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About this siteFor six years, the Internet Nexus served as my technology blog, but I've since started blogging at the SuperSite Blog instead. If you're looking for the blog, please head there. --Paul Tuesday, February 03, 2004Where Does Apple Go from Here?A must-read Harvard Business School interview: "If you invested a dollar in Apple in 1992, it would be worth $.79 today. The S&P 500 over that same time would be worth about $2.75, or more than three times your Apple investment ... For longtime Apple watcher David Yoffie, the Max and Doris Starr Professor of International Business Administration at Harvard Business School, the jury is still out on prospects for the company's long-term success. And Job's track record is hit or miss, he says ... His latest case, Apple Computer 2004, co-written with research associate Debbie Freier, was recently published by Harvard Business School Publishing."Some interesting highlights from this fascinating interview: - "Steve [Jobs] was spectacularly good at getting the company highly focused in his first couple of years. He got rid of a huge number of product lines. He streamlined the operations and he bet on a very small number of products." - "The Apple core customer base today is only about 8 million active users, in a world of 400 million Windows users ... There are roughly 25 million Macintosh users in the entire installed base. But in fact the real number of active users is something closer to 8 million, which is a tiny, tiny, tiny fraction of the real market for any electronic product. Historically, Apple was trying to sell to its installed base of Mac users, and that base has never been large enough to amount to a hill of beans." - "The last generation of operating systems cost about a billion dollars to develop. In fact Apple spent roughly a billion dollars to deliver OS X . They get to amortize that investment over 3 million annual buyers. Microsoft spends the same billion dollars to develop XP and they get to amortize that investment over roughly 120 million users a year ... [Apple] can't sustain that business model. The next generation operating system, the one that will ultimately replace OS X and XP, is probably going to cost $1.5 billion to $2 billion dollars. So, Apple's underlying economics will never allow them to support their next generation operating system. If (Microsoft's) Longhorn is ever successful, the pressure that will place on Apple will be enormous because Apple simply will not have the resources with 8 million active users to ever be able to support it." - "There are at least three different ways in which you can imagine Apple going forward ... One is to say they're going to build their business off of the digital home, the iPod, iTunes, iPhoto, etc., and become more of a service and software digital home application company ... The question is, can they sustain the huge premiums they earn with today's iPod when Dell is coming in with much lower-priced products and other competitors are entering the market? They're also running into the same challenge of selling a proprietary solution. (Music on the iPod can't play on non-Apple devices.) ... A second strategy for Apple is to really go back to the Mac OS licensing business and try and generate a large enough volume so that the economics of their operating systems business will make sense in the future ... The third option is that Apple says our real advantage is in application and industrial design. In my view, Apple has three critical advantages over anybody else in the markets they serve. One is they have an incredibly strong brand; two, they have been the best at industrial design, far better than their closest competitor, Sony; and third, they have been very good at delivering applications in the digital home space ... This strategy would suggest that Apple give up on the Mac OS, become a Microsoft customer, and go after the consumer PC in a very big way." - "Ultimately, the iPod by itself is not a business because they have to develop a whole suite of products that would go along with it." - "We're in a standards war right now, and there is proprietary standard with iTunes, and there are going to be alternative standards pushed by Microsoft, Real Networks, and others. If Apple doesn't open itself up and make sure that it becomes the dominant standard, it could end up becoming the niche product again that makes it a little bit less attractive for users." - "Even with Jobs back in the seat now for six years, they continue to shrink. So here we are now, twelve years later, and they've gone from $11 billion to roughly $6 billion in annual revenue. But they're not burning cash and they're cash-flow breakeven. They made a lot of cash during the last years of the boom, and because Steve did such a good job of streamlining the company they were able to hold on to that. But, fundamentally, they're still relatively flat growth. Their core business continues to shrink, with iPod and iTunes driving their current revenue growth." - "[Apple's mall store retail strategy] ... has had a positive impact on the brand. You do get people browsing through the stores. Despite what Apple says, the statistics suggest that there is no significant conversion of non-Macintosh users to Macintosh users on the basis of the stores. So, if you think of it as an investment in brand marketing, it has probably been a reasonable investment. However, I don't expect it will ever generate significant revenues or significant profits." - "The [Apple] brand stands for cool, hip, cutting-edge products that capture people's imagination. Jobs is a CEO who has a flare for the dramatic, and also captures people's imagination. He is the rebellious part of the computer world. Like Bill Gates, he's another college dropout who is a self-made man, but he does it with much more flare than Gates." Great, great reading, and this guy is almost 100 percent correct in his take on Apple. Very interesting. [ Posted at 6:41 PM | Permalink ]
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