Here's how Apple gets away with breaking the 'laws' of business
He explains how Apple's success goes against four apparent "laws" of business.
- The law of large numbers. As companies get larger, their growth rate naturally decreases -- there are only so many potential customers in the world, and they can only spend so much money. But Apple now seems to be bucking that trend: although it grew revenue only 7% for the entire year, revenue during the quarter was $74.5 billion, up 30% from a year ago, and it's guiding 20% growth next quarter. If it keeps going at this pace, it will have added an additional $37 to $40 billion in sales by the end of the year, which is about half of the annual sales of Google or Microsoft.
- The law of commoditization. This law says that eventually all products in a particular category become more or less the same, and people stop paying premium prices for a particular brand, creating a "race to the bottom" in pricing. A year ago, this seemed to be happening to Apple in smartphones. But Apple refused to cut prices, and the iPhone 6 and 6 Plus, with their larger screens, reversed that trend. Not only is Apple's market share growing, but its average price per sale was $50 higher than it was a year ago. And most of the people switching to Apple phones are coming from cheaper Android devices.
- The law of market share. In technology, platform market share tends to reinforce itself: developers create more apps for the highest-selling platform, which makes it more attractive to customers, which in turn draws more developers, until you end up with a virtual monopoly and a bunch of bit players. By this law, developers should be favoring Android phones, as Android now has 80% market share. But they're not. Google's store may have more apps than Apple's, but the iPhone still has the apps people want, and developers still often build for it first because Apple customers tend to spend more money.
- The law of modularity. This law says that products win when they're made up of a bunch of different interchangeable components, instead of being controlled end-to-end by one company. The competition for each component lowers prices and improves quality more quickly than a single company can do it. The end result? The componentized products are both better and cheaper than the integrated product. But Apple has stubbornly resisted modularity - first in the Mac, then in the iPod, and now with the iPhone and iPad - and its sales continue to grow.
But what about the other three? How is Apple able to break them?
Gassée suggests that they actually aren't laws at all, but "convenient wishful thinking" with "no substance."But there may be another lesson here. Laws 2, 3, and 4 were all seen during the PC era. But maybe the PC era was an exception in the tech business, rather than the rule.
Microsoft went to great pains to ensure that its operating systems worked with a lot of different hardware components (although Intel usually provided the microprocessors). This modularity led to commoditization and massive market share. Apple, and the non-commoditized Mac, suffered.Microsoft also did a lot to make it easy for developers to write software for its platforms, rather than hoarding the entire software market for itself. These weren't random choices. They were strategic decisions because Microsoft wasn't interested in hardware, but wanted Windows to run as many places as possible. A massive-scale software business has beautiful economics - you can cover your cost of development very quickly, and after you do that, each additional sale is pure profit. This is how Microsoft was able to enjoy 80%+ margins on Windows for years.Advertisement
But before Microsoft rose, there were plenty of successful computing companies that made integrated systems. For years, IBM (and its smaller competitors) sold special-purpose computing machines, and even when IBM introduced its more standardized mainframe, it sold the hardware and gave the software away for free. (IBM eventually unbundled software in the late 1960s under the threat of antitrust.)
When looking at Apple versus Android, a lot people think only of the last 20 years of the tech industry because that's the only period most of us lived through.But Google is not Microsoft, and Android is definitely not Windows. Google gives Android away for free and lets anybody do whatever they want with it. It's mainly a defensive measure to make sure Google's real business, online advertising, didn't get squeezed by the move to mobile. Advertisement
Apple, on the other hand, is still Apple. But the smartphone business, so far, is turning out to be a lot better fit for the integrated approach than the PC business was.
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