One of the challenges of writing on the Internet – of writing in general, in fact – is the understandable propensity of readers to draw but one conclusion from what you intend to be a nuanced piece. I was reminded of this the past few weeks as Philip Elmer-DeWitt wrote Apple and the Crisis of Disruption and Jean-Louis Gassée Clayton Christensen Becomes His Own Devil’s Advocate. Both cited my piece from last year What Clayton Christensen Got Wrong as a primary piece of evidence that the theory of disruption was fundamentally flawed.
That, though, is the nuance. I do think the theory is flawed, but not fundamentally. It’s simply incomplete.
As I’ve noted, I fully subscribe to the theory of new market disruption: the idea that new entrants can meet the needs of previously unaddressed customers with a seemingly inferior and cheaper solution. And, over time, that solution improves to the point where it meets the needs of the incumbent’s customers as well. A wonderful example of this is how cloud companies have eviscerated IBM (members-only) with solutions that IBM originally dismissed out of hand as being wildly impractical for their customers.
It’s the other branch of disruption theory that I took – take – issue with, namely, low-end disruption (for long-time readers, forgive this brief digression). Briefly, the idea is that an integrated solution, where a single company makes all of the major components, will win in the market when a market is new. This is because, to put it bluntly, all of the solutions suck, but the integrated solution sucks less by virtue of being integrated and working better as a unit. However, over time, products improve in quality more quickly than customers add needs – or jobs-to-be-done, to use the preferred parlance. This means that the integrated solution soon becomes too good: it adds too many features, which means increased complexity and higher prices, while modular solutions, optimized at each layer through competition, deliver at first a “good-enough” cheaper product, and eventually, as they gain share, a superior one, still at lower prices. And thus, the integrated incumbent is doomed.
In fact, I too find low-end disruption powerfully illuminating. The power of integration is why companies like BuzzFeed and Vox are remaking journalism (members-only), and the power of modularity is why Intel and Samsung are under so much pressure. My only beef is with that last sentence – the idea that integrated incumbents are inevitably doomed.1
The primary flaw in this conclusion, as I detailed last year, is that the Christensen evaluation of “good enough” only considers technical capabilities. Christensen did later add the idea of emotional jobs-to-be-done – this covers things like luxury bags, for example, which confer status – but that doesn’t fully explain Apple in particular. Instead, my position is there is a third component of product capability: the user experience. Moreover, the user experience is unique in that, like emotional jobs-to-be-done, a product can never be “too good,” and, like technical jobs-to-be-done, it is always possible to improve – or to fall behind.
Moreover, integrated solutions will just about always be superior when it comes to the user experience: if you make the whole thing, you can ensure everything works well together, avoiding the inevitable rough spots and lack of optimization that comes with standards and interconnects. The key, though, is that this integration and experience be valued by the user. That is why – and this was the crux of my criticism of Christensen’s development of the theory – the user experience angle only matters when the buyer of a product is also the user. Users care about the user experience (surprise), but an isolated buyer – as is the case for most business-to-business products, and all of Christensen’s examples – does not. I believe this was the root of Christensen’s blind spot about Apple, which persists. From an interview with Henry Blodget a month ago:
You can predict with perfect certainty that if Apple is having that extraordinary experience, the people with modularity are striving. You can predict that they are motivated to figure out how to emulate what they are offering, but with modularity. And so ultimately, unless there is no ceiling, at some point Apple hits the ceiling. So their options are hopefully they can come up with another product category or something that is proprietary because they really are good at developing products that are proprietary. Most companies have that insight into closed operating systems once, they hit the ceiling, and then they crash.
That’s the thing though: the quality of a user experience has no ceiling. As nearly every other consumer industry has shown, as long as there is a clear delineation between the top-of-the-line and everything else, some segment of the user base will pay a premium for the best. That’s the key to Apple’s future: they don’t need completely new products every other year (or half-decade); they just need to keep creating the best stuff in their categories. Easy, right?
Last week Eric Jackson wrote a piece entitled, Apple’s $100 Billion Waste: Tim Cook’s Single Biggest Mistake As CEO.
I believe the capital return program has been a total waste of Apple’s hard-earned $100 billion. I believe – although this is impossible to prove – that Apple’s stock price would be just as high as it is today (or more likely higher) had they spent that $100 billion on a combination of smart M&A and smart R&D that would have continued to extend Apple’s lead over other Android phone makers.
Jackson’s shopping list includes Tesla, Twitter, Pinterest, battery R&D, and a cool $10 billion to make iCloud work.
Altogether, this M&A and R&D spree would cost Apple $119 billion. Their cash levels would be $136 billion today instead of $155 billion. They wouldn’t have much revenue to show for that $119 billion but how much higher would Apple’s market cap be than the $700 billion it is today? If Apple owned Tesla, Twitter and Pinterest? That would be worth at least another $50 – 100 billion in stock value.
Full disclosure: while we have not met in person, I like Jackson, and interact with him regularly on Twitter. He also did this nice interview with me back when I was just getting started, which I really appreciated. That said, this argument isn’t just wrong-headed, it’s wrong-headed on multiple levels, and would, in the long run, be the doom of Apple.
The most basic mistake Jackson makes is the assumption that more R&D money would result in better batteries and better iCloud. While Apple’s percentage spend on R&D isn’t extraordinary, that’s a function of their extraordinary revenue: on an absolute basis Apple spends an incredible amount, and there are numerous examples of their willingness to spend ridiculous amounts of money to gain the slightest of improvements in their products. Were money the gating factor for battery technology, I’m fully confident Apple would already be spending it. As for iCloud, Jackson’s prescription sounds an awful lot like The Mythical Man Month; in fact, the issue there is a cultural and organizational one (more on this in a moment).
At a deeper level, it’s not clear what on earth Apple would do with Twitter or Pinterest. You can certainly argue that Twitter especially isn’t reaching its potential, and can absolutely ascribe that to its current management, but it does not follow that Tim Cook and company would do a better job. In fact, Jackson is making the exact same mistake that most of Wall Street made when Steve Jobs died: too many assumed that Apple’s success was due solely to their charismatic founder, ergo, Apple’s success today must be because Cook is just as good a CEO as Jobs. And, given that he’s such a superhero, surely he can fix Twitter! It’s silly. Cook may be a good CEO, but he’s not a magician able to transmogrify a company different from Apple in nearly every respect.
Most problematic of all, though, and the reason why Jackson’s advice would ultimately doom Apple, is something Jackson takes special pains to mock: focus. Jackson compares Apple’s refusal to make major acquisitions to an inability to walk and chew gum at the same time; leaving aside the absurdity of comparing the difficulty of integrating multiple companies with fundamentally different business models (as would be the case with any web services company), if you actually wanted to be the best gum chewer in the world, wouldn’t you actually be well advised to stand still and focus on chewing gum?
This is the precise point that Jackson and so many others miss: the overriding value for Apple, and the fundamental reason the company has thrived even with Jobs’ untimely death, is the total commitment to building the best possible personal computers (all of the iOS devices, including the Watch, fit here). Being competent at wildly disparate businesses just because you have the financial wherewithal to do so is in direct opposition to this ethos. It is a perfect example of trying to kill the goose laying golden eggs.
Because here’s the thing: the reason I started with disruption is because I think Christensen is 95% right. Low end disruption is real, and it is a threat, and Apple’s only defense is to be the best. And being the best at anything requires total dedication and yes, focus.
What makes Jackson’s article intriguing and worth more than your average Apple clickbait is that he makes some very fair points: Apple spends time on iAds, so why not a real ad-based business?2 Apple stinks at cloud services, so why not buy a cloud company? And while stock buybacks increase a stock’s earnings-per-share one could make the argument that the stock price would be just as high had Apple not done a thing.
My response, though, is to in fact argue that Apple should do the precise opposite of what Jackson suggests: they should do less. I still believe that, on balance, Apple offers superior products in their core product categories, and that their lead is still fairly substantial. Moreover, Apple benefits from the fact their main competitors – particularly Google – have horizontal business models that dictate they offer best-of-breed services on Apple’s own platform. That said, it’s hard to make the “best” argument when it comes to Apple’s web services and the quality of both Apple’s recent operating systems releases and their first-party software.
- Apple’s web services suffer from Apple’s organizational dedication to building great products. Aligning teams and schedules around the big unveil makes sense for hardware, but it’s a disaster for web services (The Information recently confirmed many of the points I made in iCloud and Apple’s Founding Myth, specifically, cloud teams are siloed and constantly build everything from scratch on an outdated stack)
- Similarly, iOS releases are tied to the device’s yearly update schedule, quality concerns be damned. And OS X releases are tied to iOS releases. Both iOS 8 and Yosemite have shown what happens when the controlling constraint for software is a ship date
- First party software like the iWork and iLife suites is completely understaffed because of the number of folks needed to get the aforementioned OS releases out the door. Moreover, both teams have been forced to readjust their priorities from superior PC software to tablet-compatible software, to the original product’s detriment
The answer is to do less:
- Apple’s web services should be built on shared infrastructure that is primarily standards-based and conventional. The only “innovation” that should happen is in areas where it actually makes a difference that Apple owns the device as well. Fortunately, it seems that Apple is moving in this direction: CloudKit is a lot more “normal” than iCloud Core Data and similar services ever were, while many of the neatest Continuity features use the cloud in a way that only Apple can. Moreover, there are strong hints (members only) that Apple is building a centralized cloud team in a new Seattle office (as an aside, I love the fact that this team – if it exists – won’t be in Cupertino; a new location is one way to counteract the tremendous cultural issues working against Apple’s cloud teams)3
- iOS releases – and thus OS X releases – should be decoupled from hardware releases, marketing be damned. Every crash, every failed rotation, every single bug chips away at that hard-to-measure-until-it’s-gone user experience that protects Apple from disruption, and we’re going on three years of disappointing software releases
- Apple should disband the first party software teams, or spin them out into a different company. Both iLife and iWork – and the pro apps – served very important functions for Apple: they gave a reason to buy a Mac at a time when the lack of 3rd party software was the primary reason not to. Today, though, Apple has the best developer ecosystem in the world, and Apple is actually hurting themselves by competing with it. Not only are any resources spent on apps better spent on the OS, but also the presence of free Apple apps depresses the segments in which they compete. Instead Apple should look for ways to improve developer monetization and sustainability; to put it another way, Apple should focus on building a better platform, not on building on top of it
As for the money, well, I think this advice would result in even more in the long run. And it’s not like Apple isn’t making smart purchases: TouchID, arguably Apple’s most important innovation in years and something that has put the company years ahead of Android was the result of an acquisition, as was Siri. Beyond that, well, sure, give it back to the shareholders: it ultimately is theirs. If I sound blasé, it’s only because I’m trying to channel the sentiment that Jony Ive in particular has articulated again and again:
Our goal isn’t to make money. Our goal absolutely at Apple is not to make money. This may sound a little flippant, but it’s the truth…Our goal and what gets us excited is to try to make great products. We trust that if we are successful people will like them, and if we are operationally competent we will make revenue, but we are very clear about our goal.
Here’s an idea for Jackson, and everyone else who thinks they know what Apple should do instead: what if you took Ive at his word? What if you realized that Apple, for its entire 38 year existence, has been focused on building the best possible personal computers?4 Sure, those computers have become ever more personal, but the drive to be the best is a constant. Would you really advocate something different?
If so, then, I guess, and despite my reputation, you are a far greater skeptic of disruption than I.
- To be specific, Christensen wrote, “When that happens, the disruptors are on a path that will ultimately crush the incumbents.” [↩︎]
- I actually don’t get to iAds, but I think Apple should dump it (members-only) [↩︎]
- This is another area I agree with Jackson: Apple should have bought Dropbox. The fact that Jobs wasn’t willing to pay up (all companies can be had if the price is high enough) for a team that combined Apple’s consumer ethos with real cloud capabilities was the result of undervaluing what the cloud and the skills it takes to succeed there [↩︎]
- This, more than anything, is why I think the Tesla argument is absurd. I suppose there are surface similarities – batteries, operational competence, software – but it’s a completely different industry [↩︎]