Apple and Nike

What kind of company is Apple, anyway?

They certainly have great technology, but to call them a technology company doesn’t seem quite right. They have great marketing, but to call them a marketing company isn’t true either. They have an incredible retail chain, but to call them a retailer is clearly off base as well.

You could ask a similar question about Nike.

They started with shoes, but their product line has extended far beyond that. Certainly they are a marketing company, one of the best in the world, but they also make many genuinely innovative products. Over the last few years they’ve been expanding their push into software and wearables, yet no one thinks of them as a technology company. And, despite self-owned and franchised stores in almost every neighborhood in the world,1 no one thinks of them as a retailer either.

Interestingly, both Apple and Nike have markedly similar business models: as various pundits never tire of telling us, Apple is selling a commodity and is doomed to inevitable margin pressure and/or massive loss of share in the face of good-enough cheap Android. For better or worse we in tech are stuck with these folks, because who knows what they would make of a company like Nike, selling pieces of leather and bits of fabric. Talk about a commodity! And yet, there is Nike, sporting a ~45% gross margin in an industry that averages 33%. Clearly they are more than just an apparel maker.

My wife just registered for the Nike Women’s Half Marathon here in Taipei; in order to register, you had to have logged at least 50km using the Nike+ Running App over the last month; immediately after registering you were presented with specially made products featuring the race logo. Typing that out sounds, well, rather annoying, but the reality was quite the opposite. My wife downloaded the app, clocked up the miles, counted down to the deadline, and joyfully bought a new pair of running pants (I was impressed at her restraint). It was fun.

What Nike is selling is the experience of being a runner (or a basketball player or a tennis player or a golfer, etc.) It’s not just the athletes in their advertisements, or the quality of their shoes, the sportiness of the clothes, or the sophistication of the apps. It’s the whole, and it’s greater than the sum of its parts. Nike is an experience company. They sell a commodity product, and make their profit off of the differentiation provided by the Nike experience. And they’re better at it than just about any company in the world, except maybe Apple.

After all, Apple too is an experience company. They are not selling you a computer, or a phone, or a tablet; they are selling an experience that encapsulates everything from their ads to their stores to their packaging to the actual user experience of their devices. They sell a commodity product, and make their profit off of the differentiation provided by the Apple experience.

Serving on corporate boards is fairly common for C-level executives, but not at Apple under Steve Jobs. To my knowledge the only exception was Tim Cook, who joined Nike’s board in 2005.2 A year later Nike and Apple released the Nike+iPod, a hugely successful collaboration that made an iPod Nano about as omnipresent as a water bottle for a great many runners, and a pair of Nikes the default choice for anyone with an iPod.

Since then the collaboration has continued, especially with the FuelBand, which has an app only for the iPhone, along with significant shelf space in Apple Retail stores. Of course the FuelBand also always seemed a potential stumbling block: would Tim Cook really release a competing product (the alleged iWatch) to the company on whose Board he sat?

Well, now that stumbling block is gone: CNET reported over the weekend that Nike fired a majority of the FuelBand team and will stop making wearable hardware:

The company informed members of the 70-person hardware team — part of its larger, technology-focused Digital Sport division comprised of about 200 people — of the job cuts Thursday. About 30 employees reside at Nike’s Hong Kong offices, with the remainder of the team at Nike’s Beaverton, Ore., headquarters.

Nike’s Digital Sport hardware team focused on areas like industrial design; manufacturing operations; electrical and mechanical hardware engineering; and software interface design. Products included not only the FuelBand but also the Nike+ sportwatch and other, more peripheral sport-specific initiatives.

First off, I highly doubt this was directly connected to Apple. By all accounts the FuelBand was a money pit and the Secret thread that first revealed the firings suggested the same. Secondly, the FuelBand was interesting in a product sense but didn’t make much business sense for Nike. It didn’t lead to the direct sale of any of their products, since it was meant for wearing around the home and office; relatedly, while there may have been some brand utility in people sporting a Nike+ wearable, a product meant to make you take the stairs doesn’t exactly remind you of an athletic lifestyle.

All that said, Nike can read the rumor sites just as well as we can, and do happen to have particularly special access to Tim Cook and a history of partnering with Apple. And Apple is certainly better at “industrial design; manufacturing operations; electrical and mechanical hardware engineering; and software interface design.” I would not at all be surprised if Nike were happy to cast aside the FuelBand in favor of recreating the Nike+iPod with the (alleged) iWatch.

The question, then, is were such a partnership to come about, what might Apple gain from Nike? Obviously we are well into the realm of speculation, but certainly the biggest question about a potential iWatch is what job it might do. And, perhaps, it really is there right in front of us.

Think about the iPhone: before it could make a call or go on the Internet, there was the iPod, which did nothing more than play music. But the foundation built by the iPod, iTunes, and the iTunes Music Store helped the iPhone tremendously, leading not only to software innovations like the App Store, but also hardware breakthroughs in miniaturization and battery life. You have to start somewhere.

So it is with a wearable. It’s not too difficult to imagine a future where your wrist is the center of your digital life, projecting a contextually appropriate user interface to the nearest dumb screen, but it’s even easier to see how that’s just not possible now – just like the iPhone wasn’t possible when the iPod launched in 2001. But you have to start somewhere.

So then, if you want a beachhead, is there a population that is already in the habit of wearing electronic accessories and loves measuring themselves? And, if you wanted the absolute best chance of winning that market, might you not want to partner with the company that sells the experience you want to provide?

Truthfully, the only reason to think Apple might not want to partner with Nike in this way is, well, because they’re Apple. But remember, Apple was quite pleased to launch the iPhone with Google services,3 and has cooperated with Microsoft for years; they’ve also long had by far the best and most comprehensive content deals. Apple’s business development acumen is one of its least appreciated competitive advantages, and their products are better when it is utilized. I bet that’s exactly the case with the iWatch.

  1. There are five Nike-branded locations I can think of off the top of my head within a kilometer of my house, none owned directly by Nike []
  2. Eddy Cue joined the Ferrari Board of Directors in 2012 []
  3. Yes, I’m quite aware of how that turned out []