It's All About the Apple Ecosystem

Apple (AAPL) is an unusually difficult company to read. Most other companies telegraph their punches, but Apple does the opposite. It even misleads Apple watchers, so that when it releases a product it will be a surprise, in some way at least.

This strategy has served it well in recent years. Before any major Apple event, like for instance the World Wide Developer Conference (WWDC) that just took place, there is a rolling wave of pre-publicity that builds up like a tsunami approaching the shore line.

The consequence is that the event and the announcements at the event are well reported, even when there is very little to report.

The Message of the WWDC

The WWDC actually contained three important announcements:

1. The inevitable new iPhone (or super-upgrade) appeared, the 3GS, with much improved camera and with video capability.
2. Snow Leopard will be released in the fall and will be very cheap, at $29 for an upgrade to Leopard.
3. A 13-inch MacBook Pro was introduced and the price of other MacBook Pros and the MacBook Air were cut.

That was it really, except for a few minor announcements for the business market. Apple will support Microsoft Exchange - it’s about time - but it also means Apple now takes the business market seriously. It didn’t use to. Another sign of this was a full 64-bit version of Snow Leopard at $499 for the server, with unlimited client licensing.

The iPhone

Apple doesn’t need to run too hard with the iPhone to stay ahead of the competition, but it’s keeping up a brisk pace anyway. The latest challenge from the Palm Pre may be real, but it’s not threatening. Apple has the App store and (see How and Why the iPhone Changes The Game), the App Store is the trump card. Developers don’t switch easily from one platform to another and Apple has the vast majority of developers for phone apps. The competition has an awful lot of running to do to get anywhere close to Apple.

Nevertheless Apple took a small swipe at Palm by cutting the cost of the cheapest iPhone to$99 and it also added some nice features like:

• Voice control
• Some neat camera features including auto-focus
• Editing video and direct publishing to Youtube
• Electronic compass - combining with map software
• Encryption
• Support for 7.2 Mbps HSDPA 3G where available

In the US, Apple’s iPhone is still constrained by its exclusive deal with AT&T which will surely be dropped when it runs out. It’s doubtful whether Apple will want to make such deals again. It was good for Apple at the time of the iPhone launch and it proved to be a sensible move because the high price of the AT&T phone deal didn’t deter too many buyers. But such deals are now acting as barriers to sales of the iPhone.

The Snow Leopard

Snow Leopard will be released in the fall and will be very cheap, at $29 for an upgrade to Leopard. Why? Nobody seems to be asking that question, but I doubt if it’s prompted by trying to compete with Windows 7. Apple zoomed past Windows long ago with the move to Intel and Microsoft is clueless about how to compete. But the fact is that Apple is willingly forgoing hundreds of millions of dollars in revenue. It could easily have sold Snow Leopard at $139 and no-one would have complained.

The logical conclusion to draw is that Apple is eager to pull its customer base onto Snow Leopard, which in turn implies that it has something else in mind. My guess is that it all has to do with the coming Mac tablet. We need to consider the whole Apple range in order to get a perspective on this.

The Mac Market

The third important announcement at the WDC was the repositioning of the MacBook range, introducing a 13″ MacBook Pro, cutting the cost of the other MacBook Pros and the MacBook Air and reducing the MacBook itself to the one basic model. My expectation is for that model to vanish when Apple’s new tablet computer is announced.

The reason that Apple is so tough to compete with at the moment (even in this economy) is that it has all its ducks lined up. From the iPod Shuffle up to the largest Apple server we have, in effect, a single OS, a single provider of hardware and a standard approach. If you think of this as a range of devices then the range is:

• iPods
• iPod Touch
• iPhones (iPod Touches with 3G phone capability)
• MacBooks
• Macbook Pros
• iMacs (including the Mac Mini)
• Mac Pros

The indications from the WWDC is that the price range between $500 and $1000, i.e. between iPhones and MacBooks is about to be filled by a Mac tablet. If you want to know the probable spec of such a device, read 10 Pointers To What Apple’s Netbook Will Be Like. But the device is itself will, in my opinion, only be part of the story. Apple is currently preparing to build a huge data in North Carolina with the intention of investing hundreds of millions of dollars - and it can’t just be for serving iTunes.

Most likely Apple intends to build on the success of iTunes and the App store and become a hub for everything digital, including e-books and apps. Most likely Apple will expand the App store to serve apps to its soon to arrive tablet and also to Macs of every variety. Why would it not do that?

In order to pursue this with maximum impact, it probably needs as much of its customer base as possible on Snow Leopard. That, I believe, is why Snow Leopard will be cheap - to help Apple build out its full range of devices and help it to gather revenues elsewhere. Apple has a large part of the software developer community eating out of its hand. It may was well unleash them across the whole range of Apple devices.

In the end, it’s all about the ecosystem.

Disclosure: No positions

Comments

[GSlusher:]

Interesting article. One thing that strikes me is that there seems to be no other company that does all of what Apple does:

- OS
- Computer hardware, "personal" and server
- Entertainment devices, portable (iPods) and home (Apple TV)
- Phones
- Content

Even the behemoth Microsoft only does three of those (plus a significant line of peripherals).

Apple also seems to be able to attract other companies to make accessories for their portable devices. I was in a Best Buy store a few weeks ago. Discounting "generic" accessories (e.g., cases that can hold many phones), the great majority of accessories in both the phone and MP3 player sections were for iPhones and iPods.

Jun 11 12:50 PM

[GSlusher:]

Interesting article. One thing that strikes me is that there seems to be no other company that does all of what Apple does:

- OS
- Computer hardware, "personal" and server
- Entertainment devices, portable (iPods) and home (Apple TV)
- Phones
- Content

Even the behemoth Microsoft only does three of those (plus a significant line of peripherals).

Apple also seems to be able to attract other companies to make accessories for their portable devices. I was in a Best Buy store a few weeks ago. Discounting "generic" accessories (e.g., cases that can hold many phones), the great majority of accessories in both the phone and MP3 player sections were for iPhones and iPods.

Jun 11 12:51 PM

[Macaholic:]

Great read on things. Apple has sold big OS upgrades pretty cheap in the past. While your assertion that Snow Leopard's cheap price is there to get more people on it for Apple's impending Giant Cloud I believe they won't orphan Leopard or even Tiger users in the process. These users will still be a large portion of their userbase.

Another way I see the cheap price of Snow Leopard being so is because they finally will be able to allow the user to benefit from all that the MacIntel architecture offers. Existing users will "get a new Mac", so to speak, for $29 (they have even used that tagline before when hyping speed improvements with new OS releases) and new buyers will see even greater appeal for the same reason. As 10.1 Puma (which was free) did for legitimizing OS X's overall functionality, Snow Leopard will finally do the same for the MacIntel platform: fulfil their promise.

Jun 11 01:53 PM

[AlfieJr:]

you're right, it is about the "ecosystem." but you missed the #1 overarching marketing message Apple was launching at WWDC, which we will hear all this year leading to the SL/Win7 showdown in the fall:

Speed.

Apple extensively emphasized the much faster speeds of Safari 4, Snow Leopard, and iPhone 3GS throughout the presentation. it even included speed comparisons with other browsers.

i've got to think Apple intends to focus on the speed issue for the SL/Win7 showdown. Windows 7 beta users have not reported big speed improvements over Vista, which has been generally criticized for being somewhat slow, and multitasking remains particularly weak. if Apple can legitimately claim that SL is significantly faster ("snappier" for consumers), it has the "premium" marketing factor it needs to continue to say OS X is superior.

the #2 marketing message from WWDC was price - lower prices. but everyone did notice that.

Jun 11 02:48 PM

[Louis G Whe...:]

There is an excellent reason Apple is so secretive. Back in the 90s, Apple would get an application within 20% of being done and the word would slip out to Microsoft about its features. Going from 80% to a 95% complete for shipping takes longer than the first 80% of code. Microsoft could get a placeholder application out into the market that was 80% done and fix it later. This copy would be junk that wasn't remotely useful, but it would beat Apple to the punch.

Second, Apple doesn't seem to be interested in the Enterprise market. What it wants is the Small to Medium sized businesses which are more flexible than companies with IT departments. Those SMB companies need to interface with Enterprise, so Apple will be providing them the tools to do so.

But, directly engaging in the Enterprise market would mean that Apple would need an Enterprise sales staff, issue long term hardware plans and shave pennies off huge purchases. Apple is unlikely to follow through with that, because it raises hell with its consumer marketing.

Third, the nature of computing is entering a new phase. It is unclear that the Enterprise market will survive the transition.

The current form factors in computers will disappear in five years because the technology will allow distributed processing. There will be a true ecosystem of parts which make up a computer. Every peripheral will have its own computer chip inside. We will buy bits and pieces to make up a computer.

We might have five or six monitors in our home or office; as we walk from room to room with the keyboard the nearest monitor would start responding to our input.

We would have specialized computers to act as tablets, keyboards, wireless headphones, mass storage, wireless internet servers, wireless security cameras, etc. Our household appliances will tell the computer what stage they are in process of, that we have run out of milk and which items are too far past their freshness date. This would be reported to the computer or our iPhone. We will have so many devises that we still need an operating system to make sense of it all and control the various pieces.

Apple seems to be slowly moving in this direction, but it is being cautious, because most of the current form factors will die out.

What I would like is a pocket book sized iTouch with a seven inch, high resolution screen with 1344 by 840 pixels. It would be a great movie viewer, an ebook, game machine and a web surfer. It would be small enough to slip into a back pocket or a purse.

What Snow Leopard does is to provide a springboard for the future. Many new features are coming. New software will take advantage of 64 bit processing, Grand Central Dispatch and OpenCL.

Snow leopard leaves behind the compromises that Steve Jobs had to make back in 1997 to fit the Mac GUI onto NeXTstep. The Developer base refused to rewrite its applications for Rhapsody, so Apple had to create Carbon API's for Mac OS 9 to act as a bridge to get them to move to a modern, real, Unix Operating System.

The Intel Move was used to force the developers to rewrite using XCode 2.0. A Cocoa application can, now, be recompiled in 64 bit for Snow leopard, so all of Apple's aps will be 64 bit within a year. The Carbon API's and applications will be allowed to slowly pass away.

Jun 11 08:21 PM

[Robert Ande...:]

I haven't seen anyone talk about an obvious reason for the "cheap" OS upgrade: mandated platform change. Snow Leopard won't run on PowerPC. Apple still has a bunch of G4s and G5s out there; they probably don't know exactly how many. The "low price" of the OS takes a little sting out of the forced hardware upgrade. Whatever Apple "loses" on software, they more than make up for in hardware.

Jun 12 02:06 AM

[neutrino23:]

Focusing on the ecosystem is very important when trying to understand Apple. Too often pundits focus on particular qualities of some Apple product such as number of megabytes or pixels and they miss the bigger picture. Unlike most other companies Apple is not just building widgets, it is building an ecosystem, as you describe.

Even now there are many blogs out there criticizing the new iPhone because it lacks one or another hardware feature. What they miss is that iPhone is more like a passport than a piece of hardware. Buying an iPhone gains one access to the connectivity of all the other Apple products, access to music and videos through the iTunes Store and access to the work of thousands of developers as well. All of that at your fingertips.

This is an enormous barrier to entry for almost any competitor. It is not about a physical keyboard, a removable battery or an OLED screen. Apple's strength is in this complex web of content and hardware and mindshare. The announcement that they were opening up the dock connector for accessories and Bluetooth for peer to peer communication was huge. This added another dimension to the Apple ecosystem.

I have no idea why Apple decided to only charge $29 for SL. That is a real puzzle. It will be interesting to see how that plays out.

Jun 12 03:43 AM

[HarveyMarcus9:]

I would have loved a couple of examples supporting the first paragraphs claim that "Apple misleads [Apple] watchers, so that when it releases a product it will be a surprise, in some way at least."

Jun 12 07:20 AM

[brewer:]

Great article. Robin really gets Apple.

Another potential reason for the $29 upgrade price is to discourage the practice of running unauthorized OS X copies on generic Intel hardware or clones. I doubt if that upgrade will work with non-Apple hardware. Perhaps Apple will have a full retail copy for those users. Maybe at a Microsoft-like full price of over $500!

And it's absolutely correct that there still are a lot of PPC machines out there who's users are waiting for the correct moment to upgrade.

And it always helps to have customers upgrade. Just ask Microsoft how the Vista upgrades went. ;-) If a lot of customers are upgrading, there will be a major clamor to have every application updated (if necessary) for SL.

Jun 12 09:03 AM