The Curious Investor

What's Happening at Apple: Steve Jobs

Tom B,

I agree completely with your view that Apple needs "critical mass" in order to continue to grow and take market share both in the consumer and enterprise market. In fact, I believe I make that contention in the next part of this post series when I discuss potential successors to the Apple CEO position. In fact, I believe the Company is so well positioned today as far as reaching a "critical mass" of consumer users (and this is really their focus, not enterprise software) that, even without a visionary presence at the firm directing future strategic initiatives, any decent executive could manage the Company's product lines effectively enough to be profitable for a considerable period of time going forward. Hence, the argument for someone like Timothy Cook over Joni Ive.

All this aside, I think we can agree that Bill Gates was a driving force strategically at Microsoft and steered the Company to a very defensible business segment (enterprise software) that continues to be the source of its strengths today. Now, Microsoft is struggling to defend its enterprise business and at the same time identify new business areas to grow into.

Steve Jobs has similarly steered Apple to success over the last ten years and created a defensible position by establishing the Company's reputation for innovation and style. These strengths, unfortunately, are much harder to defend than enterprise. As you describe yourself, enterprise needs are easy to target. Consumer purchasing decisions are much more difficult. Just look at Crocs, for example. What's hot today may not be hot tomorrow.

Given that Apple's success has come only during periods of time that Steve Jobs has been providing the motivating direction at the firm, how can we as investors feel comfortable about Apple's ability to defend its business going forward?

I realize that Crocs isn't the best comp with Apple. But, Apple is as much a retailer as it is a tech business. And, it will continue to be more a retailer until it truly reaches critical mass within the consumer market and can capitalize on the network characteristics of inherent in its products (the key difference between making trendy apparel and making aspirational personal computing products). These days, as I contend in this post series, Apple's products are more just luxury substitutes for generally available computing products - a mobile computer, a personal computer, a personal media player.

Once again, I realize that Apple is not simply a company that puts a pretty package on Apple has the benefit of not just making personal computing products. It also controls proprietary file types, operating systems, and other software that go into the whole user experience which differentiates its products from the rest of the pack. This allows them an advantage over a plain-jane retailer like Crocs or maybe more appropriately HTC, a maker of very cool cell phones, mobile computers, and portable media devices. Apple's advantage is that theoretically they should be able to use their proprietary systems to lock-in their user base both through the establishment of a critical mass (network characteristics of tech products) and through individual consumer dependence on multiple products.

It's hard to say how successful Apple has been on this part of their business. In the end, iPod and iTunes usage didn't explode until after it was released for PC. Apple eventually released Safari for PC as well. The so-called "halo effect" everyone predicted since 2005 did not really appear until the last two years. There is, however, serious evidence that users are starting to finally buy into the whole Apple experience, not just individual products. Mac sales have outpaced broader PC sales. Safari browser share continues to climb. And, the iPhone is all but synonymous with the mobile computing market. This is why I continue to hold my stake in Apple, but cast a wary eye on anything that could potential derail execution of a strategy which will extend and strengthen the Company's competitive advantages including the potential loss of one of the most innovative and influential executives in the last twenty years.