Epilogue
How Apple Became the Computer Industry Leader
APPLE WAS THE ONLY major personal computer company to resist joining the PC open industry standard and survive. It carved out a niche in the late ’70s and early ’80s and attracted a very loyal group of customers. Eventually, though, even Apple had to enable its Macs to run industry-standard software. Even so, it was reportedly on the verge of bankruptcy by the late ’90s.
Then Apple discovered a paradigm shift ahead of its competitors and surged into the leadership position. It didn’t do it by introducing a better Mac or PC; it simply wasn’t possible to overcome the strength of the open industry standard. Apple did it by inventing an entirely new way of using the Internet.
The iPad wasn’t the result of a brilliant idea conceived out of thin air. Rather, it was the result of following a logical progression starting from the original “seed”—the iPod—along with some very innovative new technology. Like many paradigm shifts, the change was invisible to the establishment until it was so far behind it was too late to catch up.
When Apple first introduced the iPad, tablet computers with touch screens had been around for over a decade. At some point, every successful PC company had introduced a tablet and thought it had found the right formula. They all tried, and they all failed. No doubt there were some chuckles in the executive ranks of those companies when Apple introduced yet another tablet computer. There simply wasn’t a market for such a product, these execs thought—but they were dead wrong.
In one sense, they were right: There wasn’t a significant market for another tablet computer similar to those they had all tried. But the iPad was a totally different animal, essentially a wolf in sheep’s clothing. The first signs of this difference appeared in 2008, two years before the iPad, when Apple introduced the second-generation iPhone. To be fair, no one, including Apple, connected the smartphone market to the PC market at that time. And when the iPad was introduced in 2010, almost no one saw it as a threat to PCs because it couldn’t replace all the functions of a laptop.
Back at the beginning, the iPod had no real connection to the computer business, but it was an interesting market opportunity that offered some additional revenue and profit to a struggling computer company. Several other companies, including Compaq, had introduced competing products, but Apple got it right by taking a page out of the playbook Compaq used for the first notebook computer in the late ’80s. Apple decided that small was the key, and bought up all the smallest hard drives available at the time. No other company was able to deliver a music player as small as the iPod because none of them could get enough small disk drives.
The really important innovation was not the iPod itself, but the iTunes online store that followed. Coming from a very proprietary mind-set, Steve Jobs wanted to sell all the music played on iPods. There was a lot of trial and error in the beginning, but eventually Apple got it right. The combination of the smallest music player and the convenience of the iTunes online store was strong enough to overcome significant customer resistance to being locked into a single source. Although Apple became the clear market leader, the iPod and iTunes were still just a nice source of revenue.
Then in 2007 Apple introduced its first smartphone. The iPhone had significant limitations, including the inability to wirelessly synchronize with Microsoft Exchange and no third-party apps, but it did include an innovative new capability: the multi-touch user interface. While most people viewed this as merely a “cool” feature, a few realized it was the solution to a previously unsolvable problem. The minimum usable screen size in notebook computers was generally accepted to be between 11 and 13 inches on the diagonal. Any smaller and text was either too small to read or the screen couldn’t show enough information. A smaller screen became a lot more useful when users could expand and shrink any part of the screen instantly with the touch of two fingers.
In hindsight, Apple was probably lucky the first iPhone didn’t get it all right. The company didn’t have the “can do no wrong” aura it has today; if it had, competitors likely would have paid more attention and realized what they were dealing with. As it happened, many weren’t expecting Apple to be a significant player in the smartphone market. The shortcomings of the first iPhone simply confirmed its competitors’ beliefs. A year later, when the second iPhone was introduced, most of Apple’s competitors still weren’t worried about it and paid no attention. But this time Apple not only had a good smartphone, it had put the final piece of the puzzle in place to create an entirely new market.
That final piece was third-party programs known as “apps.” Apps had been around for a long time on smartphones using the Palm or Microsoft platforms, so the fact that the second iPhone could use third-party apps didn’t attract much attention. It was the addition of apps to the iPhone’s other features that created Apple’s breakthrough.
Six key elements had to converge for the breakthrough to occur:
1. Multi-touch user interface
2. Third-party apps
3. Continuous connection to the Internet
4. Instant “on”
5. Competitive phone capability
6. App distribution through the iTunes online store
The fifth and sixth elements weren’t really part of the iPhone’s breakthrough functionality, but they were necessary to get the broad acceptance required to attract millions of users and thousands of app developers. In the beginning, many customers were just looking for a good smartphone and picked Apple’s because it was a good phone and had its cool multi-touch feature.
If the iTunes store hadn’t already been in place, it would have taken much longer for the large number and wide variety of apps to develop, thereby reducing or eliminating Apple’s lead over its competitors. Jobs couldn’t have known when Apple created the iTunes store in 2001 that it would be so important to enabling individual programmers to get their innovative iPhone apps into broad distribution so easily.
The first four elements added together created a new way to access the Internet’s products, services, and information. As soon as hundreds of apps became available through the iTunes store, users began to glimpse the future of Internet access. In literally seconds, they could check the current weather forecast or find movie listings and show times at a nearby theater. When the thought occurred to a user, they would simply turn on the iPhone instantly, touch the screen to select a particular app, and then touch the screen once or twice more to access the information they desired. The technology was simple enough for almost any human, and so fast that it became the preferred way to access the Internet.
When Apple made it easy for app developers to create and sell their creations, it unleashed an army of tens of thousands of individual innovators to provide solutions to real user needs. It was an interesting parallel to spreadsheet programs running on PCs in the ’80s. Spreadsheets didn’t just do numerical calculations; they included a language so simple users didn’t even realize they were writing programs. Once this tool was in the hands of tens of thousands of unwitting “programmers,” solutions were found to thousands of real user needs. As a result, the PC became much more useful and market growth accelerated.
With the easy distribution of apps through the iTunes store, Jobs duplicated one of the important advantages enjoyed by industry-standard PCs in the ’80s, effectively unleashing an army of solution creators. And it wasn’t just the iPhone that could use all these apps. A relatively intuitive parallel step for Apple was to create the iPod Touch, essentially the iPhone without the phone. The iPod Touch performed all the same functions as the iPhone, including running the same apps, but by using a Wi-Fi connection to the Internet instead of a wireless phone data network. The places a person could use it were reduced, but an iPod Touch user didn’t have to pay a phone bill or commit to a two-year contract. Within a year, millions of adults were using the iPhone and millions of kids were using the iPod Touch; a few years later, more than 60 million people were using “i-devices” to interact with the Internet.
Still, many computer executives viewed the iPhone as a phone and gadget, unrelated to PCs. They didn’t realize they were already a long way behind Apple in the next important computer market.
The main thing Apple needed to do to ensure instant success for the iPad was to make it work like the iPhone and run the 150,000 iPhone apps that were available in the iTunes store. Apple did that. When the iPad was introduced in March 2010, sales took off like a rocket. Sixty million people already knew how to operate an iPad because they owned iPhones and iPod Touches. Apple had created a giant pent-up iPad demand that they were unable to fill for months. In spite of the incredible number of units sold, many computer company executives still thought of the iPad as just a big iPhone. It wasn’t clear to them how a big iPhone was going to be a problem for PCs.
In early March 2010, just before the iPad was announced, I began contacting executives of several PC companies to discuss what the iPad was going to mean. I’m sure they all wondered why I was doing this, and what I wanted. They had difficulty accepting that I wanted to share my insights with them and help them avoid missing an important opportunity. I tried to convince them the iPhone and iPad were together going to become the preferred way of accessing Internet goods, services, and information. While iPads wouldn’t replace notebook PCs altogether, I explained that they would attract many potential new PC buyers, because the main thing many consumers wanted was Internet access.
I told them that to effectively compete with Apple, they needed to strategically address the customer needs Apple was filling, and that it wasn’t just a hardware issue. In each of those conversations, I could sense that the executives thought they had the situation under control. During one particular meeting, out of frustration, I told them they were so far behind Apple they could barely see their taillights. I was promptly shown the door.
It wasn’t long before PC companies began to see their sales growth diminish and then, a while later, their sales decline. The executives were correct in believing that neither smartphones nor tablets could replace all the functions of a notebook PC, but they were very late, unfortunately, coming to the realization that the next major source of growth for PC companies was Internet access. Smartphones and tablets together simply did a better job of addressing that market than notebooks.
As successful as Apple has been in the smartphone and tablet markets, it could have been even more dominant if it hadn’t made two key mistakes. Jobs allowed Eric Schmidt, then Google’s CEO, to remain on Apple’s board of directors during the early stages of iPhone development. Jobs must have articulated his vision for iPhones and iPads, which set in motion events that led to the establishment of Apple’s most serious competitor.
Google subsequently developed the Android operating system for smartphones and tablets. In a move similar to Microsoft’s in the ’80s PC market, it then began providing its system to all Apple’s competitors and potential competitors. Google was trying to create an industry standard much like the PC industry standard, no doubt hoping for the same powerful results.
Apple’s second major mistake compounded the effect of the first. Apple introduced the first iPhone for exclusive use on the AT&T wireless network in the United States. That made sense because Apple, as an unproven phone provider, needed to get into broad distribution. But the mistake was remaining exclusively with AT&T for over three years. Apple apparently didn’t realize the power that wireless carriers had over their customers.
During the second and third year of iPhone sales, Apple’s apps were far superior to the Android’s. If the iPhone had been available to customers of all other major wireless carriers, Android phones from Samsung, HTC, Motorola, and others wouldn’t have taken off as they did. When a customer had to pay several hundred dollars to get out of a contract and switch to AT&T in order to have the iPhone, they usually ended up staying with their provider and looking for another choice similar to the iPhone. That gave Android-based phone providers an incredible opportunity to gain a foothold in the market. It wasn’t long before the Android apps improved significantly. By the time Apple began to slowly add other wireless carriers, Android-based phones had become widely accepted and sold many millions, eventually surpassing Apple’s iPhone sales.
Proof that Android’s success didn’t have to happen is seen in the tablet market. Android-based smartphone companies probably assumed they could achieve success with tablets the way they had with smartphones, but initially, Android-based tablets flopped. Why? There weren’t any contracts with wireless carriers to inhibit customers from choosing the best tablet available, which for a long time was clearly the iPad. Since the iPad had superior apps, tablet buyers almost always bought the Apple product, even if they were already using an Android-based smartphone. It would have been the same result with smartphones if the iPhone had been available on every carrier early on.
At this time, Samsung looks like the company best positioned to give Apple its most competition. It got there by filling a lot of niches that Apple hadn’t addressed. They seem to understand how to build a strong brand and take advantages of Apple’s mistakes.
In late 2012, Microsoft finally entered the fray with the introduction of Windows 8, Windows 8 RT, Windows Phone 8, and the Surface tablet. With regard to the smartphone and tablet markets, Microsoft had long been considered to be in a coma, if not already dead, but it has usually been a mistake to count Microsoft out too early. It continues to have a dominant position in the corporate market for industry-standard PC operating systems and applications. Apple has made significant inroads into the corporate world with the iPhone and iPad, but it’s still not too late for Microsoft to hold on to a significant share of that market if it can make smartphones, tablets, and PCs work together in a seamless, useful way.
Surprisingly, Apple gave Microsoft an opening by not migrating its multi-touch technology to its notebook screens, something it could have easily done. Microsoft took advantage of that opportunity by including touch-screen notebooks and desktops with multi-touch capability as part of its Windows 8 introduction. It is the first company to enable smartphones, tablets, and PCs to operate exactly the same way.
Microsoft made one major mistake in introducing its original Surface RT tablet. All Microsoft had to do to significantly increase its chances for success was follow Apple’s lead and make sure the Surface RT ran the tens of thousands of apps available for Windows Phone 7 and 8. If it had, initial buyers of Microsoft’s first tablet would have had immediate access to many important apps, just as initial buyers of the iPad did. But Microsoft didn’t do it that way, and as a result, the Surface RT has been very slow to gain those important apps because of poor sales. As with the “chicken-or-egg” question, poor sales may continue because it doesn’t have those apps.
Microsoft also made the first version of Windows 8 more difficult to use than it should have been. It will take a while before PC users get completely comfortable with multi-touch on Windows 8 PCs, and some tweaking on Microsoft’s part will be required to get it right. But multi-touch capability is so intuitive and powerful that users are certain to prefer it on all their devices. Even if Apple responds by including multi-touch screens in future notebooks, Microsoft can still hold on to a leading share in the corporate market if it gets Windows 8 right.
Apple has taken over the leadership position in computers not by beating the open industry standard—but by going around it and inventing the next big thing. There is no doubt that the visionary leadership of Steve Jobs enabled its success. Many now wonder if Apple can continue to lead the market without Jobs. Apple has many talented and innovative people, including Tim Cook, its new CEO. Very likely, it will continue to introduce a steady stream of innovative new products into the market. But with or without Steve Jobs, the long string of important innovations that began with the first iPod, ended with the third-generation iPad. Each step along that path moved Apple farther and farther out in front of its competition in the smartphone and tablet market and enabled it to build an incredible reputation. But as it was with Compaq at the end of the ’80s, that string of successes couldn’t continue unbroken forever.
The iPad Mini was an important introduction because it addressed a niche that Apple had left for its competitors to fill. They need to do more of that. But for the foreseeable future, each new smartphone or tablet product will be an incremental step, not a big differentiator. Android and Windows 8-based products have a chance to close the competitive gap, but it depends on how well they plan and execute their strategies.
It is unlikely, however, that anyone will knock Apple out of their leadership position any time soon. But you never know—HP, Dell, Samsung, and others have the potential to make significant gains, if they understand customer needs and formulate strategies to address those needs.
Just as it was with PCs in the ’80s and ’90s, the real beneficiary of all this competition is the consumer: you.