There’s something quite clearly wrong with us at Faultline because we have entirely the wrong instincts about Apple. It’s always been this way it’s not a new phenomena. Let us explain.
We saw the Apple II as a product ahead of its time, running neat little things back in 1978 such as spreadsheet programs and email, but IT departments more or less ‘banned’ it, not because they had any alternative, but because they thought they were losing control of the IT agenda from their mainframe base. Pity we said.
Then when the original Mac came out (it was called the Lisa back then) we wondered what the fuss was about. Someone we knew thought it would be clever to put the operating system icon in the wastepaper bin and it turned out that operation was NOT banned and they crashed the system. The Mac was then born and we hated it because it was hugely expensive and had very little software on it and it stayed that way, and while a few loved it, more hated it and although it co-existed for a while with the PC, as Apple fortunes turned sour pre-Steve Job’s return and broke itself on the Japanese PC market, Macs were once again banned from the enterprise, where most PCs were used at the time.
By the mid-1990s we were in love with the Mac once again, rejuvenated under Jobs, and remember trying to order one to use for newsletter layouts using Quark Express, but the IT department told us they would NOT support it, so we were on our own.
When the first iPod came out in 2001 we said that it heralded a change in direction for Apple and that it could conquer consumer electronic markets with this, and invited anyone that had the money to buy Apple, which at the time had a lowly $9.8 billion market valuation.
But nothing much happened until Apple launched the iTunes Music Store two years later, by which time we were bored with our iPod, and the whole idea took off.
Immediately we thought that an iPhone was the next step and maybe a DVR, but neither came and by the time Apple had churned out the half witted ROKR phone working with Motorola, all hope of a decent phone experience from Apple had gone. Apple then proceeded several years later to come up with the iPhone, initially a pointless GSM device, and then the leading smartphone that it has today.
Our point is this. That whenever we get excited about something that Apple SHOULD do, it happens at the very least two years later, by which time we have already moved on. And when we think it is best to buy Apple (devices or stock) no-one else agrees.
This is NOT true about the public. The public, especially the US public, are still in love with the Apple iPhone, and their only complaint, if they have one at all, is that it’s expensive and that may changes soon.
However the more of the devices we see, the more we feel the constraints that once bothered everyone about the iPod. It’s a closed eco-system.
Now it doesn’t feel closed, we’ll grant you that, but the music and the video and the applications that are proliferating on the iPod cannot be easily (if at all) moved to another device. Eventually the iPhone will get less popular and everyone will be unable to leave it for fear of losing all their songs. The device is not open and it is DRM constrained. Keeping all your albums forever was a kind of mantra for Jobs, but it is only possible if you stay a true and permanent Apple fan. You are not allowed a break or a rest.
What Apple experienced back in the early days of Windows was the proliferation of programmers on a proprietary but open operating system. What Steve Jobs clearly believes is that history will not repeat itself if he can attract more developers to his platform, the way Windows attracted them in the 1980s. However at no point did Microsoft take control of your route to market and say, you cannot run this app on our operating system, or you cannot convert this data to work on that program.
What Microsoft DID was perhaps pretty unfair in a different way, as every development which grabbed interest on the Windows front was copied by Microsoft until it owned most of the popular applications, but people were still allowed to port their applications. Microsoft was NOT the route to market for the applications, it never offered a downloadable software library, although it tried to shape the market by what was allowed pre-installed on devices and halt rivals by not letting them have enough technical information to let their products run well.
But Apple, with both the App Store and iTunes, is the service operator and therefore the route to market. The App Store idea of course is also not new. In 1993 we knew people who worked on what they called a World Software Library, understanding that the internet was the best delivery platform ever for an application store. There have been issues with execution of this idea, but mostly there has been platform proliferation, and most software houses today offer downloads direct from their home page.
It’s not even a new idea for the handset. It is only a new idea in the manner in which Apple has set out a business model, designed to attract initial developer interest. It has worked, and the consumer thinks that Apple invented both touch screens AND the idea of an Applications Store.
But in the same way that in the early days of iTunes people were concerned with the DRM which tied iTunes music to an iPod, they will begin to feel the same way shortly, about the iPhone and its applications ‘ because they don’t run on anything else. And since the look and feel of the device is mostly about fashion, this is like agreeing in advance that you will wear clothes from one fashion house for the next three years. You know if you did that that fashion house would be bound to put you in something you hated, and so it will happen with Apple at some point.
People said back then ‘I don’t want that device but I do want those songs,’ to which Apple (initially at least) said tough. It finally got around this problem once it had 70% of the world’s portable digital music players, by offering DRM-free MP3s.
What will happen when people say, ‘I don’t want that device (iPhone) but I do want those Apps?’ Will Apple open its store to other platforms? We don’t think so. Can you imagine Apple putting its trust in its basic business model and offering Nokia devices access to the App Store? We certainly couldn’t imagine Nokia or Sony Ericsson or Motorola accepting that, although it is technically very feasible. Apple could create an iPhone emulator for App Store programs running on Android. It could even offer a recompile and run program to port the apps, but it has no interest in doing so, since its business model is to create a source of entertainment and limit it to its own hardware and sell lots of that hardware. In essence it is a doomed strategy, immensely successful in the short term.
Sure by opening the iPhone to a wider circulation of operators, Apple is potentially inviting more players into its development eco-system, but operators still have not given up either trying to develop their own App Store, or somehow including all their existing devices in some form of App Store. Meanwhile partners such as Nokia and Samsung have offered operators participation in their App Store frameworks ‘ a share of the money, plugging it straight into their billing system. So there will at least be some, and potentially a large number of operators, that do not want to proliferate the App Store, they will launch the iPhone purely as a defensive maneuver to stop iPhone defections. After all, what do they get out of the store?
However developers of Apple Apps are far more savvy and quick moving than the record labels who failed to stimulate iTunes style systems outside of the Apple environment (although in Napster, Nokia Music Store, Sony Ericsson PlayNow and Rhapsody there are examples of surviving rivals).
And while Apps, unlike music, do not have standard file formats, they simply work with one operating system or another, we would expect that a shift from the underlying Apple operating system to Android to be no more than a few days work for most applications ‘ the basis for all Apple operating systems began as Free BSD and the basis for Android is Linux and they are not worlds apart whatever Linus Torvalds would have you believe.
It will take no time, as we see the uptake for Android devices shift from 3 phones to 10 phones on the market, to 20 new phones, to more, for the developers to see that a version of the very same Apps for Android is just as appealing as running them on Apple. Why ONLY have them on one Apple phone, why not put them on both platforms and 21 phones.
And given that Google Android devices are being created whereby there may be early market exclusives for one device, but where no operators can get exclusive control of Android itself. You are not tied into an operator when you buy or rely on a particular piece of content or an application (well the content can still be DRMed, but they all offer unencrypted MP3 now). Even AT&T will eventually be forced to source Android devices to attract customers from other Android devices supplied by other operators.
This week we have heard about Verizon Wireless in the US readying the launch of its new Motorola device under the Droid brand name and as it develops its application strategy, over the next year or so, it will create appeal among its almost 90 million customers for Android applications. Those self same applications will immediately find themselves on other stores internationally, building a momentum to overshadow the not so open iPhone App Store.
The reasons this HAS to be Android is because Android, being open source, will and is becoming the basis for other devices apart from phones ‘ set tops, netbooks and ebook readers ‘ probably mp3 players and GPS devices as well, which opens up the non-cellular dimension, in the same way that the iPod Touch opens that dimension.
This will slowly lead to a level playing field for developers across both these two platforms and potentially across Ovi and the Nokia/Intel Maemo/Moblin linux-like environment ‘ Android applications will be just a few lines of code away from ports to those devices ‘ and once there is a level playing field in developers ‘ Apple’s lack of openness will begin to become a deciding factor against it, not with developers but directly with consumers.
We do not deny that Apple has re-invented the cellphone and portable music player, only that now it has been invented, it cannot continue to operate a DRM lock in on content and exclusivity of Apps for very long. Perhaps two years. No need to sell you stock yet, but the seeds of its destruction are sewn (not destruction but fall from eminence).
All that is required is that the same number of songs and apps are available from a device which has applications tightly just as integrated into a touchscreen, and then Apple’s price, profit margin, the way it has divided operators through exclusives and the fact that you cannot move your songs and apps to another device, will all speak to the consumer against Apple and many (not all) of its devotees will evaporate. There are still people that talk about the first Walkman’s and there will still be people waxing lyrical about putting a camera in a Nano, but the revolution is now at its peak, it will soon be over.
In effect Apple spotted what was wrong with phones, and it has put that right. Now that the world is copying it, is there another step beg enough in that handsets where Apple can be first mover once more? We don’t think so, and its future differentiators (which Apple will definitely come up with) may be considerably less appealing that the original touch sense of the iPhone.
As 1984 approached Apple ran a series of adverts referring to IBM as the Big Brother in Orwell’s future vision ‘ Apple was the one free man. Today the App Store and the iPhone put Apple in the position of being the big brother, bullying people into only using a single architecture, while Google has perhaps taken its role.
Currently Apple sets the ceiling for smart phone pricing ‘ but it will be apparent, judging by our attitude to Apple in the past, perhaps two years from now, that Apple is charging more and yet offering only a closed platform. Slowly that margin will be eroded by other devices, primarily driven by Android, until there is openness out there at least on devices.
We know openness drives down pricing, because it allows rivalry and price wars.
The net result is that the iPhone, in our eyes, will become the MySpace of the smart phone, appearing unassailable until a little known rival called Facebook entered the scene. And Google Android takes the role of Facebook in opening up of application platforms on handsets,