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Wednesday, June 9, 2010

Apple Extends Their World Domination With iPhone 4?

Vernon Keenan
Berkeley, California
June 9, 2010

The latest announcements from Apple, combined with the fact it has recently passed Microsoft as the world's most valuable technology company, highlights a remarkable 15 year evolution.

I am deeply impressed with how Apple has taken devotion to various computer industry strategies, and transformed these devotions into real market share, economic activity, and platform domination.

Apple's success with the iPhone and iPad are tremendous testaments to the power of proprietary vertical industry integration. Smartphones like the iPhone, Google Nexus 1 and the HTC HD2 are designed using various layers of functionality, such as an operating system that talks to a certain piece of hardware, and its all enhanced with a rich source of software and a global digital network. Alone amongst my examples, the iPhone is based on products and services from a single technology vendor, Apple. The others are all based on loose confederations of technology companies who work together to deliver a single product to the consumer.

The content, the apps, the operating system, the hardware platform and the Internet are each a layer in a technology ecosystem that runs a smartphone. In the Microsoft technology ecosystem Microsoft has tight control over just one of those layers: the operating system. It emulates the way Microsoft grew to dominate the computer industry. The whole premise of how the Microsoft computer ecosystem grew was based on interoperability of the various pieces of the hardware layer. Since Microsoft didn't make the hardware, they left the market free to compete for customers based on technology innovation.

Hardware interoperability worked tremendously from the start for Microsoft. Companies like Compaq and Dell flourished as they shipped PC systems around the world. The Mac languished in a proprietary backwater while the whole world geared up with Microsoft-based desktops, servers, laptops and networks. In the subsequent decades the diversified hardware ecosystem worked beautifully for Microsoft and Apple became a virtual afterthought by 1995.

But the evolution of the Microsoft ecosystem slowed tremendously throughout the 2000's. This was primarily due to the nightmarish scenarios confronted by system integrators and hardware builders who had to deal with the inherently unstable design of the Microsoft hardware driver and memory management systems. Every time a new technology was introduced, such as more RAM, wireless networking or more powerful graphics cards, it was up to Microsoft to orchestrate the chorus of hardware vendors who chimed in with their own APIs and programmatic controls. Often, the result was incompatibility and fragile systems.

My feeling is that a commodity hardware marketplace worked pretty good for the computer industry from the 1980's until about 2005. Then we all stood around waiting for Microsoft to figure out how to keep up with the hardware innovations and then watching them misfire with Vista in 2007.

Although it didn't seem to be true at the time, Steve Jobs had it figured out way back in 1985 when he dealt with his biggest crisis at Apple. He had to face how the IBM PC hardware ecosystem had displaced Apple as the #1 computer company, and how he might have hired the wrong CEO, former PepsiCo chief executive John Sculley. Jobs quit Apple because he believed so deeply in integrating the hardware and the operating system. He was forced out by Sculley who decided to bow to ever-increasing power of the Microsoft-IBM-Intel "standard." When he was told the company would emulate the Microsoft business model by licensing the MacOS to other hardware companies, Jobs turned in his resignation and sold all but one share of his stock.

Without re-telling the whole John Sculley and Gil Amelio story, Steve Jobs eventually came back in 1997 and used his NeXT operating system to form the basis of OS X, the next generation OS for the Macintosh. As Jobs was vindicated, he canceled the MacOS licensing agreement with all the clone makers, thus reasserting his belief in vertical integration within a technology platform.

Apple also vertically integrated the retail industry stack. Steve Jobs' control ethic is in full force with the Apple Stores where the staff are actual Apple employees and all of the stores have a consistent look and feel. No other global brand has such a successful retail presence. Millions of iPods were sold in the Apple Stores, and the iTunes digital store tamed the wild digital music world.

As the PC industry languished for the last five years, the features and usability of OS X consistently outpaced Windows. Microsoft still hasn't recovered from the Vista debacle, and the growth in the industry is now degraded to replacement of older equipment instead of delivering on new capabilities. iTunes is now a such a major factor in music sales Apple can afford to dictate terms to most of the music labels. It was Apple's ability to slowly evolve their platform with consistent and reliable results that has caught the attention of the world.

Until 2007 the smartphone marketplace was a mishmash of hardware and operating systems, most of them hard to use with inaccessible features. People put up with it because they wanted the communication and messaging features. When Apple introduced the iPhone they not only vertically integrated the hardware and the operating system, but also set out strict rules for developers and created a digital delivery mechanism that they controlled. While leaving the wireless part up to service providers, the only layer they don't control in the iPhone package is the content itself.

By simply announcing the iPhone in 2007 Apple lapped all of the competition. What Apple delivered wasn't just a phone, but a pocket Internet computer that worked very well. Plus, it was so easy to use that many advanced features are well-used by iPhone owners. The marketplace has caught on and the iPhone is now the leading smartphone as measured by unit sales. This week's iPhone 4 and iOS announcement totally solidifies Apple's leadership in smartphone technology and platform dominance.

Even as Apple becomes the world's most valuable technology company in 2010 they are still very well positioned for what could be a shift from PC products in the home to more iOS-based products. iOS is revolutionary in it's approach to the human-computer interface by eliminating the mouse and using touch. That advantage could translate into sales for new products in the digital home.

As the smartphone becomes better integrated into business information, iOS could penetrate more into corporations. I think that Apple could even experience a resurgence of OS X in corporations as users want better integration between IT systems and smartphones.

There is still plenty of room for the iPhone to grow within the US smartphone market as soon as versions compatible with other 3G networks become available. Plus, Apple is well-established in all the major international markets. A major set of decisions and challenges will be how fast and where Apple will scale its operation.

It seems to be coming down to vertical platform integration, aka Steve Jobs' personal religion! Using that platform philosophy already sells more iPhones than any other smartphone. The rest of the smartphone industry is based on the hardware ecosystem model that served the computer industry so well in the 1980's and 1990's. Apple's unit sales, financial success and iPhone momentum makes the Steve Jobs' way of doing things seem to be a safe bet.

I've been an observer and fan of Apple since 1984 when I got my first Macintosh. I abandoned them in 1995 when they weren't paying attention to the Internet. I got excited again when I got my iPhone in 2007. Now I'm saying they are well positioned for a long-predicted inflection point in the technology industry where they could even grow much larger.

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