How Apple Wins

If in 2009 we’re using Yahoo! or Rhapsody or some new subscription service to get our Music on our Apple hardware, does Apple care? No. They never have. So long as we’re buying their circuitry, they don’t care where we’re getting the music from. And they’ve shifted the hardware tide irreversibly and created momentum that’ll easily carry them through Steve’s retirement if not Steve’s.

I certainly find this interesting, not just because Ian is an intensely smart blogger and one of my favorites, but because I’ve heard it a few times before and it rings true. Apple is in the business of selling hardware, but from the beginning they’ve recognized that superior hardware is useless without superior software/services/content. Sure, they had a few missteps in the 1990’s (remember when everyone said Apple wouldn’t exist next year/month/week??), but once they realized that content is king, they used it as a vehicle to sell hardware.
The strategy so far has gone like this. Apple wants to sell a new piece of hardware. They recognize early that to do so, and to keep people using Apple hardware, they’ll have to redefine and shakeup the marketplace for the first few years while their competitors struggle to catch up. Those crucial few years give Apple the opportunity to sell hardware at a significant price premium. Their strategy to shake up the market has been to offer nominal hardware packaged with superior software/services.
If the iPod were just another MP3 player (and they did exist back then!), it might well have been a flop. But Apple came up with three killer features that redefined the entire marketplace. First, the iPod could hold all of your songs – not just the 30 you could fit on your legacy flash-card player. Second, it allayed music industry fears by selling music to consumers. Finally, it bundled software that made it dead simple to manage your music.
That blew everyone out of the water. Why would anyone want a non-iPod? The strategy worked well for a few years, but what we’re seeing now is that Apple did a good job of adapting along the way. Content companies are now balking at Apple’s restrictions on iTMS pricing, DRM, etc. But my guess is that Apple doesn’t really care because iTMS seems to be a high cost, complex business that isn’t terribly profitable on its own. (This report disagrees)
But the key is that by selling so many iPods and redefining the standard, Apple has now forced content industries to continue to offer iPod-compatible content. If the music and video providers don’t want to continue with iTMS, they’ll have to go DRM-free, which was probably the goal all along. After all, it sells more iPods.
Maybe an even better example is the iPhone. Apple saw an opportunity to sell high-margin hardware by redefining the software and user experience. They wouldn’t have just sold another mobile phone – it had to change the market so they could maintain their price premium. They not only redefined how a mobile phone should work, they forced an upgrade of services from AT&T (visual voicemail, unlimited data at a reasonable price). It will take Motorola, Nokia, Ericsson, Verizon, Sprint, etc at least two years to catch up with the initial iPhone. They’ve taken *both* parts of the cellular/mobile industry and turned them on their heads. It’s the Apple way.

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