Big Blue and Apple's Soul

I hope you’ll forgive my writing about week-old news,1 but I find it striking to compare the paucity of words written about Apple’s partnership with IBM, at least relative to what was written when Apple acquired Beats. After all, the IBM partnership is a much bigger deal.

It certainly seems that Tim Cook feels the same. On yesterday’s earnings call Cook spent, by my count, five times the amount of time talking about IBM than he did Beats2, much of it unprompted by questions. The key paragraph was this one:

We also are in the — virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500…[but] the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week. We think that the core thing that unleashes this is a better go to market, which IBM clearly brings to the table

In other words, lots of enterprises have dabbled with iOS, but Apple doesn’t have an effective way to sell more.

Apple is in a fascinating position when it comes to the enterprise: it turns out that iOS is the best choice for enterprise from a product perspective.3 Blackberry has the integration, but everything else is obsolete; Android has less-effective device management built in and suffers from the usual Android fragmentation issues (which are improving),4 while Windows Phone, shockingly, has only in the last update added basics such as VPN support.5

However, especially in the enterprise, product is not enough; in fact, very few devices are sold to enterprises as-is. Rather, they are delivered as part of “solutions”, the total cost of which is multiples greater than the underlying device. These “solutions” include things like custom software, implementation, training, consulting, and service contracts. Each of these pieces is fully customizable and negotiable for each enterprise customer, and it is for this you need a massive sales force. Ultimately, no matter how good of a product the iPhone may be, without the sales force and willingness to build “solutions” – the right go-to-market, in Cook’s words – Apple was never going to fully realize the enterprise opportunity.

The problem is that building said sales force is massively expensive, and not just in dollars: it has a big impact on a company’s culture.6 As Jobs wrote in his biography:

The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [Steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

To Jobs this was anathema. If Jobs was adamant about anything it was that Apple always focus on creating the best possible product. If that meant forgoing a massively lucrative enterprise market, then so be it.

That, though, is what makes this partnership so brilliant for Apple. By offloading everything onto IBM – who is playing the role of whats called a “Value-added reseller” (VAR) – Apple can now sell into the enterprise without building the sales capability that in the long run would be poisonous to the product-centric mindset that is their ultimate differentiator.

To be clear, while I’ve been writing from Apple’s perspective, this is an even bigger deal for IBM. As I just noted, the total cost of a VAR “solution” is usually multiples greater than the cost of the underlying device or software; fully integrating a device into an enterprise is a messy business, but dealing with messiness is not only worth a lot of money, it also entails building deep and ongoing relationships with the company you are servicing. In other words, when it comes to the sort of enterprise deals that IBM is going to put together, iOS devices are much closer to commodities; it is IBM that will provide the most value from the enterprise’s perspective. This is a risk for Apple: it’s certainly possible to envision a scenario where IBM switches out iOS for another platform, and there will be nothing Apple can really do about that.

I’m sure, though, that Apple is well aware of this and counts it as a price they are willing to pay7 (in addition to the commission they’ll likely pay IBM on each iPhone or iPad, in case it’s not clear who will be the lead in this partnership). Apple is getting access to a massive market that had long been off-limits, and they are doing so without giving up their product-centric soul.

  1. I was on vacation at the time []
  2. 777 words versus 174 []
  3. It’s hard to overstate what a change this is; Apple has always prioritized the user experience over features, but in a market where the buyer is not the user, a user experience advantage is worthless. That’s what Steve Jobs was driving at in this classic clip []
  4. Note: I originally said Android lacked device management completely, which was not right. I apologize for the error []
  5. There is no greater example of Microsoft’s misplaced hubris than in launching Windows Phone without any enterprise features in the belief they could knock the iPhone off in the consumer market. Remember this? []
  6. To be clear, I have no problem with sales forces or their effect on culture – they are critical for enterprise businesses. The issue is when you try to do both enterprise and consumer []
  7. This is also an interesting contrast to Apple and Google Maps; in this case, Apple is prioritizing their culture over control. When it came to maps Apple prioritized control over the product []