SmoothSpan Blog

Apple just announced fantastic results today driven by a variety of forces.  The world likes to focus on the iPod and iPhone, and those are fantastic businesses, but we should not lose sight of the Mac business.  iPod year-on-year growth was 17%, but the PC business at Apple grew a whopping 34%.  ZD’s Larry Dignan calls the Mac “an unappreciated juggernaut–it’s delivering big time.”  Meanwhile, Microsoft’s Vista is settling into the serious ho-hum doldrums.  Having seen the large percentage of laptops sporting fruit on the cover at various forums (including lunch at Stanford today), I can tell you that the Mac is steadily replacing PC’s among many audiences in Silicon Valley.  I would go so far as to say that if you value the impression you make with others in the Valley, you might want to seriously consider toting a Mac.

How did this turnabout happen?

Technology and markets have a tendency to move from initial innovations to a period of commoditization.  So it is with Windows and the Macintosh.  When the Macintosh first appeared, it created a tremendous innovation spike in the market with the world’s first GUI for the rest of us.  Microsoft worked to commoditize that spike away with Windows, and for a long time they succeeded.  But the forces of commoditization are universal and cannot be owned by any one entity.  Live by the sword and you will ultimately die by the sword.  Recent trends involving the Internet and Virtualization have made it possible for the Apple to shift the playing field once again and commoditize Windows advantage away.  Let me explain.

For a long time, the problem for the Mac was application availability.  When developers were faced with writing radically different products for two operating systems, they naturally would tend to focus on the larger installed base:  advantage Windows.  But the Internet and Virtualization have changed that dynamic.  Using Virtualization, I can run my Windows software on a Mac.  Given the Macs even run Intel processors now, it works pretty darned well.  So well that people I know with both machines see no advantage in a PC for running Windows software! 

What’s being commoditized is the ability for a particular platform to run your software of choice, and the Mac has now eliminated that as an advantage for PC’s.  The Internet has contributed further to the commoditization of apps because so many apps these days are web apps.  They could care less whether you run Windows, Macintosh, or even Linux.

Michael Porter, Harvard expert on competitive strategy, has said there are basically 3 ways companies compete:

1. They can build a differentiated “best” product in the market.
2. They can serve a niche better than the “best” product leader.
3. They can be the low cost provider.

How does Apple fit in?  I will argue they’re either #1 or #2.  They either build the “best” PC for those who are True Mac Believers, or for the rest, they build a PC that is differentiated for the niche of style conscious people who want a brand that resonates with their lifestyle.  Low cost provider has traditionally been Dell, but HP has a thing or two to say about that as well.  I’m not sure who to pick for “best” if we slot Apple as a niche player, but as the #3 largest PC company behind HP and Dell, it has to be a pretty darned big niche.

Vista has in many ways made the situation worse for Microsoft.  It fails to introduce much of interest that applications can write to in order to restore dominance.  In addition, Microsoft’s rift with the web also decouples a large number of applications from Microsoft’s proprietary grip.  Nevertheless, as the ZDNet folks have pointed out, Apple still hasn’t penetrated the corporate markets very well.  This too is a function of that Michael Porter competitive strategy palette.  The corporate world will be reluctant to spend money because a product is best or stylish unless there is a demonstrated business reason for it. 

Now there is yet another trend that may upset this apple cart (no pun intended!).  It seems that companies are now toying with the idea that employees should buy their own computers.  Gartner predicts that by the end of next year, 10% of companies will be doing this.  Rob Enderle says this is just like companies doing away with the idea of “company cars” over time.  While I’m surprised, it makes good sense. 

This will change a lot of things, most of them in Apple’s favor.  I would think companies would provide some sort of allowance where they pay for a portion of the computer, much as they pay for mileage even though they won’t provide a company car.  This amounts to a subsidy for those who want to buy a more expensive machine, such as a Mac.  Here’s another prediction: such a move hugely favors web applications.  Corporate IT is not going to want to deal with a plethora of machine types each running a load of different apps.  They’ll be happiest just making sure your web browser runs and leaving the rest to you.  This trend will also loosen the grip IT has on what apps you can run on your machine, and how you can use the machine.  It may start to interfere with IT’s ability to eavesdrop and spy on you.  It will make it easier for internal workgroups to adopt web software that doesn’t necessarily fall into the approved category.  These things are already happening, but they are much, much easier when they happen on your machine as opposed to their machine.

The commoditization of the basic ability to run interesting software will continue.  Users and companies will be the beneficiaries.

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Apple is worth more than IBM for the first time in history.  Wow!  This is what fiddling can bring while Rome is burning.  Microsoft had better watch out!