Apple stands on the threshold of markets to which it has historically been denied entrance, or refused to seek. Changes in Apple's leadership and in its competitive position worldwide have created previously-unattainable access to these markets. While Apple Inc. (AAPL) could certainly fail to capture these markets - or to capture them to the extent of the market for music players - it is worth noting the existence of such opportunity in an era in which Apple is regarded in some quarters as being too large at present to have any serious prospects for growth.
Travel through time with me to the Nineties. Apple has a reputation for selling to schools, but schools are replacing their Unix systems with Microsoft's (MSFT) NT and their desktop systems with Windows-95. Apple has a server product, but nobody you know has ever heard of A/UX and it can't run Macintosh applications without an emulator. Apple computers require peripherals designed to support the Apple Desktop Bus ("ADB") or Small Computer System Interface ("SCSI") devices, and are generally incompatible with the large-volume market for peripherals compatible with the IBM PC (having RS-232 serial connectors, PS/2 ports, or IBM parallel cables). Thus, the move to an Apple involves a complete changeout not only of the computer but any printers, scanners, or external storage that may be involved in one's work.
And then there are the applications.
Exchanging work with others - drawings made with drawing programs, documents made with word processors, spreadsheets -requires users on both ends to be able to read and write the same file formats, so people who exchange papers for publication or other purposes have only a few choices - software from vendors that support both platforms. And wouldn't you know that these vendors charge separately for a "license" to run the software on a different system than the one supported by the box of disks you acquired in your original purchase? And wouldn't you know the versions sold for the different platforms come out on different schedules, so you don't have the same interface (steepening the learning curve for switching) or even the same features - or even the same file format?
The network effect of the IBM-compatible computer and its associated peripherals (and their drivers) and applications (and their file formats) creates a seemingly insurmountable barrier to adoption of Apple's computers by firms with existing installations of anything else. Particularly problematic is file format lock-in: since each business must exchange work product across the enterprise and with trading partners, the safety of using what everyone else uses is a powerful disincentive to experiment with potential disaster.
Remember the iMac?
It was advertised as the easiest way onto the Internet, and it sold like hot cakes (at least, compared to the Mac products it replaced). Some of the big changes brought to the consumer market included a built-in CRT (you do remember CRT screens, don't you?) with a 1024x768 pixel count, substantially raising the bar from the 640x480 monitors that previously governed web designers' expectation of users' display capabilities. After the iMac, web designers began to assume that even consumer-grade machines would be able to display a browser window 1024 pixels wide (including scroll bars). The web didn't really enjoy HTML standards until standards-based browsers gained ascendance some years later, but raising the bar on quality was a start and the iMac played its part.
Another evolution the iMac ushered in was also related to hardware. The iMac had no ADB ports, no SCSI port, no serial port - only ports supporting the then-uncommon "universal serial bus" ("USB"). USB had appeared on non-Mac computers for a while, but only to the accompaniment of PS/2 mouse and keyboard jacks, parallel printer ports, and RS/232 ports for things like external modems. Apple sold the first computer that required users to have USB devices. And Apple sold so many of them that peripheral manufacturers - even manufacturers with no particular history of targeting Macs - began making USB products so they could add iMac users to the PC market already targeted by their devices. After all, the PC makers had been offering a few USB ports in their machines for some time - they just didn't have USB devices to connect them to.
Apple took flack for not having legacy ports, but by abandoning all the legacy ports Apple forced peripheral purchases and made USB really relevant. The upshot? With the consequent adoption of USB by device manufacturers, users could physically connect to Macs any hardware being built. Whether the things would work, of course, depended whether anyone had written a device driver for Macs. (Apple's IOKit would later make device drivers easier to write, and make it easier for Macs to figure out which device driver should be used to communicate with and control a particular device.)
Writing applications on Macs continued to be a trick: not only did developers need Motorola's not-cheap MetroWorks software development tools (in order to code for the PowerPC chips Motorola sold to Apple for its Macs), but getting software to compile and run predictably in that environment was complicated by the fact that PowerPC chips read numbers in the opposite direction of Intel's processors. The first digit in Intel's processors is the little end of a number - in effect, it reads and writes numbers right-to-left. Macs running on PowerPC chips read numbers left-to-right. Imagine reading data from files, saving data to disk, sending data between computers, and copying programming logic between algorithms designed to work on processors that read data in opposite directions. After a years-long MacOS X on x86 skunkworks project, Apple announced that it would switch to Intel CPUs in Macs in 2006. Since then, Apple's products have been little-endian just like Linux, MS-Windows, and FreeBSD.
Meanwhile, every Mac is ready for cross-platform development for Macs and iOS devices. Apple provides its own software development tools - the ones Apple uses to create its operating systems and every Apple-vended application - for free. And while all that was going on, WebKit (or another standards-based browser engine such as Mozilla) became such a substantial fraction of the web client base (especially in the fast-growing and much-targeted mobile market) that operating system has become largely irrelevant on the web as web developers have targeted standards instead of specific browsers.
The upshot? Look at the changes in the barriers to entry:
- Same peripherals available for Macs as for non-Macs means less barrier to trying a Mac or adding a Mac to an existing office or household
- Same CPUs for Mac desktops and Mac notebooks as offered in non-Macs means easier porting of applications
- Free development tools means easier access by developers to professional-grade tools (especially starving new developers)
- Web standards make the platform of many clients altogether irrelevant, so most users can switch without impact on online banking, web applications, etc.
About the only thing left is proprietary file format lock-in, and despite that most word processors and spreadsheets purport to translate into and out of the file formats used by Microsoft in its Office suite, Microsoft has fought tooth and nail to prevent genuine standards from emerging for desktop productivity applications. Efforts like Google's to move storage and applications to the cloud are an effort to end-run around file format lock-in, but their ultimate success naturally turns on their breadth of adoption.
Steve Jobs, whatever his other traits, was no fan of the suits in big corporations. Typically appearing in blue jeans, the anti-authoritarian Jobs openly referred to wireless carrier partners as "orifices". (The irony of Jobs as an anti-authoritarian - while one of the most famously volatile despots to hold a CEO title - is not lost on the author. But as Bill Gates acknowledged, he had taste.) When MacOS X launched as a Unix operating system, partners with dreams of big-business accounts hoped Apple would build enterprise infrastructure compatibility into the servers (to replace non-Mac solutions) and clients (to make Macs easily-adapted clients in heterogeneous networks). Yet Apple delivered half-baked solutions for years, in one instance reportedly dedicating no engineering resources to a long-standing enterprise request until a member of Apple's sales force attempted to code a solution.
The recent change in attitude toward the enterprise combines with Apple's change in barriers to entry to yield big results: projected enterprise sales growth of Macs and iPads is over 50% this year. The popularity of Apple in the enterprise will have a bigger effect on Apple's current management and resource allocation than was possible years ago (in '07) when Apple lacked engineers to manage timely production of both desktop and mobile operating systems at the same time. Apple now has the engineering resources to deliver a major OS upgrade each year to both Apple's mobile platform iOS, and Apple's desktop/laptop/server platform OS X. Apple - which has since the iPhone launch deployed a number of enterprise-friendly tools such as a batch-configuration program for setting up users' iOS devices - is less likely to respond to corporate purchase overtures with the same disdainful lack of support that previously characterized Apple's approach to enterprise sales. (The author of the Applepeels blog once had specific examples of the historically hostile-to-business and even hostile-to-the-enterprise-salesforce behavior of the pre-Cook Apple, but these descriptions have disappeared as he readies a book on his experiences working for Apple.)
The fact that Apple is willing to do business with unsexy enterprises - not only to answer calls from but actively court sales by developing relevant supporting software like the iOS configuration tool - is a sea-change for Apple. Apple could do worse than to ask what enterprises need from their IT infrastructure, and begin delivering enterprise-wide single-sign-on solutions based on the same open-source LDAP and Kerberos tools from which Microsoft built what it markets as "Active Directory", then begin using those tools to apportion resources ranging from printer shares to network storage and cloud-based tools offered by Apple or by enterprise vendors. How many corporate infrastructures are stuck with poorly-performing Microsoft products simply because desktop users are expected to use Microsoft Outlook, which in turn is paired with costly Exchange licenses on the back-end? Enterprise-scale email worked fine on freeware servers at Hotmail before it was bought by Microsoft; why shouldn't Apple offer effective replacements? It's not like every copy of OS X doesn't already ship complete with an email server, a web server, and a calendar server. With some thoughtful work, Apple could enable its users to host and share calendars that could be re-shared to authorized users by Apple-vended servers, shifting from corporate desktops traffic enterprises would rather keep from the network segments in which desktop users must perform their work. It's not like Apple's expertise with multicore hardware and with ARM systems can't readily translate into a low-cost-of-ownership server platform; Hewlett-Packard (HPQ) and Dell (DELL) are already moving into ARM servers. On the other hand, as enterprise interest in Apple's brand awakens Apple can easily revive its x86 server line. When Apple last offered XServe rack-mounted hardware, it was lauded for its quality and design; now that Apple has serious enterprise interest, Apple should offer products everywhere it has opportunity, including in the costly back-office where so much desktop spending is driven.
Time was, Apple's fortunes hinged on the U.S. market. For a few years now, Apple's revenues have been at least half foreign-sourced. Most of Apple's cash is abroad, part of the reason Apple's new dividend and share buyback programs are so modest.
(Repatriating to the U.S. more money for larger dividends and/or buybacks would subject the money to more taxes. The reason Apple's foreign-taxed income doesn't bear at least US levels of taxation is in part due to deliberate organizational structuring to avoid taxation. For example, much European royalty revenue is channeled through an Apple subsidiary domiciled in a jurisdiction with favorable tax treaties governing royalty revenue. Even in the U.S., Apple uses a Nevada subsidiary's offices as the site of income "earned" from Apple entities subject to local income taxes in a variety of states).
Today, Apple obtains but a third of its revenues from the United States -- the remaining two thirds are foreign income. Among those foreign markets is mainland China, where Apple sold 5x the phones last quarter than in the comparable quarter last year, and where Apple is still building its sales infrastructure. China accounts for 20% of revenues worldwide at Apple, and at the wild growth rates in mainland China it's clear that Apple's largest market by revenue will soon be China. If not in 2012, then in 2013.
Given the growth in China - and its hunger not just for Apple phones but computers and apparently anything else bearing the company's brand - Apple is in for an even more exhilarating ride than among corporate customers in markets in which Apple has previously been denied access to the enterprise.
Apple has demonstrated great success in obtaining outsized profits from modest CPU share in PCs. Against the backdrop of this phenomenal trait, Apple now enjoys access to markets in which barriers to adopting its products have dramatically declined since the time Apple bought NeXT in the late '90s. The combination of margins and unit growth prospects presents terrific bottom-line opportunity.
Acceptance of the Apple brand in enterprise promises to grow unit sales into enterprise over 50% not only in tablets, but in Apple's Mac line where its share of the market - especially in enterprise - is minuscule. (But which could be significant: look at the fraction of Microsoft's profits attributable to enterprise products.) Dramatically lower barriers to migration onto Mac hardware, coupled with improved brand acceptance in enterprise, promise to make big business an important market segment for Apple, and a source of recurring revenue as enterprise training and support creates future momentum based on hardware demanded by users today. In China, the story is similar except that the growth rate is much higher than 50% as Apple builds sales infrastructure for the first time, adding points of sale to replace counterfeit "Apple" stores.
Apple's change in attitude toward enterprise promises investors an opportunity for growth that was historically possible only in one's dreams: Apple could for the first time take big business seriously as a meaningful market. Ease of use, low overhead, and high efficiency are all valued in large enterprises where even small savings can multiply over many units into meaningful business decisions. What's more, Apple could bring to every scale of business the centralized IT control currently enjoyed only in enterprise (provisioning users' access to network and remote storage, provisioning access to network printers and printers shared on a local network, facilitating the simplicity of single sign-on, administering users' access to cloud-based resources from one control panel business-wide, pushing software and/or updates to users on the schedule of the business, etc.). These features aren't available from any vendor at prices most small businesses would pay, but Apple's decision to sell servers for $999 including the hardware means that Apple could, by making Apple server software irresistible, dramatically change its server sales volume.
Bargain servers are a high-quality opportunity to take Chinese back-offices with Unix. Through world-class satisfaction and customer support - and famously well-liked user interfaces - Apple may be in a position to take and hold Chinese IT mind share and with it, unit sales share and long-term profits.
Apple faces golden opportunities in China and in Enterprise - the question is which opportunities Apple will bother to seize.
Disclosure: I am long AAPL.