The question about 'grand strategy' that made Tim Cook unhappy on Apple's earning call was based on a Harvard professor's theory that makes uncomfortable reading for Apple
Milunovich asked the question two different ways, and Cook gave two non-answers, one of which was "as usual, we're not going to talk about what's ahead."
There is a reason Milunovich asked that question. It's not merely about Cook's tradition of not giving clues about what Apple will do next. Rather, Milunovich's question was based on a theory by Harvard Business School Professor Clayton Christensen. The theory makes uncomfortable reading for observers of Apple, and perhaps for insiders too.Milunovch published a lengthy, thoughtful note about the theory and how it relates to Apple on October 25, the morning of last night's earnings call.
Very briefly, Christensen's theory is an attempt to explain why companies succeed. His conclusion is that consumers buy products that complete specific jobs for them. They want to complete "the job to be done." Classicly, this is a restatement of the truism that people don't really want quarter-inch drills, what they actually buy is quarter-inch holes.
A good example of this is the iPod. Before the launch of the iPod, consumers who wanted portable music were apparently satisfied by the Walkman and the Discman - even though those devices limited your listening to just a few dozens songs on a cassette or disc. The iPod, by contrast, gave you 1,000 songs in your pocket. Consumers bought the iPod because it solves the job of granting listeners a massively extended portable library of music.
Clearly, Apple's products have solved some major jobs for consumers: Macs can do anything. The iPhone is a utility so useful it is difficult to live without. And who knew that a need existed for the iPad in the gap on the coffee table between the laptop and the phone?
"The company seems to be struggling to identify the jobs for Apple Watch and Apple Pay"
But recently, Apple has had difficulty solving new "jobs to be done," Milunovich believes. People don't really need an Apple Watch, and the device's sales reflect that. Apple TV appears to be going nowhere. And the company seems to have backed off making an Apple car from scratch. Milunovich wrote:
"Jony Ive's Industrial Design Group has shown a knack for identifying jobs even before consumers know of their need. The iPod's "1,000 songs in your pocket" was an example. Moreover, Apple's functional organization and metrics appear to align with the jobs to be done approach. Still, the company seems to be struggling to identify the jobs for Apple Watch and Apple Pay."
The best example is, perhaps, Stewart Butterfield's Slack. Slack is the workplace chatroom app that is revolutionizing the way offices communicate internally, and - most importantly - replacing a large portion of the useless internal email that companies generate.
But Slack was created almost by accident. Butterfield founded his company with a $17 million investment to create an online game called Glitch. The company created a private chatroom for itself so its staff could communicate better as they worked on the game. But the game turned out to be a failure. The chatroom, however, turned out to be much more useful so they developed that instead. Now Slack is one of the most important workplace productivity software companies on the planet.
Slack solved a "job to be done."
"Do you know what you want to do over the next three to maybe five years?"
With that as the background, Milunovich's exchange with Cook last night looks much more gloomy. Note that Milunovich specifically cites Christensen's "the next job to be done" concept:
"Steven Milunovich - UBS Securities: Tim, some investors are antsy that Apple has not acquired new profit pools or introduced a financially material new product in recent years. The question is, A, does Apple today have a grand strategy for what you want to do? I know you won't tell us what it us, but do you know what you want to do over the next three to maybe five years? Or is it more a read the market and quickly react? And B, do you have any sense that we're kind of in a gap period where the technology and arguably what we'd call the next job to be done haven't yet aligned? And so maybe in a couple years, we will see this flurry of new products and it'll sort of match what people want to do, but it's not quite here yet?
Tim Cook - Apple: We have the strongest pipeline that we've ever had and we're really confident about the things in it. But as usual, we're not going to talk about what's ahead.
Milunovich: But in terms of your approach I guess to new products, do you have a strong sense of where technology is going and where you're going to play? Or is it still enough up the year that you are willing to react fairly quickly, which arguably your organization allows you to do for the size of company you are?Cook: We have a strong sense of where things go and we're very agile to shift as we need to."
In April 2014, he hinted that he saw the physical wallet as problem to be solved: "It's an area where nobody has figured it out yet. I realize that there are some companies playing in it, but you still have a wallet in your back pocket and I do too which probably means it hasn't been figured out just yet." After that, Apple launched Apple Pay.
In February 2015, Cook suggested that Apple's Touch ID fingerprint security could be used to replace physical keys. The Apple Watch is an extension of that.
And last night, he said "television has intense interest with me and many other people here ... I think it's a great opportunity for us both from a creation point of view and an ownership point of view. and so it's is an area that we're focused on."
So clearly, we cannot read too much into Cook's responses. He sounded tired and subdued on the call last night. Maybe he just had a cold. Maybe he was just sick of being asked "What is Apple going to do next?," a question he must encounter 1,000 times a day.
"Is it reasonable to think that this is an ongoing growing business for the company?"
Now look at this exchange with Antonio Sacconaghi of Bernstein. It's brutal. Sacconaghi is suggesting that Apple can't grow iPhone sales even when its competitors implode and it has extra time to sell them:
"Antonio Sacconaghi - Sanford C. Bernstein & Co: I guess a cynic could say Apple is benefiting from an extra week this quarter and is benefiting from Samsung being in complete disarray. And yet from your guidance, it's unclear that iPhone unit growth will be up ... you have terrific new products, your major competitor's laying down, you have an enormous, you have a significant contribution from an extra week, arguably 7% or 8%, and yet the iPhone growth is sort of flattish, what does that really say about how investors should think about iPhone on a sustained basis growing forward? And is it reasonable to think that this is an ongoing growing business for the company?
Luca Maestri (Apple's CFO): You're right, we've got an extra few days ... But maybe the most important element of this is the fact that we are supply constrained on 7 and 7 Plus. And so when you talk about other competitors, it's not particularly relevant to us right now because we are selling everything that we can produce."OK, so Apple can't make the iPhone 7 fast enough. But it isn't supply constrained on all its other products - and they're sinking too.
This is becoming a theme with analysts.
One way to look at Milunovich's question is to regard it as a sea-change amongst analysts who appear to no longer be confident that Apple knows where the next big thing is coming from.
Back in September, Colin Gillis of BGC said buying an iPhone "will be like buying a microwave - something people do but not a major event." He called the iPhone a "liability" because Apple was so dependent on it, and because it wasn't growing sales.
This is a new, negative environment for Apple, one that Cook is not used to dealing with.
It is not surprising he doesn't like it.
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