Umair Haque / Bubblegeneration
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Saturday, June 30, 2007

Research Note: iStrategy


What's Apple's larger strategy behind the iPhone? Is there even one, or is the iPhone just a pretty face?

Since - to my surprise - it's not transparent, let me try and offer my perspective.

1) Pick an industry which sucks (ie, imposes significant nuisance costs/menu costs/externalities on consumers)
2) Redress the imbalance by making something consumers love
3) ...Which disrupts the long-standing industry equilibrium, and shifts market power
4) Use said market power to redesign (a hyperefficient) value chain

Now, note that this is a repeat of Apple's iPod strategy writ large. Conversely, if you don't swallow the argument, consider the fact taht the economic pressures created by the iPhone will most likely force Apple to tread this path, whether they like it or not.

Apple can't offer totally open platforms, unlocked phones, etc, etc...yet. No network operator will consider giving away the channel control which earns them at least marginal returns - it's a classic case of a strategic trap, because the short term costs of the cannibalization that implies (significantly) exceed the short term gains.

But after the iPhone shifts massive market power to Apple, network guys will have little choice but to play by Apple's rules, to accede to it's newer, better value chain design - because the pool of consumers Apple offers access to will simply be too large a percentage of the profit pool for decisions not to be dictated by them.

It's a brilliant strategy. And it should be a very, very familiar one - it's exactly what Apple's done to the music industry. Labels couldn't give up the rights regimes and other mechanisms of channel control which propped up decayed strategies and rotting business models - until Apple made them.

Now, here's the interesting part (to me, at least). The first time around - with the iPod - I don't think Jobs had any inkling of the dynamics that were to be unleashed, or the path Apple would follow.

But this time around, I think Jobs can see the same pattern - the same economics powering uncannily similar strategic dynamics - with a clarity of vision he hasn't had since the Mac days.

-- umair // 11:03 PM // 9 comments


Comments:

Excellent piece. I wonder if the carriers understand what is going on, but are going along with it anyway, thinking they can somehow dodge the disruption Apple will bring to the market?
// Anonymous Mike Butcher // 10:09 AM
 

Brilliant analysis!
// Anonymous Bill Olen // 5:38 PM
 

Hi Umair,

It's been a long time since I've visited here to discuss Apple's "closed" strategy. And I think you have a very thoughtful piece, but it echoes what many have tried to tell you before.

The product Apple sells (iPod, now iPhone, and maybe someday the AppleTV, all combined at a minimum with iTunes) to the consumer is an end-to-end system. As such, it needs to remain mostly "closed" (the open spots are carefully picked) so that Apple can exert the market's desire for its great product against the other occupants in the value chain.

So my only point of disagreement with you is that I think Jobs realized this just prior to launching iPod for Windows, and not just recently with the iPhone. To him, the iPod originally was a unique feature/peripheral to help sell Macs. But something was confirmed in the early days of the iTunes Store, and this moved him to release it as a product in its own right, where the iTunes content became a unique feature to help sell iPods.

It's not an easy strategy; it requires many well-executed pieces to make it work. One, there has to be a current of consumer dissatisfaction in the related markets. Two, the Apple product must truly break new ground in combining software and hardware and UI and design; not at all an easy task. Three, the marketing (Jobs, ads, videos, etc) has to fill the customer dissatisfaction with a clear vision and hope for a better future because the product is initially more expensive and less mature. Four, the retail chain and customer service has to augment the product; almost like customer service is an extension of the UI. There might be more but these four seem to be at the top.

Apple is executing well on these for the iPod (music and radio industry) and based on this weekend, the iPhone (cellular industry); though we'll have to let some time pass before we can really judge. However, the AppleTV (movie/TV content, cable/TV industries) has yet to move the commercial content producers to give way to Apple's "demands" for cost and features, so Apple has turned to other avenues like YouTube to make the AppleTV more desired as a product.

Anyway, nice post and given this as the starting point, I'm looking forward to hearing what you think are the implications and future directions for such a strategy.
// Anonymous Anonymous // 10:14 PM
 

Maybe after Jobs overhauls the mobile phone biz, he can take on the sucktastic broadband and cable tv markets.

Because there's no service provider of any stripe that I hate more than Comcast. C'mon Steve, I already got an Apple TV.
// Blogger 42 // 12:56 AM
 

I'd add that I don't think Apple and Microsoft are in cell phone wars or mp3 player wars or OS wars, they are in interoperability wars.

Jobs let loose a little secret during his interview with Gates at the 'All things D' conference when he said that Apple is really a software co, with great wrappers.

IMHO, I think Apple (=iTunes, .mac) risks being the 2000's wall garden version of AOL and needs to seek ways to open up.

Good to see you back on full force, Umair.
// Anonymous CoryS // 2:11 PM
 

Good thinking. Let's add two steps:

1. Enormous sales potential
One addresses the fiscal challenge that Apple faces, related to its scale as a company: Wall Street desires enormous growth, regardless of the needs and wishes of the company itself or its customers. So Apple must pick a market space that will generate astronomical sales over a five year period—sales that will need to double again in the following period.

2. Highly captivating content
So, yes, TV is a great candidate for another reason, another step: Apple best pick markets where it does not have to generate content but can vendor highly desirable, consumer content.
// Blogger SN // 6:30 PM
 

iPod & iPhone both provide access to a long tail market that did not exist for the music industry in any meaningful way prior to their release. If you where an unknown artiest it was dam difficult to get an audiance. iTunes and YouTube both now on the iPhone provide that access. It's another marketting ploy by Jobs.
// Anonymous Anonymous // 5:58 PM
 

glad i own the stock
// Blogger David // 7:53 AM
 

glad i own the stock
// Blogger David // 7:53 AM
 
 

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