Meritocracy Consulting Blog

In many posts I point out the perils of vertical integration.  Yes, Apple has succeeded with a strategy of vertical integration, but correlation is not causation.  They have not succeeded because of vertical integration, they have succeeded in spite of it (so far).

In recent years, almost everything Apple has done has been genius…not necessarily complicated:

Apple’s computers are successful because they clearly found a niche of people that like design, aesthetics and being different…then they built on their success and actually grew this market…or rode the naturally growing trend of discerning consumers.

Apple’s ipod was successful because at it’s launch consumers had thousands of dollars of free/stolen music sitting on their computer.  This phenomenon created an unnatural majority of consumers who were willing to overpay for “the best” and even “fashionable” product that leveraged their existing music collection….then we got hooked.  Imagine if you found a briefcase of $1,000,000 in cash in your backyard.  Are you going to go ask for tax advice from H&R block, or are you going to pay $400/hr for advice from the top legal accountant in your area?

Apple’s iphone was successful because no competent software company took the mobile space seriously.

Apple’s ipad will be successful for the same reasons as the iphone.  Amazon has demonstrated that their is a growing new interest in display only media consumption, but like GPS device makers (who demonstrated the market for high quality mobile experiences), Amazon has created a 1 trick pony.  People want a multi-function platform.

On computers: In any space with public consumption (think sunglasses…not cereal), there will always be a luxury market.  If other people know what you buy, then at least some people will really care about how they are perceived for their purchases.  As prices drop or as the visibility grows, the base of luxury or fashion conscious consumers will also grow.  As prices dropped, people started buying more laptops and computers truly became “personal” (not shared by families).  Apple perfectly seized the opportunity to make people feel special…the reliability and beauty of their software were just differentiation points that further helped convince customers to pay a bit more.

On the ipod: Apple’s product was elegant.  Even excluding the ability to purchase music, itunes was leaps and bounds ahead of Windows media player and winamp.  The fact that people could purchase music legally through itunes just further added to the excitment and allowed retailers, journalists and the media to refer to the ipod/itunes combo as “the solution” to piracy.

On the iphone: Sorry Nokia, Sony, Palm and every other pre-iphone mobile OS maker, your software was terrible.  Apple was the first company to stop “trying to allow mobile phones to use the internet” and they actually figured out how to do it.  If anyone used a phone to try to access the internet BEFORE the iphone you know what I am talking about…your internet access was a party trick at best.  The app market, media integration and touch screen were all great features, but really Apple’s main differentiator was the fact that they made the mobile internet experience fun and possible.  Blackberry was leading the pack in a major way before the iphone.  They countered with an inferior touchscreen, when they should have leveraged their strengths and ONLY their strengths.  If they expanded the accessibility and quality of their apps, addressed the crappy browser, continuously stayed 3X over apple in video and picture quality (which Apple was not very aggressive with)…they would still be leading.  Only when they figured out how to advance touch should they have come out with a touch screen.  Apple pushed mobile forward, but they are not invincible.  Picasso said “good artists copy and great artists steal”, but artists that copy and produce something inferior may damage their reputation forever.

On the ipad: Simply put, Apple has a track record and lot’s of street cred.  They deserve it.  With that said, Bill Gates has been talking about tablet computing for 10 years.  After the ipod came out…and then the iphone…and then the Kindle…what is Microsoft waiting for?  Their existing tablet OS is not that bad, for the past 5 years they should have been developing more “tablet specific” UIs while working on pushing their partners to the exact specs of Apple’s ipad.  I think they feared they would cannibalize laptops and desktops.  I could write many separate posts about how short sighted it is for companies to fear cannibalization, but in short, if you have an idea for a product that consumers would like more than what you currently offer…if possible, do it, or someone else will.

Despite acknowledging Apple’s many successes, Microsoft should not follow Apple down the road of vertical integration. Ever heard the expression that “you should leave the dance with the person that brought you”?  This advice should have been applied by Microsoft the past 5 years and will prove critical to their ability to maintain their relevance going forward.

Microsoft (perhaps still the best software firm) decided to create an XBOX instead of leveraging their strengths (creating software, and presumably software games). While the XBOX is doing OK, the approach alienated many other companies who previously were diehard Microsoft supporters. While it is hard to imagine, what if Microsoft instead created a gaming OS and allowed other companies to create the hardware? Perhaps through a distributed network of peripheral and software creators, innovations such as the Wii remote, TIVO and boxee would have first emerged within the Windows gaming ecosystem. Instead, Microsoft’s media center is on life support, and lightweight hardware devices that stream media are gaining traction as an alternative to bloated and expensive windows home servers. Perhaps most importantly, if Microsoft were more focused on their core businesses they would have been able to jump in front of the curve on Gmail, Youtube and Google Docs while avoiding the Windows Vista disaster.  It is a tough position to criticize successful ventures (like XBOX), but it is my belief that a more focused and consistent approach by Microsoft would have positioned them much better for future success in their 5 largest (or most significant) divisions:

1. Operating systems and server software
2. Office software
3. Mobile, tablets and embedded software (like gas pumps, home appliances, etc…)
4. Search
5. Advertising

Microsoft got distracted by the excitement around the ipod and now the iphone…their approach should have been that of the Android. Essentially, Google (with the Android) is giving away the mobile OS to further their strategic goals with items 3, 4 & 5 above, and possibly to give them a strategic beachhead on items 1 & 2 as well. Yes, Microsoft was out front with a mobile strategy, but they were trying to charge $10 for an average…non-innovative mobile OS. Really Microsoft? No internal leaders were able to recognize and galvanize the troops to realize that mobile, search and advertising are your 3 largest vulnerabilities and have been for the past 8 years? Instead, they released a buggy OS, attempted to build a proprietary software/hardware combo with the Zune and XBOX and now are playing catchup big time in all categories (except the operating system…which they lead, but now finally has real competition).

Bill George wrote that this past decade has essentially been lost for American businesses and he critiques the lack of leadership that one demonstrates when they apply (possibly misapply) Milton Friedman’s overemphasis on “shareholder” value.  Companies have focused on financial engineering, outsourcing and cost-cutting…over leadership.   Cost-cutting is great, but a smart, trained and motivated workforce can be re-tasked (rather than fired) if a company has innovation pipelined and a business strategy based on continuous improvement and innovation…essentially a sense of pride and desire to create a lasting and meaningful business.  In layman’s terms, Microsoft should not covet thy neighbors strategy…their problems are related to user experience and a lack of innovation. Any of Microsoft’s new closed systems are not going to solve those problems and instead it alienates all of their customers and partners who have been patient and supportive of their open and clunky (read ‘non-apple’) strategy for years. Those supporters are deteriorating…along with Microsoft’s ability to collect their toll on all computer users.

Some argue that it is not possible for Microsoft to fix their problems (i.e. buggy and non-innovative software) without moving toward closed and vertically integrated solutions.  I believe this conclusion is myopic and possibly delusional.   Microsoft knows that their “partnership strategy” got them where they are, they need to stick with it.  Does that mean change nothing?  Absolutely not.  Specifically, they need to take a close look at their faults and user complaints, reassure their hardware and reseller partners that success will be shared, outline a clear vision, and then copy just 1 thing from Apple…the ability to under-promise and over-deliver.