Apple Isn't Being Paranoid Enough

Image: Business Insider

Image: Business Insider

This week sees major announcements from Google and Microsoft, with Apple’s iPad Mini having launched just last week. It’s fun when you get to see competing business models tested side by side like this. As analyst Chetan Sharma has put it:

Apple’s goal is to commoditize the software, Microsoft’s goal is to commoditize the hardware, Google - both

— chetansharma (@chetansharma) June 7, 2011

This article at Tech Crunch about Apple not “Fighting Down” (i.e. keeping its prices/margins high and not getting caught up in the low-ball game) started a conversation at work that I’ll expand on here. While I agree that Apple is not (yet) on a race to the bottom, I have a slightly different take on it – I think Apple is not being paranoid enough.

By sheer coincidence I wrote on my cube whiteboard this morning a quote from (I think) Tim O’Reilly:

“Do you want to protect your future from your past, or your past from your future?”

With the iPad Mini and the iPhone 5, Apple is showing that it is more worried about protecting its past from the future at the moment. I believe this is a very dangerous posture for Apple, especially if it keeps it up for long. Sure, they’re sitting fat and happy right now, and it’s easy to project a straight line into the future of unbridled growth and prosperity. But there are enough warning signs out there that make me think they are in the midst of a Wiley Coyote moment - off the cliff but still running and not aware yet that a fall is inevitable.

I know many will think I’m crazy for saying that. Maybe I am. Maybe I will be proved wrong - I certainly don’t wish Apple ill will. The iPad continues to hugely dominate its market, and I don’t think the fall is going to happen in a few months. But, but… 

In a different context not so long ago, “Fighting down” is exactly what Apple did with iPods. Fairly soon after the expensive iPods had been around, the Shuffle and then the Nano were launched. Why? To create a firebreak against low-end competitors. The Shuffle went in to the market with such a low price (despite being very feature poor) that it essentially stifled the competition.

The mp3 player market is largely done now, but Apple never relinquished dominance due to their willingness to cover all the bases. They have taken the opposite tack with the iPhone - pretty much just one model at a time, one form factor, and price points that start high and go higher. They have made a lot of money with it for sure, but at the same time Android has taken the majority of the market. When you’re in this for an ecosystem play, that’s not a great place to be in the long run.

But iPods are relatively simple devices that are relatively easy to replicate (compared to smartphones and tablets, with all their radios, touch interfaces, OSes, etc.). The complexity of the iPad and iPhone makes it harder for others to create a dramatically lower-end strategy. So maybe Apple is being smart about not giving in to the low price war. Right now, late 2012, that is probably true. But price pressures are increasing, and coming out with an iPad Mini that is $100+ above the competition and with a screen that’s 2 years out of date (and with a design that looks weirdly wide into the bargain) does not smell of confidence.

Let’s bring it back to business model. Apple makes its money with hardware. Customers like hardware. They like good user experiences, and they like ecosystems that work smoothly and comprehensively. But what if they can buy into good quality experiences and ecosystems and get hardware that’s just about as good as Apple’s, for half the price? That’s the downside scenario for Apple. And it’s happened over and over again the in tech industry, from Macs (vs PCs) to Tivo (vs Motorola DVRs from cable providers); or Sony TVs vs Chinese off-brand TVs.

People say they like Apple’s industrial design, but actions speak louder than words, and at the end of the day, they mostly cover them with cases that lack all of Apple’s oh-so-serious design approach and sub-millimeter attention to detail. People mostly really care about what’s on the screen. Can Apple maintain its lead in user experience and ecosystems (which deliver what’s on the screen), and still keep its hardware margins over the next 2-3 years? I’m skeptical.