counternotions

Suppose you were the CEO of Apple in 2005 when a couple of intergalactic visitors with time-warping technology offered you this bet:

Design and manufacture a small mobile device that seamlessly combines the functionalities of a cellular phone, a web surfer, an audio/video player and a small PC, and your company will double its market cap and establish a third mass-market computing platform after Windows and Macintosh.

Would you take it?

Before you say, “Are you nuts, why wouldn’t I?” ponder just a few of the issues involved:

1. It won’t be possible to enter this market quietly or modestly and hope to grow slowly (like with Xserve a few years earlier). Yours will have to be a blockbuster entry. You are good in raising awareness and expectations around a product but that raises the consequences of failure exponentially.
2. If you fail, it would be a public fiasco of the first order, likely lopping off at least a third of your market cap and seriously eroding financial sector confidence in your company’s ability to grow and diversify beyond the Mac and the iPod businesses.
3. You will have to enter a highly-regulated, highly-contested, large-scale and capital-intensive industry of established players with deep pockets that you have never been involved with.
4. You don’t have an operating system designed for mobile devices and adopting someone else’s OS doesn’t make business or technical sense.
5. You’ll have to solve a very long list of vexing technical problems for mobile devices including power management, radio efficiency, miniaturization, storage, display, CPU utilization, multi-tasking, cloud computing, advanced graphics, data/sensory input, etc.
6. While you’re beginning to appreciate logistic and component pricing advantages on volume-based products like the iPod, you won’t have similar advantages with this device especially at the start and against players like Nokia that sells hundreds of millions of units around the world each year.
7. You may have thought dealing with music labels wasn’t much fun, now try changing handset acquisition and revenue sharing models of entrenched and oligopolistic carriers here and abroad to an extent never tried before.
8. You may think Jonathan Ive can easily design the hardware, but you’ll have to invent a stunning UI and a truly innovative interaction paradigm so that it’ll give you at least a two-to-three year competitive cushion against other players, as you will surely need it.
9. This device will likely require a bunch of proprietary service and content components (maps, email, media, games, etc) beyond your core competency, requiring lengthy negotiations and strategic partnerships.
10. In order to create a sufficiently large and attractive platform you’ll have to entice developers with an array of inexpensive development tools and create a highly-lubricated marketplace unlike any other.
11. As with the iPod, you’ll have to sell this device to a mostly Windows-oriented world.
12. In order not to be quickly marginalized, you’ll have to distribute the device in most countries around the world, even where you have little or no Mac or iPod penetration.
13. If you want to achieve iPod-scale (and you must) you’ll have to implement and operate a different, dedicated and larger sales and support network on a global basis.
14. Clearly, this is a bet-the-company move and the anti-Apple brigades are ready and armed.
15. Incidentally, you’ve recently been diagnosed with pancreatic cancer.

Often, the anything-but-Apple choir doesn’t quite appreciate the immensity of the risks Apple took with the iPhone.

So it’s 2005, will you still take the bet? Steve Jobs did:

In an interview with The Financial Times yesterday, Verizon CEO Ivan Seidenberg had this to say when asked about the competition posed by Apple’s iPhone:

“It’s very cool. And Steve Jobs eventually will get old… I like our chances.”

That’s got to be one of the most indelicate utterances by one CEO regarding another.

Mr. Seidenberg is about a decade older than Mr. Jobs, so he can’t possibly be referring to his age with the most unfortunate “Steve Jobs eventually will get old” phrase. He must be referring to Mr. Job’s frail appearance at the Apple WWDC in June.

Apple said Mr. Jobs was suffering from a “common bug” but various pundits and AAPL shorters claimed it was due to his recent brush with pancreatic cancer. Nobody outside of his immediate circle really knows what may or may not be medically worrisome with Mr. Jobs, but why would a competitor’s CEO feel the need to raise it so brazenly?

This chart covering the period from Mr. Jobs’ cancer diagnosis in October 2003 to the present might give a clue (red: Apple, blue: Verizon):

What’s peculiar is that Apple doesn’t directly compete with Verizon: the former is the maker of the iPhone, the latter is a carrier. The competitor Verizon should actually be worried about is AT&T, Apple’s iPhone carrier partner in the U.S.

What should really concern Verizon’s board, however, is why 18 months after the announcement of the iPhone, the Verizon camp hasn’t been able to come up with any remotely credible “iPhone-killer”? They should ask their CEO what other concrete plans he might have to compete with the iPhone other than hoping that Apple’s CEO drops out of the picture due to “old age.” How does the $20.3 million-a-year CEO of a $100 billion company like Verizon display so openly its inability to compete on innovation by placing its “chances” on the demise of another CEO?

Can you imagine another CEO, even such an old adversary like Bill Gates (or even Steve Ballmer, not lacking tackiness otherwise), would ever make such an ill-wishing statement? For shame. The least Mr. Seidenberg can do is to apologize to Mr. Jobs pronto.

In an interesting San Francisco Chronicle interview, Robbie Bach, president of Microsoft’s entertainment and devices division, reveals in no uncertain terms how pleased the company is with Zune:

Q: How is the Zune business going?

A: We’re actually super-pleased at where we are. When you talk to people, customer satisfaction is somewhere north of 90 percent. We think we’ve got a product that is very strong. You’ve seen that strength in some of the new ideas that we are trying, things like Zune Social, where we have over 2 million people who are on the Zune Social site, who are sharing their playlists with other people, letting people experiment with what they are listening to, letting people see their top 10 list and creating a social experience around it.

If you look at actual sales, depending on the month, we’re No. 2, sometimes No. 3. It goes back and forth. It’s a good solid share. We’re not clipping at the heels of Apple just yet in the market share space. But that’s something that will evolve over time.

I’d be interested in our readers’ impression of how Zune is doing:

1. Should Microsoft be “super-pleased” with Zune?
2. Do products with 90+ percentage satisfaction ratings result in an on-target outfit like GameStop to discontinue selling Zunes due to “insufficient demand from customers”?
3. Is Zune a “very strong” product?
4. Is Zune’s market presence a “good solid share”?
5. Is Zune capable of “clipping at the heels of Apple” in market share over time?

Bonus questions:

1. Bach: “We will outsell the iPhone. We will outsell the BlackBerry.” Do you believe him?
2. Bach: “We don’t make phones ourselves. We don’t have any plans to make phones ourselves.” Do you think Microsoft will or will not get into cellphone hardware business?

I’m not even going to bother asking the awkward question as to why Robbie Bach is still employed at Microsoft, because that wouldn’t be fair…to MSFT shareholders.

With the March 6 unveiling of the SDK and associated announcements, Apple has greatly strengthened its iPhone value proposition to an extent that some have publicly called it game over in the mobile platform wars. Others, including professional Apple haters, AAPL shorters, nitpickers and link-baiters, had a field day trying to find holes in Apple’s new conquest plan.

Before calling Apple’s new position unassailable, let’s first see what the company uniquely brings to the battle field:

1. Design - Nearly half a decade after the introduction of the iPod and over a year after the iPhone unveiling, no other mobile player has caught up with Apple. With its unique position in the industry as the only truly vertically integrated company that can tightly couple its own hardware and software at the OS level, and bolstered by numerous patents, Apple’s industrial design and highly polished multi-touch interface have no peers.

2. Stores - Apple not only has the fastest growing and most profitable physical retail store chain in the U.S., it also offers apple.com, the most visited computer hardware site online; the iTunes Store, the best media download site that has sold over four billion songs; and now, what’s likely to be the best application discovery and download venue, the App Store. For developers that can see past ‘control’ issues, the promise of the iTunes Store-like App Store is genuinely outstanding.

3. Pricing - Unlike its mostly proprietary pre-Intel past, Apple can now leverage its high-volume iPod/Mac businesses to get favorable component prices and has been the industry leader in inventory and supply chain management. Backed with relentless product development, the company has mastered aggressive pricing strategies with its iPod line, offering the best price/value at every product segment. Apple will follow this proven pricing strategy with upcoming iPhone iterations.

4. Games - With a 163 ppi high-resolution 3.5″ screen, Core Animation, H.264 video, SQLite local storage, hardware accelerated OpenGL ES, 3-D OpenAL sound, accelerometer and multi-touch capabilities, the iPhone 2.0 has just become the most capable, nearly console-quality mobile game platform.

5. WebKit - Safari on the iPhone has already captured %71 of the mobile browser market in less than a year. While others like Adobe and Nokia also use the WebKit engine, nowhere does it shine brighter than on the iPhone with its multi-touch gestures and big screen. Apple is also about to let Safari run full-screen (like a native app), go native with JavaScript DOM traversal for huge speed gains and allow JavaScript to access some multi-touch gestures and other iPhone features.

6. Depth - Apple officially announced that it regards the iPod touch as the precursor of a mobile platform. Its multi-touch patent portfolio and gesture library bridges PCs (current Mac notebooks offer multi-touch trackpads) and mobile devices of various sizes/shapes, signaling product possibilities from iTablet to Minority Report-like form factors. Economies of scale, core design competencies like power management and miniaturization and cross-device integration opportunities will give Apple an incontrovertible advantage in product design in the post-PC era.

7. SDK - Cocoa Touch, the marriage of OS X and multi-touch UI, gives developers access to the hardware, multi-touch controls and events, accelerometer, view hierarchy, localization, alerts, web view, people/image picker, camera, etc., in a sophisticated IDE. The development tools in the new SDK, including an emulator and direct iPhone diagnostics, put it at the very top of the mobile development platform pyramid.

8. Enterprise - Under Steve Jobs Apple has never directly targeted the enterprise with any coherency or intent, believing that a frontal attack on Microsoft would be suicidal. The mobile space, however, has no such entrenched competitor that Apple believes it cannot effectively compete against. So, uncharacteristically, it has begun to openly court businesses large and small and, to the extent that it can maintain its momentum and focus, the enterprise world is a new and significant market for the company.

9. Ecosystem - From automobiles to leather cases, Apple has already created the biggest-ever ecosystem around a consumer electronics product line with the iPod. No other player in the mobile space has comparable experience in growing a billion dollar plus ecosystem, which should come in handy with a growing iPhone franchise.

10. Curatorship - Some pundits and developers see Apple-imposed restrictions in the SDK or the App Store as impediments to wider adoption of the iPhone. However, Apple has proven with Mac OS X and the iPod that it can anticipate user needs, trade featuritis for enhanced user experience and carefully distill choices to create coherent and desirable products. User satisfaction surveys consistently prove actual users love their iPhones at rates far above rival devices.

Are there any chinks in Apple’s armor? Certainly. There are real and perceived ’shortcomings’ that likely won’t change soon: dedicated enterprise sales network, physical keyboard, removable battery, etc. Others may change soon with the iPhone 2.0: video, GPS, Bluetooth A2DP, cut and paste, global search, exposed file system and so on. Some new capabilities like 3G will surely come in a few months.

What was displayed by Apple at the March 6 SDK event and the uniquely competitive factors listed above, however, should overwhelm most if not all its competitors, to echo General Colin Powell’s famous doctrine of attacking adversaries with overwhelming force to ensure victory. Apple’s arsenal is now the widest and deepest in the industry.

Who then can challenge Apple? Not Palm or Motorola (extremely weak and rudderless leadership); not RIM (no OS level hw/sw integration, little UI and very limited consumer market expertise); not Sony, Samsung or LG (no OS level hw/sw integration and limited UI expertise); not Adobe or Google (not much hardware experience). Nokia and Microsoft appear to have had the longest experience, but neither has anything like the ten factors cited above that make Apple such a well rounded competitor in this field.

As the PlaysForSure and Zune debacles have amply demonstrated Microsoft is forever saddled with the inability to choose between the OEM/partnership approach that worked on the desktop and going it alone which hasn’t in the mobile space. No doubt Microsoft will come up with its own mobile/phone hardware device and then try to balance that with its Windows Mobile licensees’ interests. The $44.6 billion question for Microsoft is, can it juggle all this with its impending Yahoo entanglement over the next three years?

Finally, how good a competitor will Nokia be? To its credit the company quickly recognized its weak points in interface development (bought Trolltech), music downloads (opened a UK-based store but it’s IE/Windows only) and online presence (recently started Ovi). Nokia is the volume leader in the mobile industry, but hasn’t really exploited that advantage, as we previously covered. It has to walk a very tight rope in order not to upset its carrier partners.

We thus see no other player that can bring as much to the table as Apple. Clearly, this is Apple’s war to lose.

In the current Newsweek cover story “The Future of Reading” Steven Levy describes Amazon’s new eBook reader Kindle. In development since 2004, the stats on Kindle are impressive:

$399; 10.3 ounces, paperback size and shape; 6-inch high-res 167 ppi screen from E-Ink; 200 book, extensible storage capacity; 30 hour battery, with 2-hour recharge; wireless connectivity via Sprint EVDO; 88,000 books for sale, most new books at $9.99; prominent newspapers, magazines subscriptions; Wikipedia, Google searches; always-on, PC tethering not necessary.

But we’ve heard so many eBook promises for so long that it’s hard to take them seriously: Franklin eBookMan, Rocket eBook, Sony Librié, iRex iLiad, to cite some of the better known ones. The latest (and the first major implementor of the E-Ink screen technology also used by Kindle) is the $299 Sony Reader. None of these devices have caught the attention of readers in any meaningful way. Why should Kindle be any different then?

Potential

Because it’s from Amazon, the most prominent retailer on the web. Amazon CEO Jeff Bezos is careful not to position Kindle as yet another digital gadget: “This isn’t a device, it’s a service.”

Levy speculates on the potential for reading devices like Kindle that are always-on to aid the discovery process by links to other eBooks and reader communities, automatic subscriptions, community annotations, cross-book searches, recommendations, hyper-targeted advertising, even serialized books where the text is never quite finished as it’s constantly updated by the author or the community. These can all play to Amazon’s strengths, unlike earlier attempts that have not been successful in cultivating services for connected devices.

The price of Kindle may be too high (Bezos points to the iPod that was priced also at $399 at its introduction). Kindle’s design may be clunky, DRM too restrictive, screen not as large or colorful, storage capacity not enough, store not as extensive, and so on. But in Amazon, Kindle has a parent that is determined to take a loss to expand the market and the reach of the device.

“The iPod of reading”?

Levy says “Though Bezos is reluctant to make the comparison, Amazon believes it has created the iPod of reading.” While “the iPod of …” has become a cliché to describe any product with a semblance of distilled design sensibilities emanating from Cupertino, there is one fundamental strategic reason why Kindle won’t be like the iPod.

As Steve Jobs often repeats, the vast majority of music on existing iPods are not purchased from the iTunes Store. The music labels claim they are pirated, Apple and others say they are mostly ripped from existing CD collections or otherwise acquired online or from friends. Either way, iPod users have had an easy way to populate their devices, without having to repurchase most of what they have already paid for or illegally downloaded.

Kindle users, however, will have to purchase or repurchase all the content on their reader. Whereas it was possible to pay $399 for an iPod and enjoy all the music you wanted legally or illegally without any additional expense, not so with Kindle. Amazon is banking on the proposition that readers will indeed pay more for the convenience and additional social aspects of the digital device, just as they have for iPod/iTunes.

Kindle or iPhone?

Bezos’ comparison aside, I think Kindle is far more comparable to the iPhone than the iPod. The iPhone is roughly half the weight (4.8 ounces) of Kindle, its screen (3.5 inches) is about 40% smaller and its resolution (160 ppi) is almost the same. The two devices seem to share a lot of capabilities. In fact, Levy drops a either a juicy hint or a common wish-lits item regarding the iPhone’s potential as an eBook reader itself:

I’ve been reading Boswell’s “Life of Johnson” on my iPhone, a device that is expected to be a major outlet for e-books in the coming months.

This invites us to further speculate. A device like Kindle embodies many Apple strengths: small form factor, connectivity, easy interface, service back-end, media integration, systems design, transactional fees, untapped market, existing patents, etc.

While its screen is smaller, the iPhone’s connectivity, storage, integration with the web via Safari, multimedia capabilities, etc., are equal or better than Kindle’s, at a much better price considering all the other features it supports. So why hasn’t Apple brought in the publishing industry to the iPhone? Yes there have been a few announcements like the Texterity portal, but by and large, prominent brands and especially book publishers are absent on Apple’s device. Does Apple believe that long-text reading is not suitable for mobile devices and thus not a viable business? Or is it possible that they are already in touch with publishers for iPhone partnerships? Or will the iPhone get bigger and transform into the fabled “iTablet” device everybody’s been waiting for?

In digital music, despite Apple’s seemingly insurmountable lead, Amazon has shown its willingness to compete with Apple head on. With no apparent current interest in the market, could Apple be ceding the eBooks front to Amazon? If Apple were to compete, would it be wiser to build its eBook business on the iPhone or a new, larger and perhaps a more dedicated device?