Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Saturday, July 31, 2004

Siva Vaidyananthan and Dan Gillmor on Apple vs. Real. As Umair pointed out, Apple is being incredibly stupid (once again) by not using network economics to its advantage. Attracting complementors is a must-do for any strategy based on exploiting externalities. This much is standard b-school stuff.

However, I find Dan and Siva's posts more interesting for other issues they raise. In the post-PC, post-MS era, buyers are increasingly leery of switching costs and supplier lock-in's. How should a company make their strategy in the post-standards war universe where winning the game is only going to result in alienated customers? Fool me once, shame on you...fool me twice, shame on me :-). In my mind, that's the real challenge : how can a company become dominant inspite of buyers' resistance? If it does succeed, how can it exert market power to extract rents from its core customer base without alienating them?

Once you think about this, you realize the magnitude of the opportunitcy cost of Apple's current short-sighted strategy with the iPod : they are blowing an increasingly rare opportunity for becoming a strong player based on an old digital strategy that is losing its effectiveness. See the twists and turns Google is going through to exploit the same strategy. It's pretty much re-inventing the entire corporation model (read Umair's brilliant analysis on the side), going to the extent of writing "We will not be evil" in its SEC filing! Apple could use a few lessons in corporate diplomacy from the young upstarts across the Bay Bridge. Note to Steve : pissing off the rest of the world did not work in the eighties or nineties and sure as hell is not going to work in the 00's.

-- Mahashunyam // 4:24 PM // 5 comments


The difference between MS and Apple is MS locks you into a sucky product and Apple locks you into a very good one. Another difference, Apple may be locking you in, but they sure as hell aren't extracting excessive, monopoly profits like MS is. In other words, they are basically just paying the bills (and not paying shareholders much by the way).

I've said it once and I'll say it a thousand times here. Apple can innovate faster by making the whole enchilada. The fact they have closed platforms doesn't eliminate the competition. The mac is closed, yet it has massive competition from windows. iTunes/iPod/iTMS has lots of competition too, just apple has stayed ahead (yes by making the whole thing and innovating faster). Sorry guys, you theories just don't square with reality.
// Blogger cesman // 6:18 AM

Two points:

1.Apple is not extracting monopoly rents because it does *not* have the monopoly a la MS. If they had as much market power, would they still be just paying their bills? As a consumer, would I be smart in betting on their continued benevolence? A lock-in is a lock-in is a lock-in and the supplier will *always* try to extract rents if they could, they would be stupid not to.

2.No single company, especially one trying to build a dominant platform, can match the creativity, investments and innovative power of an eco-system of complementors. The reason why complementors exist in the first place is because they serve a purpose in the market. For example, if Apple could be Real, the market would not need Real. The fact that Real exists nad has a value on it should clue Apple into the fact that Real has invested and specialized in soomething that Apple hasn't. Therefore, Apple should try to get Real to use its platform and position the iPod as a cospecialized asset for that relationship.

The key reason why dominant platforms emerge is because the platform entrenches itself into many such relatioships with different complementors in the market, but the investments required to do that fall exponentially as the platform becomes stronger due to network effects. This is what Apple needs to do : build as many such relationships as possible, entrench the iPod and not piss off the rest of the world.
// Blogger Mahashunyam // 7:32 PM

"No single company, especially one trying to build a dominant platform, can match the creativity, investments and innovative power of an eco-system of complementors."

Oh yeah, then why is apple kicking the crap out of Napster/Creative/iRiver/Dell/Musicmatch/Real/WMA? Why is apple's integrated product so much more satisfying? Why does only apple have airport express? Why does only apple have easy sharing of music libraries over a network? Are you guys just slow or what? Take a look around you. The single company is running circles around the band of "complementers" that is apple's competition.

Here's another thing. The complementers can come up with ideas Apple didn't come up with, they can innovate all they want. But guess what? Whatever they come up with, Apple can probably implement it better, sooner on their closed platform before the hoard of "complementers" get their act together, if they ever do.

Furthermore, Apple is already reaping network effects on iTunes/iPod/iTMS. There's way more accesories for the iPod than any other player out there. BMW and Alpine car stereo integration is coming. So closed does not mean no network effects.

Second, is anybody here ever going to own up
// Blogger cesman // 12:37 AM

I would like to own up.

I admit it - Apple is completely and utterly wrong.


// Blogger umair // 1:10 AM

Yup, Jobs is being his usual idiotic self straight out of the b-school case studies. I'll own up too : Apple is going to pay a *huge* opportunity cost by not getting its strategy right for the ipod. Jobs hasn't learnt anything even after being thrashed in the PC market place and reducing Apple to survive on the lifeline thrown by none other than the Evil Incarnate from Redmond. Yup, being The One company to do everything worked so well in the past, didn't it?

Nobody here disputes that apple makes excellent, well-designed products. But when will they grow up beyond a cult, become a success in the market and live up to their immense promise, not to mention provide a real competition to M$? Gawd, I *so* want them to win! But Apple has perfected the art of winning defeat from the jaws of victory. *Sigh*. Live and *not* learn, I guess.

Godd luck to Apple in its quest to become the Be All and End All in digital music. For me, I can't wait for these guys ( to do their thing and not have to deal with Apple ever again.
// Blogger Mahashunyam // 1:54 AM

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