Apple Wins When Content Is King

Apple (AAPL) is on a path to become the Sony (SNE) of the Digital World. The key difference is Sony could never string together their different businesses to feed one another and Apple is making that their operating model. Let's examine the pieces Apple has:

1. Hardware - while the iPod is their claim to fame, they have used this small device to open the doors to Apple computers again. That coupled w/ their adoption of Intel allowing Windows to operate on their systems is a powerful way to gain trial of Apple's hardware and more importantly software (inc OS). When Apple ran the Switch campaign couple of years ago, they didn't have the substance but I have to say now they do. With designs like the Mac Mini and the new set top box, Apple is beginning to address the convergence of PC & CE.

2. Software - undoubtedly Apple's OS and software are miles ahead compared to the Window's franchise...specially in terms of reliability and usability. And now with the ability to run Windows they are a phenomenal solution for consumers.

3. Content services - with iTunes and Jobs' ability to negotiate with Hollywood and the music industry, Apple will soon become the largest distributor/re-seller/retailer of content in the world. It's just a matter of time.

When you start to string these pieces together, what you get is a picture of the digital home - h/w, s/w and content along with peripherals through the iPod brand. While Rahul Sood in his blog obliquely refers to how Michael Dell didn't understand Apple's strategy with the iPod but didn't clarify, I'm going to lay out what I believe it is (even though Steve and I are not on first name terms).

Apple's strategy is exactly the same as Gillette's razor/blade strategy. Their long term goal is to get a razor into every house so that they can make a ton of money on the constant replacement of blades. This is also HP's (HPQ) strategy for their printer and cartridges. It is every mobile phone operators strategy around the world where they subsidize hardware to earn recurring revenue on service.

The key question here is once my brand enters your existence, how do I continue to monetize that relationship. And for Apple "it's not the hardware stoopid - it's the content". Apple's goal is to become the largest distributor of digital content in the world. They will become the Walmart (WMT) of digital music & movies & perhaps even games over time. As Apple's user base grows, Steve's ability to command pricing and content will grow. The key difference between Apple and Walmart will be that content unlike household groceries cannot be commodotized because every piece of content is unique.

The path to this is to make the Apple hardware ubiquitous. Which means expect more and more devices of every kind to serve every need over time. From PC's, to set top boxes and at some point even ultra-mobile PCs. If it's a way to experience connected content, Apple hardware will get there.

The impact of this on Dell and HP and every other hardware supplier is that they now risk getting further commoditized and as a result marginalized in the mind of the consumer. The hardware becomes a little more (not completely) irrelevant since all you really want anyways is the content. When was the last time you worried about what the configuration of your set top box was? The one chance the OEM boys do have is if people want to take that connected content and experience or manipulate it offline. Because to do that you need hardware capabilities. However, many non techie consumers will probably be happy to experience the content on demand and be able to transfer it to a device easily.

So if Michael Dell didn't get it, I hope he does now. As for Microsoft (MSFT), boy oh boy are they in trouble yet again. If Apple owns the content experience and the hardware to deliver it, they have the opportunity to own everything behind it over time including... all the other software. Of course, Google knocking on the other side giving away free software for ad space isn't helping.

So ladies and gentlemen - kiss your stock price good bye to any technology player who doesn't have a long term strategy to earn revenue from service. And this includes AMD (AMD) and Intel (INTC). Having said that, in this world of connected content, Intel has a key piece of their strategy called Wimax. And this is an opportunity for them to earn service revenue. Because people care about the brands they carry and starting Q107 the Centrino brand has a Wimax product. I'm hypothesizing but we could see a replication or version of the cellphone model where Intel works with service providers to take a share of revenue to enable their service directly onto the hardware...or variations thereof.

So for the dudes stuck on the "my micro-processor is better than yours" argument, welcome to a place where hardware is a commodity, content & services are king and Apple defines the future of the consumer technology industry. And will they dump Intel. Nope - not any time soon = the next 10 years. Because Intel is bending so far backward for Apple they can kiss their own ass. And Steve has an ego... and that ego means he doesn't give a damn if AMD offers him cheaper prices like Dell does. Because Intel probably has a thousand engineers helping him customize their products for his super cool machines.

Comments

[Tom B:]

" Software - undoubtedly Apple's OS and software are miles ahead compared to the Window's franchise...specially in terms of reliability and usability. And now with the ability to run Windows they are a phenomenal solution for consumers."

They are a phenomenal solution for Enterprise, too, but those IT guys tend to be pretty slow on the uptake.


Don't forget: What's hot today? YouTube. Who owns he Digital Video market? Well, there are Windows products, and there's Avid on the Pro end, but the answer is basically "Apple". Final Cut Pro (HD) is the best thing out there at the high end, IMHO, and iMovie is the ONLY thing worth considering at the consumer-level.

2006 Oct 25 08:54 AM

[Stephen Evers:]

"Software - undoubtedly Apple's OS and software are miles ahead compared to the Window's franchise...specially in terms of reliability and usability. And now with the ability to run Windows they are a phenomenal solution for consumers."

Huh??? If Apple's software is so far ahead why would anyone want to run Windows on thier Mac????

2006 Nov 06 05:02 PM

[Rob Sanheim:]

Stephen: the big attraction for windows on the mac is to run win-only software (ie MS money, or games, or weird little intranet apps). Its also key for web developers who want to test their sites cross-platform.

Trust me, noone who owns a mac really _wants_ to spend much time in a winxp environment - its just a necessary evil from time to time.

2006 Nov 06 05:21 PM