Apple’s hardware “dilemma”
Wed, Jun 6, 12
It has become a routine: rumors and speculations lead up to an Apple event wherein the company introduces products that “fail expectations” but go on to sell out and make huge profits. But why does this happen like clockwork, year after year?
To be sure, part of it comes from market speculators who make money from AAPL price swings, but the inability or unwillingness of analysts and pundits to understand how Apple works is the more likely reason.
The “failure” is declared by comparing Apple’s hardware specs against those of its competitors. Like “covering” a U.S. President through the confines of the White House press briefing room, hardware specs are the lazy person’s ideal tool: short, simple, often numerical, but ultimately not very illuminating.
One of the key ingredients of Apple’s spectacular success over the last decade has been the inability of its rivals to distinguish hardware from product. As the proverbial design adage goes, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” Non-geeks, Apple’s primary audience, aren’t interested in what the hardware is, but how the product solves their specific problems. Hence they buy on demonstrable value, rather than on potential of hardware specs.
But Apple detractors ask why should the most valuable technology company on the planet — with a large patent portfolio, unrivaled in-house industrial design capabilities and enormous influence over its supply chain and component pricing — fail to offer the best hardware specs in the industry for its premium products? There are a few basic reasons why Apple doesn’t believe it’s in a hardware race.
Hit or miss, no surprises here
Like Hollywood, Apple is perceived to run a hit-driven business. Perhaps the single most important question affecting AAPL’s P/E compression is whether Apple can continue to generate blockbuster products with regularity, especially in its most profitable iOS line.
This requires a sufficient degree of surprise of the “One more thing…” variety and the secrecy that secures it. However, it’s a monumental task for Apple to coordinate the sourcing and assembly of countless parts for its iOS and Mac devices from three continents in total secrecy so that it can spring on its loyal users products to buy at specific annual intervals. No wonder Tim Cook recently said Apple is going to “double down on secrecy.”
While surprise has been essential to Apple’s success, total secrecy may no longer be attainable or even necessary.
From Retina displays to DRAM chips to CPUs, Apple’s principal component supplier for iOS devices is Samsung, accounting for about a quarter of the component cost of an iPhone. To add insult to injury, Samsung is also Apple’s biggest rival in consumer electronics and one that takes particular delight in aping every aspect of its products down to icons. Furthermore, as various investigations and court cases reveal, many people in Apple’s vast supply chain are fond of divulging its upcoming product secrets in exchange for money from stock manipulators and rivals. One way or another, rumors, tips, “supply chain checks” and “sources in Asia” turn into a steady stream of “Confirmed!” headlines that then precondition us to discount the significance of Apple’s offerings when they do in fact materialize.
Lately, it’s become very difficult for Apple to surprise us with breakthrough hardware. As a matter of fact, since the introduction of the iPhone, Apple gave us precious few surprising breakthroughs in hardware. To an average user, the differences between consecutive iPhone versions, from 3G to 4S, are purely incremental improvements or aesthetic embellishments, not hardware breakthroughs. Sure, better cameras, higher resolution screens, cases that feel richer to the touch, faster speeds…but no significant surprises or breakthroughs in hardware. In hardware terms, the iPad is indeed not much more than a large iPod touch. And yes, days before their likely introduction, we know and certainly expect Retina-like displays on upcoming Macs. They’ll surely be great, but hardly surprising hardware breakthroughs.
Lots of new technologies not yet in iOS products have already been deployed by an army of Apple rivals: larger phone screens, NFC, haptic displays, stylus, inductive charging, very high-resolution cameras and so on. So we couldn’t count their appearance on upcoming Apple products as surprising or hardware breakthroughs either.
But doesn’t Apple have a ton of interesting patents yet to be deployed? Indeed, Apple has a huge spectrum of hardware patents, ranging from illuminated hardware cases to password recovery information stored inside a charging adapter to optical stylus with advanced haptics to Thunderbolt interface on iOS devices to coded/secure magnets to ionic wind generator cooling systems.
We could certainly see in an upcoming iOS device some unforeseen application of Liquid Metal or a novel 3D camera setup or flawless bio-metric security or a one-week battery or a silky smooth digital pen with zero perceptible latency or wireless power transmission or bendable screens…We could, but we likely won’t any time soon.
Apple knows how to count SKUs
There are certain characteristics of Apple that put it in a different category than any other hardware manufacturer. Unlike others, Apple carries an extremely small number of products in each category, with minor and easily discernible differences. There’s really only one iPhone and one iPad. There are no pro, lite, region-specific or one-off versions. Samsung can introduce a phablet with a stylus. When it fails, not a big deal, Samsung has dozens of other models. Motorola can try a smartphone that forms the brains of a larger computer when docked into it. When it fails, it’s yet another Motorola model to be forgotten. Kyocera can try a dual-touchscreen phone. When it fails, Kyocera has scores of other models that will also fail.
When Apple introduces its annual phone, however, it’s a single product, with minor storage, radio and black|white SKU variations. These days, a new iPhone product has to sell 100-200 million units within 12-18 months. There’s no room for (what often seems) frivolous experimentation so prevalent in the industry. No other single product sells in such large numbers.
Apple is also unique in constantly moving millions of users into elevated patterns of computing behavior over time. Apple creates markets, others follow. As a market maker, if you will, Apple is in a unique position to create the rules and then educate its users in how to participate in the new paradigm. No other technology company has ever created so many “markets” and educated so many users. Historically, Apple has taught millions how to use GUI-based computers with a mouse. It transitioned personal storage from floppies to hard disk to optical disk to flash. It moved the notion of a cellphone from a device that makes phone calls to a diminutive personal computer with multiple sensors and multi-touch input for hundreds of millions of people. It got millions to pay for music online by the song. It educated people into buying billions of apps instead of using a web browser.
Of course, these new markets have been very good to Apple. But (as I explained four years ago in Why Apple doesn’t do “Concept Products”) with market making comes the responsibility of introducing new technologies with extreme deliberation and the willingness to educate tens of millions of users year after year. There’s no magic to introducing a new OS, for example, when your previous one is deployed by only 7% of your users. In market making, there are no shortcuts.
It may be a dilemma, but it’s not a weakness
The rumor inflated expectations prior to Apple product introductions, followed by the inevitable “let down” has been a familiar leitmotif. Doubled-down secrecy or not, this is unlikely to change in the near future.
But what the pundits may be missing is that Apple is hardly unhappy about this state of affairs. When Steve Jobs said in 2010 that “RIM would have a hard time catching up to Apple because it has been forced to move beyond its area of strength and into unfamiliar territory of trying to become a software platform company,” it was clear that smartphone value proposition had transitioned from hardware to platforms — a clear Apple core competency.
Apple has the best hardware-software-service integration in the industry, bar none. So the fact that the new device wars are now actually fought not on hardware specs but on vertical integration accords Apple a unique advantage. Hardware discipline coupled with constrained SKU count give Apple enormous economies of scale which, in turn, provide depth, reach, staying power, unparalleled gross margins, service excellence and, ultimately, customer loyalty. Counterintuitive as it may seem, rivals may find out that too much hardware “innovation” can actually kill a company. And that is a dilemma.