The Unrealized Potential of Apple’s Hybrid Platform: Mac, iPod, iPhone, and TV
January 24th, 2008
Daniel Eran Dilger
Back in 2006, I wrote a series of articles looking at the iPod, the as yet unreleased Apple TV, and the unannounced iPhone, and described them all as a single platform that would grow alongside the Mac. I assumed that the three new products would make up a new platform based upon the iPod.
That assumption led me to think that Apple TV would be essentially an iPod with TV output; I also described the G6 iPod as a conventional iPod with mobile communication features. I was wrong about both products being glorified models of the then existing sense of the iPod.
Throughout 2007, it was progressively revealed that the future of all three products (iPod, iPhone, Apple TV) would bake together into a single platform, but rather than being an iPod sidecar to Apple’s Mac motorcycle, they’ve all piled onto bikes of their own built upon the same engine.
In other words, rather than having a Mac business with an accessory iPod franchise bolted on the side, Apple now has four independent vehicles tearing up the road in parallel:
- The Macintosh desktops, laptops, and servers
- Apple TV
- the iPhone
- the iPod Touch and other existing fleet of iPods
While my ability to foresee the future is certainly fallible, my forecast of Apple’s platform position is particularly interesting in that the platform convergence I described–before having a full picture of what was happening–actually worked out to be more cohesive than I originally surmised.
The various components of this new expansive platform will benefit more from shared code and resources than I had optimistically observed back in 2006, before all of the details were public.
iPhone By Any Other Name Sells As Swift.
This reality began to fall into place when Apple announced that the new iPhone would be running OS X. Pundits initially insisted that this was merely a marketing gimmick along the lines of Microsoft’s Windows branding, which has been applied to various products with very different architectures, from DOS to NT to CE to a variety of “Windows Everywhere” initiatives that intended to brand copiers and other office equipment with Microsoft’s Windows logo despite their using disparate, unrelated technologies.
The Windows brand didn’t turn out to be as strong as Microsoft had hoped. None of the CE, smartphone, office equipment, or other Windows Everywhere initiatives have turned out to be financially viable at all, leaving Windows confined to the company’s desktop and server products.
However, the iPhone really is a Macintosh, albeit running on an ARM processor and using a Flash-based architecture rather than booting from a conventional hard drive. It has the same kernel, the same frameworks foundation, and shares human interface guidelines and gestures that make it a cohesive relation to the latest Macs running Leopard.
So are the iPod Touch and the Apple TV, both of which prove that Apple doesn’t need to use a hyped brand association to sell its technology or deliver products that actually work.
The Many Splendored Mac.
From that perspective, it is noteworthy that Apple not only sold a record number of Mac desktops and laptops to hit a record 2.3 million units in the winter quarter–up dramatically from the flat line of around 700,000 Macs per quarter the company was stuck at for four years after the dotcom crunch in 2000–but that it has augmented those sales with another 2.3 million iPhones in the quarter.
That means Apple actually sold over 4.6 million Mac-based devices in the quarter, in addition to the unit numbers of the iPod Touch and Apple TV, both of which are part of the same platform.
That number isn’t just a contrived manipulation of statistics, but actually matters because the it helps put into perspective the scale of shared efforts Apple is now managing and benefitting from.
Shared Development Resources.
Mac OS X is no longer just a software development effort that services a static installed base of around 25 million specialized PCs. That installed base is now growing rapidly and in new directions, and features developed for one product line are finding their way back into others. Apple is now realizing significant economies of scale, and using its relatively small development circle to introduce hot new products with innovative features across a wide range of hardware applications.
Improvements Apple makes to the Mac OS X XNU kernel for mobility and battery efficiency in its iPhone will flow back into the Mac, refining the battery life of laptops and the efficiency of desktops. Low level multicore support driving performance in Xserves and Mac Pro workstation products will also cast an engineering halo downstream. The multitouch features that were designed for the iPhone are now showing up in the MacBook Air, and will percolate across Apple’s laptop line.
Similarly, efforts Apple invests into Apple TV are shared with Front Row and iTunes in general on the Mac. As the company expands its offerings, each node of the network becomes more valuable. Further, the investments of third party Mac developers to master Cocoa development will be rewarded with new opportunities in the mobile space on the iPhone and Touch, as well the option to develop new modules for Apple TV. New development interest in the iPhone will also bathe the Mac OS in new talent.
Competitors Lack a Similar Platform Flexibility.
The various competitors Apple positions its products against don’t share this same software synergy. Microsoft ships far more copies of its desktop platform, but that software hasn’t shipped on anything else apart from the Xbox consoles and buyerless UMPCs.
WinCE/Windows Mobile lacks much meaningful overlap with the desktop operating system of the same name, and the desktop Windows isn’t even universal across 32 and 64-bt hardware, or between IA64/IA32 processor architectures the way Mac OS X is on the CPUs it supports.
Nokia sells far more phone sets, but its Symbian OS can’t even scale to serve as the OS for its Touch-like Internet Tablet, which has to run Linux. Worldwide, Symbian is split between three principle vendors, Nokia, Sony Ericcson, and NTT DoCoMo, each of which manages its version a unique software platform.
Sony sells hardware running Linux, Symbian, and Windows, enjoying no shared engineering efforts. Motorola, HTC, and others sell their phones running either Linux and Windows Mobile.
Ten Myths of Leopard: 10 Leopard is a Vista Knockoff!: 64-bitness
Readers Write About Symbian, OS X and the iPhone
Off the Charts.
Apple not only has a cohesive software strategy, but is rapidly expanding its unified platform. The company has transitioned from selling around 3 million Macs per year as it did between 2001 and 2004, to selling 11.6 million Mac-based devices in calendar year 2007: 7.6 million Macs and well more more than 4 million other Mac-based devices such as the iPhone, Touch, and Apple TV.
In March of last year, I estimated sales of around twelve million Mac-based devices for 2007, based on a forecast of 6.5 million Macs, an overly enthusiastic 2 million units of Apple TV predicted by analysts, and an expectation of 3.5 million iPhones.
Apple actually sold well past expectations for Macs and iPhones. While it didn’t break out individual unit sales figures for the Apple TV or Touch, it sold far more than a half million units to bump the total number of Mac-based devices well over my estimated 12 million for 2007.
Apple exceeded the expectations of my forecast despite the soft sales of Apple TV, making the parallel estimation of 18.5 million sales for 2008 easily believable as well, particularly given that Apple TV has been given a far wider and more attractive feature set for the new year.
Note that neither years’ forecast figured in sales of the Touch, which hadn’t been released when I put the numbers together. It would be hard to imagine Apple sold fewer than three million Touch units in 2007, and even the most pessimistic of wags have estimated that Apple has sold at least a half million Apple TVs. That pushes the total number of Mac-based devices north of 15 million for the calendar year.
All of this growth in the Mac platform comes despite the fact that Apple only offered the iPhone in the second half of 2007, and the Touch only in the final quarter. This year, the company will be selling units through all four engines throughout the entire year.
It wouldn’t be unthinkable for Apple to blow out more than 20 million Mac-based devices this calendar year, a tremendous increase from 3 million just a few years ago and well off the chart I posted last March (below).
But Wait, There’s More.
While the iPhone and Touch are really mobile Macs, they’re also iPods. That means they don’t need the halo, they are the halo. Both are selling rapidly in the US at relatively high price points for iPods, and growing Apple’s market share dramatically in international markets.
Last year and particularly in the winter quarter, Apple upgraded iPod buyers into sales of full featured luxury units, and still sold more units than it did the year before, when it was featuring simple economy models at lower prices and lower profit margins. Additionally, the most expensive iPod model wasn’t even counted as an iPod sale, as the iPhone was put in its own category.
Analysts and investors have complained that Apple should be selling more iPod units, failing to take into consideration that more units at less revenue can easily result in less profit. Just ask Dell and HP, who have been specializing in blowing low value, disposable ewaste PCs into the market at razor thin profit margins, or in some cases at a loss.
Sony and Microsoft are also fighting to give away subsidized video game consoles at a loss in order to build an impressive platform comprised of the most units.
Apple has been unique in upgrading its users to buy higher end products that can be sold at a sustainable profit, while still maintaining market share and growth, and while increasing revenues and profit margins, even while facing stiff competition from rivals.
Apple’s strongest iPod competitor hasn’t been Microsoft’s Zune, but the very low priced MP3 players from SanDisk, which sell in respectable volumes commonly for less than $100 and rely on SD cards for storage. Even so, Apple has maintained its dominance in both the low end with the Shuffle, and across the range from Nanos to the Classic and Touch.
That’s not because of the wag-invented idea of iTunes monopoly tactics, but because Apple works to deliver strong, desirable products. While Microsoft gets lots of airtime, it is only even attempting to compete in a higher end, lower volume market that is currently dying. Apple is intentionally killing off the classic iPod to replace it with a new iPod platform serving as a WiFi mobile platform for applications.
Competing with Itself.
Apple introduced the iPod back in 2001 as a 5GB hard disk player, besting existing models by offering much faster FireWire sync rather than the prevailing USB 1.0. It also delivered smart sync software that helped to simplify the iPod itself by delegating library organization to an attached computer. After building that business over several years, Apple branched out in music sales, Flash RAM players, and then video playback and the TV sales and later movie downloads that supported them.
Apple’s strategy hasn’t just been planting new seeds however; it also uproots its existing crops to make more room for new ones, continually working to obsolesce its own products before rivals can.
For example, Apple killed the popular Mini with the introduction of the new Nano as soon as the company was able to deliver a Flash replacement to its hard drive based ultra-portable model. Last fall, it repositioned the flagship iPod as the Classic, and introduced a new video-playing Nano to replace it on the low end, and the Touch to replace its future on the high end.
Rather than just taking away capacity to change the game, Apple has employed sophisticated software to make storage capacity less of a central feature. With smart playlists and automated syncing in iTunes, the new Flash based iPods can be kept loaded with fresh content without needing a complex hard drive and suffering from the problems inherent to delicate mechanical parts housed inside a mobile device.
The New WiFi Mobile Platform for Applications.
During its conference call with investors, Apple executives made it very clear that the company sees the future of the iPod not as a linear progression of new MP3 players with slightly higher capacities and the occasional new feature, but as a new WiFi mobile platform for applications. This was already evident, but Apple had to emphasize this because too many people simply weren’t getting it.
Apple detractors had long been trying to talk down the iPod as a commoditized product that Microsoft would soon replace with a clone bearing its own logo. While Microsoft hasn’t been able to accomplish what it set out to do in copying the iPod, its failed strategy has been rendered even more irrelevant by the fact that it has only attempted to copy where Apple has been; Microsoft appeared oblivious of the iPods’ obvious future. Did Microsoft really think that the technology announced for the iPhone in January wouldn’t find its way into the iPod line?
As a casual observer, I have to admit that even I didn’t anticipate that Apple would release a product like the Touch within just months of the iPhone’s release. That’s aggressive risk taking, and follows the pattern of Apple’s historical efforts to replace satisfactory products with advanced models even before there is any drop in attention.
Were Apple more conservative, it might be able to coast along on past efforts and fully monetize investments already made. The risk with such a strategy is that a competitor could take advantage of that pause and exploit it, as the tortoise did to the hare.
The Risk of Risk Aversion.
That’s exactly what happened in the late 80s, when Apple under John Sculley and Jean Luis Gassée stopped releasing rapid new product introductions and began trying to pull profits from the Macintosh at minimal effort. That conservative strategy allowed the company to earn top profits for a number of years, but it also enabled Microsoft gain a foothold with a far more inferior, copycat product.
Once established, Microsoft could leverage its broad sales volumes to incrementally solve the worst of its outstanding technical problems; it continued to do this over the next decade. Apple was caught blindsided, and left with a niche market offering little growth potential. Lower volume sales and slow growth meant Apple couldn’t invest in efforts to rapidly advance its product, and progressively fell behind.
Its efforts to gain market share through licensing also failed for being too little, too late. By 1995, Apple was falling apart as Microsoft was establishing itself as a fierce monopoly dominating the PC space. It took Apple nearly a decade to recover, even under the very capable hands of an impressive board and management team.
The Turning of The Tables.
It is now Microsoft sitting on top of a market that is dying. The growth in desktop PCs is stagnant, and the best hope for expansion is in China and third world markets where the software market is not only riddled with piracy, but where there simply isn’t any potential for selling $500 copies of Office and $400 copies of Windows. Incidentally, buyers in those same markets are willing to pay $600 and up for unlocked iPhones.
Microsoft has worked to syphon off the most profits it can from its existing niche, raising the cost of Vista dramatically even while consumers and corporations have demonstrated little interest in the product.
While Microsoft lumbers along like a dinosaur and its Windows Enthusiast wags praise it for being so big and impressive, the climate is changing. New throngs of consumers aren’t rushing to buy cheap desktop PC boxes with an expensive operating system, sending PC unit growth into the single digits.
Even Microsoft’s brightest star, the profitable high end US gaming market, is being overshadowed by the clouds of increasingly bleak economic conditions that will put a damper on the enthusiasm of minimum wage gamers who save up to buy $1000 video card upgrades and $60 games at regular intervals.
Microsoft is competing against itself, but only in marketing its PC gamers the less profitable Xbox 360 consoles that have neither expanded the gaming market nor helped boost the company’s bottom line. The company has only lost money on its investments in gaming and entertainment, and has only shuffled around unit sales in its niche gaming market rather than expanding it dramatically in new directions.
Sales of the 360 are actually slower than the original Xbox, and the new model is running out of momentum just as Sony’s PlayStation 3 is picking up speed. Real market growth in consoles is being syphoned off by Nintendo’s Wii, which eschews the expense of the HD consoles to present gameplay attractive to a wider demographic.
Apple’s Recession Strategy.
Microsoft’s bleak outlook in PCs and gaming platforms contrasts with that of Apple, which is headed into a dimmer economy with brighter prospects for its rapidly growing platform that has successfully been branching off into new product categories at every opportunity.
Apple is eating into corporate sales with MacBook Pros, swallowing workstation sales with its Pro applications (Logic is the Office of musicians; Final Cut Studio is the Office of filmmakers), aggressively biting off education market share, and dramatically tearing into consumer sales. Apple is riding the keen interest in laptops sales, the company’s payback for investing in mobile development back in 2001 when the US economy last soured.
The iPhone is aggressively pouncing on rivals and the iPod Touch is stalking out expansion into foreign markets where the iPhone isn’t yet available.
Apple’s retail outlets are doing booming business, and serving as conduits for rapid sales of what will be the next PC: the handheld WiFi mobile platform for applications that cost less than $500. While Windows PC makers are struggling to sell dinosaur ewaste PCs for that price at a loss, Apple will be offering state of the art handhelds and smartphones that no competitor has yet come close to matching, and doing so at a sustainable profit..
Further, while Apple’s Macintosh systems in the late 80s weren’t so obviously different from cheaper, low end PC clones to the casual observer, Apple’s iPhone and new iPod lineup are dramatically different from knockoff players and phones that typically cost the same amount.
Future Outlook for Apple in Q2.
The market hasn’t yet reflected an accurate understanding of Apple’s future prospects. While the media has worked hard to play down Apple’s success as a problem, fearing that the company won’t be able to sustain it, reality offers more reasons to be optimistic.
First, it’s important to remember that Apple originally shocked the market by releasing its historically conservative guidance for the winter quarter well above what analysts were expecting, despite being headed into difficult economic prospects.
As reader Jon Tilneys noted, “The bit about expectations that everyone has forgotten – including you Dan it seems – is that after the Q4 2007 results there was a big issue made about how Apple had, for the first time ever, guided above Wall Street. In October, the Street consensus guided for Q1 08 at just $8.58 billion in revenue and earnings of $1.39 per share.”
As Apple delivered beyond its guidance, the expectation of Wall Street ramped up over a billion dollars, and Apple still outpaced what analysts hoped to see. Their expectations for Apple’s Q2, the quarter ending in March, is now exceed the company’s guidance of $6.8 billion, which would be another record quarter for the company and a significant increase over last year’s record of $5.26 billion.
Apple’s Conservative Guidance.
Also interesting is the margin of conservative outlook Apple provides compared to the results it has been able to deliver, even during an economic downturn. Tom Shaughnessy wrote to note his figures on the subject:
“In fiscal 2007, Apple did 7.1 billion in their first quarter and 5.26 in the second. That yields a ratio of 1 to .74. In fiscal 2008, Apple did 9.6 billion in their first quarter after projecting 9.2 billion which was perceived at the time as considerably aggressive. They outperformed their aggressive projection by 4.3%.
”Yesterday Apple projected 6.8 billion for the second quarter of fiscal 2008. Given the company’s logical approach and historical record of under projecting and outperforming, I increased their 6.8 billion projection by the same percentage in which they outperformed their first quarter projection. That suggests the second quarter might reasonably come in at 7.072 billion.
“If, for discussion’s sake, we can grant the possibility that Apple will do 9.6 in the first quarter and 7.072 in the second, we discover a ratio of 1 to .736. Yesterday, Apple in essence predicted consistent year over year growth all the while shouldering the responsibility to do so impacting performance measured against the best quarter in the company’s history and in the face of a media firestorm declaring a paralyzing recession.
”Can it be the collective reporting on this matter has abandoned facts for agenda? How can this be? Hmmm, trying to picture in my mind the requirements to bring a class action against the mass media with the sole intent to force journalism majors to take remedial math courses and to tie their compensation to their test scores.“
Shaughnessy also charted out the climb of Apple’s revenue and profits, which offers an interesting portrayal of the company’s performance over the last four years.
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