intents and purposes Hewlett Packard, a long-time partner with Microsoft that had for years built everything from PCs to lap tops to note books on Microsoft’s Windows operating system and that was set to roll out an iPad killer tablet built on Microsoft’s operating system , spent $1.2 billion to buy an operating system.
That’s how much Apple has changed the terms of battle.To stand any chance of surviving, let alone winning, a computer company can’t just be a re-packager of commodity chips and software anymore. (I’m still not a big fan of Apple’s PC strategy by the way. I think they could be grabbing more market share in that sector than they are. See my post http://jubakpicks.com/2009/11/13/has-apple-blown-it-did-the-company-squander-the-competitive-chance-of-a-lifetime/ )
You have to own your own operating system and build your own hardware to make not computers but easy to use, innovative consumer devices that get upgraded with new models as if they rode (and created) fashion trends. And then own a retail channel that sends consumers back again and again to your product.
Nobody in the sector is very well equipped to compete with Apple on these terms. Putting together hardware and software teams that would rank in the industry’s top ten at one company isn’t exactly easy. Apple has been working in this direction for a decade. And tech companies aren’t accustomed to running retail stores of either the glass and stainless steel or virtual types.
But Hewlett Packard’s purchase of Palm, Google’s attempt to make its own cell phones, Microsoft’s perhaps mythical tablet, and just about everybody’s attempt to build an app store are all testimony to the industry-wide conviction that the old model had reached a dead end and that Apple’s iPod and iPhone finally killed it.
In the old model device makers bought chips from Intel (INTC) or one its competitors and licensed an operating system from Microsoft and engineered them into a PC or phone or whatever. The model had its advantages: Intel’s huge scale and manufacturing prowess kept driving the price of chips down and the power of chips up. Company engineers building the devices and consumers using them had a uniform operating system to learn.
But the model had what Apple has turned into a huge vulnerability. Because engineers at device makers were working with purchased processors and licensed operating systems from two separate and independent companies, nobody ever got a processor or an operating system precisely optimized for the device they were building. PCs or phones or whatever worked okay, but increasingly they worked like what they were: commodity devices built out of commodity parts.
They even looked like commodities: in a world colored in gray, black was a style breakthrough.
Apple’s PCs were different. They ran Apple’s own operating system. They were in many ways easier to use. (I’m speaking from personal and observed experience. I own both Apple and Microsoft-based machines.) Apple’s even came in colors and occasionally broke a rule or two. (Like putting the guts of the computer in the screen.)
But with its market share shrinking toward 4% (and threatening to go lower), nobody in the PC industry cared what Apple did.
And then came the iPod. Introduced in November 2001, the device had racked up unit sales of 100 million by April 2007. By September 2009 the figure was up to 225 million. And Apple dominates the market. Nine years after the iPod was introduced it held 74% of the market for MP3 players.
And it’s not as if no one else has tried to take a piece of that market. Microsoft’s Zune MP3 player hit the market in 2006, for example. But by September 2009 Microsoft had just a little over 1% of the MP3 player market. Flash memory maker SanDisk (SNDK) was No. 2 with 7.2% of the market.
To prove that was no fluke, Apple then did the same thing with the iPhone, launched in June of 2007. By September 2008 the company had sold 13 million units and, by revenue, was the third largest mobile phone maker in the world behind Nokia (NOK) and Samsung. By May 2010 the total was up to 45 million iPhone units sold since the product’s original launch and in April 2010 Apple beat out long-time champ Motorola (MOT) to become the biggest U.S. mobile phone maker. (To keep these sales numbers in perspective, Nokia shipped 127 million phones in the fourth quarter of 2009.)
But it’s not just the number of phones sold that sent a shiver through the competition. It’s Apple’s extraordinary ability to seize a market, create a high margin business, and then keep the bulk of the market share it originally claimed. Technology products aren’t supposed to work like that. They’re supposed to quickly become commodities as competitors attracted by high margins jump in and release competitive products that eat up those margins. (For a global perspective on why that is, in general, happening faster than ever see my posthttp://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/ )
And then there’s the way that Apple has been able to integrate hardware, software, and a retail strategy, the App Store, into products that create an immense, perhaps insurmountable, first mover advantage.
So, for example, in the handheld game market there are 607 games available for the portable version of Sony’s (SNE) PlayStation and 3,680 games available for the Nintendo DS, and 21,178 games available through Apple’s Apps Store for playing on the iPod Touch, the iPhone, and now in 2010 the iPad. Developers want to write for Apple’s products because that’s where the consumers are. And each new App for the iPod, iPhone or iPad becomes another reason for consumers to prefer those products over the competition. And for developers to write new software.
In the current market application developers write code for the iPhone, then Android, Blackberry, Windows Mobile, and Nokia’s Symbian. That pecking order is one reason that Apple has 200,000 apps in its App Store.
It’s not that Apple’s competitors don’t know they have to figure out a new strategy for competing in the market place as Apple has redesigned it. It’s just extremely difficult.
Nokia, for example, has its own operating system, and has launched music and apps stores but the company just can’t get the magic right in hardware. Its smart phone designs over the last two years have been late to market and just not very exciting.
Google has built a mobile operating system Android and launched what is, at this point in time, the most competitive app store to Apple’s, but its partners haven’t been able to build hardware that matches the “cool” of the iPhone. And Google’s own Nexus One phone has been a sales laggard.
Dell is searching for a strategy. And Microsoft seems thrown completely back on its heels. It took a longtime to update Windows Mobile and it may or may not have killed its iPad competitor—depending on whether a prototype named Courier was for a product intended for the market or not.
To disrupt Apple at its own disruptive game, a competitor is going to have to bring something new to the fight.
Hewlett Packard poses a serious threat. It now owns a good mobile operating system and it has long been the best, from my perspective as a consumer, in the PC world at integrating software and hardware into relatively easy to use products. (Granted ease of use in the PC world isn’t a tough bar to jump, but if you’ve even set up a Hewlett Packard printer and one from Epson, say, you’ll know what I mean.)
That gives Hewlett Packard a reasonable shot at assembling an Apple-like strategy. But Hewlett Packard comes to the battle with strengths in the sales channel that Apple can’t match. Hewlett Packard is sold everywhere. (None of this building glass and steel magnet stores. Great marketing but expensive.) It can use its sales volumes to sell products at a price that Apple couldn’t match if it wanted to, although there’s no sign that Apple wants to compete on price, thank you very much. At this moment they’re the one PC maker that I take seriously as a potential competitor for Apple in the tablet market.
Of course, Hewlett Packard doesn’t yet have a tablet product to sell. Silicon Valley was sure that Hewlett Packard was about to launch a tablet named Slate in the very near future, but that was before the company bought Palm and its webOS. Now the betting is that Hewlett Packard will delay the product, dump its Microsoft Windows operating system, and come out with a new Slate running the Palm operating system. When might that be? Good question. The end of the year?
If I can judge by its actions, the competitor that Apple is watching most closely is Google. Some of Apple’s most recent acquisitions seem to have been designed to keep technology out of Google’s hands. For example, Apple’s recent acquisition of Intrinsity keeps that company’s technology for building speedier devices away from Google. (Apple is moving deeper and deeper into chip design. The iPad runs on an Apple-designed A4 chip, although chip mavens say that much of the technology in the chip actually comes from other companies.)
Google’s acquisition strategy returns the favor. On May 3 Google bought Toronto’s Bump Technologies, the developer of BumpTop software that enables a desktop to go 3D. The thinking is that this software will get bundled into the next edition of Google’s Chrome operating system and will be used on a tablet designed to go up against the iPad by year end. (For more on the Google/Apple apps battle see my post http://jubakpicks.com/2010/01/06/the-other-war-between-apple-and-google/ )
And I certainly wouldn’t count Nokia out. I know the company looks like an also ran if all you see if the North American market, but in the rest of the world it’s Apple that’s chasing Nokia for market share. And it’s only a matter of time before Nokia manages to blunder on a smart phone design that if not cutting edge is good enough to close the coolness gap. The company has the deep pockets and the patience to win any battle that turns into a slug fest rather than a foot race.
Unfortunately for these competitors, by the time they figure out how to compete by the new rules, Apple will be well beyond the one million iPads that it has sold so far and into generation two or three of that product. (I’m betting that the Justice Department’s recently launched anti-trust inquiry won’t materially damage Apple’s competitive advantage. The investigation is looking at whether Apple unfairly uses its market share to discourage developers from writing applications for other platforms.)
Apple has the great advantage of not having to invent a new strategy—and then acquire the pieces to execute it successfully—but just to execute what it does so well over and over again.
As Steve Jobs told said to a Wall Street analyst at the company’s September 2008 conference call: “From everything I heard, Babe Ruth had only one home run; he just kept hitting it over and over again.”
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