Apple After Jobs: Cook's Real Challenge

A year after the death of its charismatic leader, Apple is thriving. But CEO Tim Cook's success may depend on content services--not finding another iPad.
Apple One Year After Steve Jobs: Hits And Misses
Apple One Year After Steve Jobs: Hits And Misses
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Steve Jobs had it easy. His second coming at Apple coincided with periods of remarkable technical change: The creation of the Web in the mid-'90s, and the advent of the mobile era a decade later. Jobs had the opportunity, vision, acumen, resources, and luck to create three products--the iPod, the iPhone, and the iPad--that would transform the company he co-founded in the 1970s from Apple Computer, Inc. to one of the world's most successful brands, Apple, Inc.

In so doing, Jobs transformed the world as well. The iPod and iTunes helped normalize paying for music downloads. The iPhone made the Web functional on mobile devices and brought touch-based interaction with personal devices into the mainstream. The iPad amplified the iPhone revolution by providing enough screen real estate to challenge the need for mouse-driven desktop computing in a wider variety of scenarios.

And there's more: Jobs allowed third-party developers to add value to the iOS platform, creating a mobile development gold rush. He transformed mass market software distribution, licensing, and pricing with the iOS App Store and the Mac App Store. So successful were his innovations that Amazon, Google, Intel, Microsoft, and others all have apps stores and have adopted similar business strategies. Mobile phone makers all have touch-screen phones inspired by the iPhone.

[ The recent map application flap wasn't Apple's first mea culpa. Read Apple's Top 20 Public Apologies. ]

But Jobs' success wasn't simply the result of his years of tech industry experience. It was made possible by the failings of Apple's competitors: broad industry disinterest in refined design; a focus on maintaining existing revenue streams rather than innovation; lack of appreciation of what platform ownership means once computing moves beyond the desktop; and underestimation of the value of controlling both software and hardware.

Microsoft chairman Bill Gates in 2000 showed off a tablet PC prototype at the Comdex trade show. In 2012, two years after the launch of Apple's iPad, Microsoft is finally taking the tablet market seriously with its forthcoming Surface device. It squandered a decade lead. And things have gone even worse for HP, Nokia, and RIM. Only Google has managed to keep pace, with Amazon arriving on the scene rather unexpectedly.

Tim Cook, Jobs' successor as CEO of Apple, has a more difficult challenge. First, he's not Steve Jobs. Talk about a tough act to follow. At least, Cook shines when compared to Steve Ballmer, who took the reins at Microsoft in 2000 when Bill Gates stepped aside. Microsoft was the most valuable company in the world in December 2000, worth about $510 billion. Today, its market value is about half that, $247 billion.

It won't be possible to truly compare Cook's leadership in financial terms for another decade, but so far, he's doing well: Apple was worth $349 billion on August 24, 2011, when Steve Jobs stepped down. A year later, the company was worth $627 billion, and is close to that high today.

Whether Cook can rival Jobs as a steward of new products will depend on whether there's an opportunity in consumer hardware to match the iPod, iPhone, and iPad. At the moment, there isn't an obvious contender that would benefit from an Apple makeover or would fit Apple's hardware-oriented business model.

Apple is said to be working on its own TV, but TVs don't really matter from a consumer technology perspective. They are mainly a commodity user interface for watching video. TVs are fundamentally uninteresting as computing devices because they're designed for content consumption rather than content creation, like computers, and because they don't support computational operations on content. In other words, the presence of iOS or OS X wouldn't add much value to a TV.

Apple already has made it clear that it's more interested in being a content gatekeeper, through iTunes. It does that quite well through its $99 Apple TV streaming box. Eventually, Apple will offer a DVR, either through hardware, iCloud, or both. But there's no reason Apple would need to produce a TV when a plug-in box would work better and sell orders of magnitude more units at a far lower price. The one obvious opportunity in TVs involves improving the atrocious user experience, as anyone trying to manage a modern television with multiple input sources and multiple remote controls will attest. But Apple already has a device that could replace difficult-to-set-up universal remotes: The iPad.

Are there other consumer products Apple could transform? The wristwatch? Possibly. The car? Doubtful. What cars need is free, persistent Internet connectivity. That's the territory of Google or mobile carriers. The printer? Been there, done that. The camera? There's already a camera in every iOS device. Thermostats? Apple alumnus Tony Faddell's Nest already has applied the Apple treatment there. Kitchen appliances? All they really need is built-in Wi-Fi hardware to transmit updates, notifications, and diagnostic data. And beyond that we're talking about specialty electronics, synthesizers, medical devices, and the like--niche markets that aren't likely to be interesting to Apple. The company could invent something entirely new, but its modus operandi to date has focused on making existing products more usable.

Then there's a growing realization in the tech industry that services matter at least as much as hardware in the connected world. Amazon CEO Jeff Bezos articulated that view during the introduction of the Kindle Fire HD in September. "We want to make money when people use our devices, not when they buy our devices," he said.

Apple has been working to improve its competency as provider of online services. Its consumer software management services, also known as the iOS and OS App Stores, function quite well and truly have changed the industry. But it also has stumbled several times. The company's MobileMe service had a rocky launch in 2008 and always seemed overpriced compared to what Google offered for free. Its Ping social network, just recently shut down, was a flop. And its decision to replace Google's map backend with its own technology has gone so poorly that Cook recently apologized for allowing Apple's standards to slip.

Al Hilwa, an analyst with research firm IDC, believes Apple is in a completely different situation than it was in the late '90s. "Today, Apple is riding high as the most valuable company in the world and on a trajectory to be the largest company in tech by revenues," he said in an email. "They have been growing for a sequence of quarters at an astronomical pace for a company of their size. Tim Cook faces some challenges creating an ecosystem that relies on Apple technologies and may have to put the Apple user base through some hardship to do that, but it is unlikely to change the market dynamics Apple is playing in drastically, unless Apple's competitors find a way to exploit these weaknesses more dexterously."

Hilwa believes Apple's problems with Maps might open the door for competitors, although he adds that neither Microsoft nor RIM has the devices to respond at the moment.

Google is best positioned to take advantage of the situation. Android keeps making progress, despite Apple's patent war, Microsoft's patent royalty tax, and Oracle's Java lawsuit. And Google isn't just thinking about short-term responses to Apple's moves: It continues to develop its own hardware, underwhelming though projects like the Nexus Q might be, and initiatives like Google Fiber suggest that the company is laying the groundwork--the optical cable--for a future as an Internet and content service provider.

Cook's nightmare probably involves waking up to a world where Google is offering Android phones for free, along with low- or no-cost communication and data services.

But Google has to worry about Apple, too, particularly in China where Google's history with Chinese authorities puts it at a disadvantage. During its 2012 second-quarter conference call for investors, Apple revealed that iPhone sales in China had grown five times from the same quarter in 2011. Apple also has been conspicuously adding services to iOS and OS X to help its products in the Chinese market. If Cook can seal a deal with China Mobile, that's hundreds of millions of potential new Apple customers. And that's to say nothing of the dwindling data stream Google receives from iOS devices as Apple adds features such as the "Limit Ad Tracking" feature in iOS 6.

Cook is no Steve Jobs. But he might be just what Apple needs right now. A year from now, when Apple has revealed products or services developed on Cook's watch, we should have a better sense of whether Apple will grow or wither.

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