Forrester Research has always been quick off the mark in explaining the new rules which define a new era for technology. It was one of the leaders in explaining the eco-system for the dot.com revolution, how to build web sites, how to create e-commerce and drive traffic. Now it thinks that it can define a new era by defining Apple and has come up with a report that offers guidance for product strategists of rival companies ‘ the message is that if you want to stay in the digital home, you must be aware of what Apple will do in this market and Forrester wants to put itself up as THE source on the subject.
The truth is that Steve Jobs is pretty predictable, if you happen to be as smart as he is, and what his company has done is fairly easily defined, although it’s not easy to execute on. Apple takes what is currently just about ready to become possible in any given product genre, and delivers it early using standard off the shelf components before anyone else actually gets to market. And it does it with style and often ties up huge amounts of the component market exclusively.
We can hear everyone indignantly saying ‘ ‘So how did Apple able to create such a breakthrough product with the iPhone,’ and how come it was so different from all the product offerings out there. Well inertial sensors, used to tell an application which way round the screen is being used, and touch screens, had both had a decade long march to where they could be integrated into handsets, and Samsung had already put inertial sensors in handsets and Sony had them in portable video players, and LG had already announced plans to put a touch screen in a handset, when Apple launched the iPhone. In essence none of the technology was new and none of it was Apple’s – only the extent to which the new facilities were used to stretch the functions was new ‘ call it the style factor.
It was automatic that once you have a touch screen, you need far fewer buttons on the actual device, the screen can be much bigger, and more features can be added without clogging up the menus. But you have to give yourself up wholeheartedly to the concept, and go for broke, which Apple did, and not only that, you have to be so sure of yourself that this is the ‘right’ direction that you can convince an AT&T or someone similar.
Nokia cannot convince AT&T of anything, but it could have and would have eventually delivered an iPhone class product, in 3G and cheaper than the iPhone. But Nokia can convince many operators outside the US to take such gambles, and in that it remains a more powerful force for transformation of the handset, than Apple, when things are considered globally.
But Forrester, despite being global in reach, is a US research house, and as such it sees more influence in Apple’s demesne than is really there. Apple finds it hard to stimulate new product genres, it finds it fairly easy to make a stylish, far reaching implementation of an existing genre.
Take iTunes, the download manager that was around for over 3 years before the iPod took off. There were plenty of other download managers with the same function, some were even free, and one or two were already used to manage pirated music. The iPod too was not a huge hit, not in its first two years. The stroke of genius was not even that, a stroke of genius, which triggered the take off. It was obvious to anyone that studied the market that flat rate single tracks at 99 cents would create an avalanche from a music service, but it took the personality and gall of Jobs to convince the record labels to give it a try. Not only that, he also had the gall to tie up the majority of micro disk drives being built all over the world, so that initially at least, no-one else could follow Apple in this strategy. Apple’s execution and single-mindedness also helped.
When Faultline first suggested that Apple could become a CE play (see headline ‘Apple can shift to CE play if it has a video iPod up its sleeve,’ was in April 2004 (long before the Video iPod launch) and when we carried that piece the Apple share prices was under $14 with a market capitalization of around $12 billion. Today the Apple share prices is $181 and its value close to $160 billion. So perhaps we have more right than any to say what’s actually going to happen at Apple.
Anyway that said, let’s look at the Forrester thought process. It says that four existing products, the Mac, Apple TV, iTunes and the company’s retail stores will form the initial basis of its digital home dominance, and that by the addition of four new product ideas, home servers, a universal music controller, network enabled gadgets such as digital photo frames, and alarm clocks, and in-home installation services ‘ it will become the hub of the digital home by 2013.
Going back to what Apple has done well in the past ‘ spotted technology steps in advance of them being implemented by market incumbents, getting devices to market first, using a proprietary service lock-in, plus great design for consumer appeal ‘ just how would that apply to these areas. The Apple Mac is really basking in glory reflected from the iPod and iTunes; Apple TV is in its second generation and is not a breakthrough, has equivalent rivals and the chip sets that it’s based upon are now commodity; iTunes already has dominance fine. But what about the new product areas.
An Apple Home server, more like a DVR has been predicted for around two years now, but there already exists an Apple back-up or home server which attaches to Apple’s Airport Extreme range of Wi-Fi routers for all services. A universal controller has been in the DLNA (Digital Living Network Alliance) roadmap for 4 years, and device manufacturers are well on the way with these, for both TV and Music, with an underlying control architecture that sets the rules for what remote device calls are allowed to do, through the controller, so there’s no real edge here for Apple, although an Apple version would probably sell far more than any other similar controller. That leaves us gadgets and in-home installations services.
These may be straight from the Apple product roadmap via the Forrester analysts, but just because Apple says that it will make money here, it doesn’t mean that there’s another iTunes pincer movement ‘ services and locked in hardware ‘ on the horizon.
The only way things like digital photo frames, and network connected alarm clocks make sense is in a pure wi-fi world, which is open. Do they need Fairplay DRM control (so that no-one can change the pictures on your wall or your alarm setting without your say so) ‘ no, they may need a simple password protection, but that’s all. Which leaves us with in-home installation services ‘ one of the lowest margin businesses on the planet, better suited to a cable operator or a telco.
The truth is that all of these additions relate to iTunes. They each feed off its continued acceptance, building it an additional eco-system. The online home server for device backups and cross copying of content and Fairplay license issuing, the MAC for creation and editing of User Generated Content; remote controls for moving iTunes content around and showing preview clips of video content; gadgets for playing iTunes content and as new destinations for such content, the key one though is the iPhone. What Apple needs to do is be the first to offering rapid wireless syncing and sideloading of TV and downloaded content onto the handset. At present it is cumbersome and technical and fiddly to sideload TV programming.
All of this means that Fairplay, Apple’s REAL top product, because it cements the iTunes content onto Apple blessed devices, can extend its reach around the home, and that’s key. The margin on Apple devices only remains high because other devices cannot play Fairplay content, but to have a real impact such devices also have to be ubiquitous (Apple TV may make it to that level yet ‘ remember the iPod was also a slow starter).
The biggest issue that Apple has to overcome is extending this hegemony out of the home onto the personal device. It took Sony Ericsson around 5 years to built a noticeably market share with its handsets which are now typified by its Walkman designs. Last quarter it shipped 22 million handsets, even in a cautious down quarter, with a run rate heading inexorably towards 100 million devices compared to Apple’s 10 million.
The way for Apple to repeat this achievement with its own iPhone range, preferably faster, is to increasingly offer its devices untethered (so that ALL operators in a territory can offer them) once exclusive deals have run their course, and to solve the problems of DVR storage and rapid sideloading using Firewireless or Wireless USB.
But insofar as Apple’s core achievement is as a low priced music and video operator, it is a portal business. So in the same way that Google is chasing that market with Android, and Nokia with Ovi, this is where Apple needs to innovate, but starting with the fact that iTunes has already delivered much of the online digital music content that’s out there and protected today. Gradually it must extend this to video and here it will never embrace a DRM-free model, and it must create more service offerings that begin with the iTunes store.
So it needs a social network element built into its devices and their browsers, which share playlists and video lists and offer place-shifting and sideload syncing from iTunes servers at home, across flat rate broadband wireless networks. If it can, Apple should copy the Kindle breakthrough and cut deals with wireless operators for flat rate services where content arrives at devices magically through the air, with no extra fee (Kindle offers ebook updates across cellular data services with this being paid for out of the device purchase price and appearing free to customers).
Steve Jobs and his team has the imagination to see how best to give his second and third generation iPhones an edge over accepted favorites like Nokia and Sony Ericsson by cutting deals which make his devices more popular with consumers and therefore cellular operators.
Almost 7 years after the launch of the iPod, no devices are making inroads into its market share lead, unless it’s the iPhone. Jobs now needs to leverage the iTunes store to repeat this achievement and create a credible home ‘ mobile challenge, where the advantages of the music dominance extend to the handset. The only place where Apple can continue to get the type of margin it wants for its products is out there in mobile land.
If it would do him any good, Jobs would buy all or part of Motorola, for the R&D and advanced engineering, but he knows that this is a company that has tried to initiate core new technologies, the same way Apple used to years ago, and it is not the type of move that would drive his share price. Instead he needs to replace Motorola in the hearts and minds of Americans with the iPhone, by extending it, taking Fairplay controlled content into everyone’s pockets.
And to do that Apple needs to embrace all the waves washing over cellular, touch screen, GPS and location services, mobile advertising and mobile search, mobile TV and the handset as a DVR.
The one lesson that Jobs has given time and time again, is that it all starts with absolute control of the music, and in one or two more year’s time Apple will control such a huge chunk of portable music that not one record label will be able to break free.
Each step is bigger than you realize, and music has not run out of steam for Apple. Not all iTunes customers have thrown away their CD players, few of them take their iPod and plug it into their car stereos ‘ there’s plenty more left in the digital music revolution before Jobs starts accelerating the digital video revolution.
But that won’t be easy, and in the wings wait Microsoft which wants to offer PlayReady as a way for companies like Nokia to fight back or for it to create its own Zune phone, and companies like Sony have moved their Walkman franchise to the cellular world and will follow up with its Cybershot camera and video camera franchises and eventually it promises a PlayStation phone.
The iPhone took 28% of what the US defines as the smartphone market, which compares with 41% by Research in Motion with its Blackberry range, now aimed at the iPhone. As the service components of mobile strategies unravel, Nokia and Microsoft, Sony Ericsson and Google and RIM will all stand shoulder to shoulder facing Apple. But if it does not continue to make broad brush strokes in the mobile market, it will lose the surprise of the iPhone attack and shrink back to being an MP3 player supplier.