Where Apple is Most Exposed

Tuesday Apr 1st 2008 by Rob Enderle
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Apple relies heavily on five "crown jewels," yet each of these valuables faces risk factors.

While Apple has been sliding a little of late I think you could make a compelling argument that they are near the top of their game with strong growth in most of their market segments. But all companies have hills and valleys. The next few years could as easily be down as up and it’s probably time to take a look at the down side because the Apple Fan base is solidly glued to the up-side.

(For those wondering why I don’t do something similar with regard to Microsoft, I did and you can find it here.)

Why I thought this would be particularly interesting it that Apple’s key assets aren’t just products, they are their unique CEO and their loyal users. What brought the users to mind was an excerpt from a recent book “True Enough: Learning to Live in a Post Fact Society” by Farhad Manjoo. He uses a study done by a number of psychologists on Israel/Palestine behavior to explain the Apple fan’s behavior of blindly supporting everything Apple does and thinking those that don’t “must be licking someone’s balls.”

In the excerpt, even Walt Mossberg is quoted as having been singled out by the Apple fans as being biased against Apple. The folks over at MacUser, clearly not having read the book nor intending to, proved Manjoo’s thesis. MacDailyNews, also not reading the book, even goes further to prove Manjoo’s points of groups using selective exposure and selective selection to avoid uncomfortable truths.

(selective exposure is when a person avoids information they disagree with like not reading the book; selective selection is where they read something but actually don’t take in the parts they disagree with.)

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I should point out the Mac users are just one of many examples – most having virtually nothing to do with technology – that showcase this twisted behavior. It covers bigotry, religion, and politic. I think it should be required reading in school.

The stuff on the 911 and Kennedy assassination conspiracies is worth the price of this book alone. But this is a tech publication so let’s flip back to where I think Apple’s exposures may reside.

The 80/40 Rule

I typically identify products that are important to a company by how influential they are in their respective markets, and attach risk to them to the extent they could become less influential.

At 80 percent and over they are the market. As they drop below 80 percent and approach 40 percent they are at increasing risk, and as they drop below 40 percent, if their dominance was critical to the firm, the sharp decline in dominance can bring the company down.

Also recall that it is the control of the market – not the actual market share – that is important. For instance, in the similar Microsoft piece I link to in the opening I argue that while Microsoft may be dominant with Windows, their mid-year reduction of support for XP effectively drops their control below 40 percent.

Apple’s Crown Jewels

In order of exposure I think Apple has 5 key things that could be called crown jewels but only three are products.

In reverse order of importance they are 5) the Mac Platform (hardware/software), 4) the iPod/iPhone Line, 3) iTunes, 2) the Mac Fan Base, and 1) Steve Jobs. This already starts out being interesting because I’ve never had the CEO pop up in an exercise like this, let alone pop to the top.

Mac Platform: This is not a keystone product (a keystone product is one where, were it lost, it would take a lot of the related products with it) and it hasn’t carried Apple for some time now. It is large enough so that were it lost Apple would feel a lot of pain, but losing the Mac would not necessarily put any of the other key product lines (iPod/iPhone/Apple TV/iTunes) at risk, as they are actually more prevalent on non-Mac platforms.

While not over 80 percent (though the PC market they occupy is a distinct niche), currently Apple has virtually 100 percent of that niche given the distinct differences between Windows and the Mac platform.

The biggest risk to this dominance is the blurring distinctions between the Mac segment and the Windows segment. Initially, because the platform is now surging, this provides significant upside potential, but the larger PC companies are starting to focus on the same value attributes currently driving the Mac.

If they can close the gap they enjoy substantial economy of scale advantages and, in a merged market, Apple would immediately fall well below the 40 percent in terms of share and influence, putting this at high risk.

For now there is more upside potential than real downside risk but that could change quickly.

iPod/iPhone: These aren’t keystone products either but they now form the engine underneath Apple’s profitability.

With around 80 percent market share, Apple dominates the related segment. In the case of loss of market leadership these products would severely impact iTunes but wouldn’t necessarily kill it if Apple retained the Mac platform. The Mac platform would likely continue with relatively minor damage (mostly resulting from lower store traffic).

The iPod is at risk of market saturation and being replaced by smart phones. The iPhone is a solid hedge against both problems and has the potential to exceed – once it becomes a line of products – the installed base enjoyed by the iPod line significantly.

Exposures revolve around a much more robust and powerful set of competitors for the iPhone than ever existed for the iPod. And the control that carriers and corporate buyers have over this segment is greater than Apple’s, which both reduce Apple’s control significantly (absolute in the iPod segment) as the market transitions. Currently, Apple is at moderate risk in this area as a result, largely due to an anticipated reduction in control as opposed to an anticipated decline in market share, but one is likely to follow the other in either direction.

iTunes: This is a keystone product but only with regard to the iPod/iPhone. Were it to drop precipitously it would also likely have a severe impact on these related hardware lines. It’s also dominant in the segment, but with under 80 percent share if you factor in Microsoft’s Player, Real Networks and Yahoo properties, this product is at significant risk largely resulting from an industry move to non-DRM music.

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Currently most iTunes customers are locked into the service by the music they have purchased through it. Removing the DRM will increasingly break that lock. But this won’t happen overnight unless subscription services take off, which has suddenly become very likely. Amazon’s movie into digital music is creating a significant risk to iTunes. They have recently surged to No. 2, as they are dominant in their online retail segment since they are the largest and most powerful on-line retailer in the U.S.

However, the biggest risk is an effort by Time Warner to make all music available to all Cable users as part of their cable subscription for a $5 monthly additional charge. This has broad implications for everyone in this segment but, because Apple is dominant, they face the greatest displacement risk.

Apple Fans: These people, who are significant in number, help create an environment where it is very difficult to be critical of Apple. They actively sell Apple products while generating little or no cost to the company.

As the book I referenced in the opening paragraph points out, these people are closer to political or religious fanatics and relatively unique (Linux/Open Source Fans are similar). Were they to switch alliances the overall damage to Apple would be significant. Apple’s products might survive, and might even improve because they would have to, but they would likely lose substantial market share until Apple was able to replace their services by paid marketing and sales employees who would probably be less efficient.

This group has survived some incredibly hard times for the company in the 90s and there is no imagined external threat that will likely dislocate them. However, Apple’s success is diluting them significantly while focusing more writers on their unusual behavior. A significant trigger event, like the initial departure of Steve Jobs or an obvious betrayal by Apple, could force them to think different, resulting in significant damage to the firm. On this last, the surprise switch to Intel by Apple was arguably a major betrayal and they survived that. So I truly doubt they are at much risk unless Steve Jobs departs.

Steve Jobs: And here lies the critical link. With the return of Steve Jobs the Apple fan base largely has shifted from being loyal to Apple to being loyal to Steve Jobs. Were he to leave Apple voluntarily there would be a problem; an involuntarily departure could prompt a revolt with significant adverse implications for Apple revenue and profitability. Steve is largely responsible for some of the critical deals surrounding iTunes, Microsoft, and the various carriers all favoring Apple.

Steve is also one of the key parts of the perceived quality assurance process and the belief in his personal touch has a great deal to do with perceived product quality. Finally, Steve is the equivalent of a super Ronald McDonald, in that he has been turned into the physical representation of the company. He has had serious health problems in the relatively recent past, and has reached an age where many in his position choose to retire.

Advice to Apple’s New CEO

So, much like in the Microsoft piece, I’ll conclude with my advice to a new CEO coming in after Steve Jobs left as to where that person should focus.

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The company is so tightly tied to Steve Jobs that the first thing out of my mouth would likely be: “unless you can change your name to Steve Jobs and get some really fast plastic surgery you’re screwed.”

Seriously, while Apple doesn’t enjoy the multiple dependencies tied to a troubled product like Microsoft does, they have a different set of more complex problems to deal with. These problems are led by their CEO, who will certainly depart in the next 5 or 10 years (many of his peers, including Bill Gates, are retiring from their respective businesses).

Finding someone to run Apple will be difficult but doable; getting someone to hold the Apple fan base will be much more difficult; and getting the same person to do both may be impossible (otherwise we’d have a Steve Jobs clone running another company by now).

The solution may reside with how the public face of Steve Jobs was created in the first place, but I wonder if the same thing will work twice.

Finally, if Time Warner succeeds in their effort to make music universally available, iTunes and iPod/iPhone exposures goes through the roof and either stopping or mitigating that should be a high priority.

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