Where Does Apple Go From Here?

Apple is a company built on a paradox. Over the past decade, it's embraced change and reinvented itself several times, building iPods, iPhones, iTunes, and the App Store into strategic businesses.

Apple changes fast -- but it also stays the same. The company remains true to a unified vision -- the same one that Steve Jobs and Steve Wozniak had when they founded Apple more than 30 years ago: to make computing simple and fun.

Apple has plenty left to do to achieve that vision, including making the Mac more stable and easy to use, making it easier to share media files and documents among multiple devices, and conquering the space under consumers' televisions. Solving those problems can keep Apple prosperous for decades to come.

But first the company needs to triumph over the threats that it faces. The economic downturn threatens Apple uniquely among tech companies because Apple makes a boutique product, more expensive than its competitors. Mac sales have been propelled by perceived bugginess of its chief competitor, Windows Vista, but Windows 7, Vista's successor, is looking pretty good so far. Other vendors, including Palm and Google, are introducing smartphones that could carve away at the iPhone's dominance of the market.

Potentially the biggest threat of all: Visionary CEO Steve Jobs stepped aside from day-to-day responsibilities last month. What if he doesn't come back? How long can the company last without his firm hand at the helm?

Taking The Hassles Out

Apple's mission from the beginning was to simplify -- to produce computers and, later, consumer electronics that were fun to use and took the hassles out of computing.

"From day one, Apple was making devices for consumer end-users at home, who might also use them for business," said Ezra Gottheil, an analyst with Technology Business Research. "Jobs had in his mind's eye a regular person trying to get some pleasure out of these intrinsically complicated devices." Apple is the only company making PCs or smartphones for the end-user, Gottheil said. PC manufacturers have IT as the ideal customer, handset manufacturers are targeting cell phone providers, and Microsoft is targeting the PC manufacturers. Apple, on the other hand, is a consumer company.

After nearly three decades competing in the personal computer market, Apple brought the same simplification strategy to music players. When Apple introduced the iPod, portable music players were complicated devices requiring considerable configuration and installation of multiple software apps. Apple decided to simplify by providing the whole package.

Gottheil compared Jobs to Thomas Edison, who invented the gramophone more than a century earlier. Like Jobs, Edison realized he couldn't just sell hardware -- he had to own the whole experience. "When Edison decided to make a big business out of his music player, he knew he had to do the whole thing," Gottheil said. Edison sold gramophones, and also sold the music cylinders to play on the gramophone. Edison applied the same vision to moving pictures -- when he invented cameras and projectors, he didn't just sell hardware, he also made movies.

Likewise, Apple doesn't just sell the music and video player -- it provides the software and sells music and video through the iTunes Store.

An iPhone-Simple Netbook

The next step for Apple: back to the Mac. More specifically, take some of the simplicity lessons that Apple learned from the iPhone and iPod, and apply those insights to the desktop computer, Gottheil said.

"For all that the Mac is both easier and less troublesome than a Windows-based PC, it's still more of a hairball than most people want to deal with," Gottheil said.

The iPod and iPhone are far simpler to use and maintain. "Apple controls the whole experience -- which was always Apple's goal anyway. The reason why Macs are problematic is they have to run software from all over the place."

Microsoft Windows offers even more freedom of choice, supporting a wide range of hardware that the Mac doesn't support -- which leads to greater unreliability. By contrast, the iPhone and iPod Touch only run software that's been downloaded from the App Store.

Apple needs to make a personal computer that functions more like an iPhone -- Apple's own version of the growing netbook market, Gottheil said.

Gottheil predicted in December that Apple would introduce a $599 netbook at Macworld in January, and ship the product mid-year. Macworld came and went with no netbook announcement from Apple, but Gottheil continues to say that a netbook from Apple is coming.

The prediction seemed ridiculous when Gottheil made it two months ago. The current generation of netbooks is, basically, underpowered notebook computers, running the same software as their bigger and more expensive brethren, but doing it less well. Apple has never shown any interest in competing for budget customers.

Jobs turned his nose up at netbooks during a teleconference with analysts in October. "We don't know how to make a $500 computer that's not a piece of junk," Jobs said.

But Gottheil's prediction makes more sense if you think of the device as a scaled-up iPhone or iPod Touch, rather than a crippled notebook. The Apple netbook would be something like an iPhone or iPod Touch, but with a bigger display, more powerful hardware, and an external keyboard.

A key feature of the product: The software will be locked down. If you want additional apps, you'll have to go to the App Store, and Apple will have approval authority over every app that runs on the device, Gottheil said.

That would take freedom of choice away from the customer, but allow for greater reliability and application quality control from Apple. It would also be a revenue opportunity for Apple, which currently gets a 30% cut of every application sold in the App Store. By contrast, when you buy a third-party app for your Mac, Apple doesn't see a penny of that sale.

Another reason for Apple to come out with a netbook: The company is facing price pressure -- while Apple computers have always been a little more expensive than the competition, now they're becoming a lot more expensive, as netbooks have driven the pricing sweet spot for PCs down by about $500, said Rob Enderle, analyst with the Enderle Group. Improve Synch

In addition to a netbook, Apple needs to work on improving the ability to synch media and documents between all devices, Enderle said. For example, users with multiple iPods, iPhones, Macs, and Apple TVs should be able to easily and automatically share media and documents among all those devices.

"Let's say I have a series of iPods and want music in my house -- why not have all the iPods play the same song around the house?" Likewise, music on a home system should automatically synch to an iPod in the car. "Why should I have to physically move the device around -- why not have the car pull the music off the network?"

He added, "I feel like we're one step short of something that's really wonderful, but we're not quite here yet."

Google and Microsoft are going in that direction with their focus on cloud computing, but they're going about it in different ways, Enderle said. Google is focused on clientless software that runs in the cloud, requiring only a Web browser to access. And Microsoft is tying cloud computing with heavyweight applications like Office. Apple would need to connect the cloud with its own hardware devices -- because Apple is, in the end, a hardware vendor.

Conquer The Digital Living Room

Another opportunity for Apple: The digital living room, said Chuq von Rospach, who worked at Apple for 17½ years building community among developers and other Apple partners. Von Rospach left 2½ years ago. He remains a staunch Apple fan -- even though he just took a job at one of Apple's smartphone competitors (whose name he asked us to keep confidential).

That's where the Apple TV comes in. Introduced in 2007, the device sits in your living room and connects to your television. It allows users to rent high-definition movies, buy HD TV shows, listen to iTunes music, and show off photos, just by connecting a single HDMI cable to the television. It's priced starting at $299.

Apple doesn't consider Apple TV a strategic product; executives routinely call the product a "hobby." But it has a great deal of potential, with sales tripling year-over-year in the fourth quarter.

Apple can expand the Apple TV to support a greater variety of video sources, putting the company in direct competition with the Microsoft XBox and Nintendo Wii, Von Rospach said.

"The Xbox, the Wii, and whatever Apple does are going to end up in a dogfight for who's going to be under the television set," Von Rospach said. Apple TV is part of the company's overall movement away from general-purpose computers and toward specialized appliances, Von Rospach said, adding that he sees this direction as an emerging industry trend. "In 10 years, I'm not sure anyone but hardcore geeks will own computers, they will own things that happen to have computers in them," Von Rospach said. The living room device will be a hub for video, music, and photos, an entertainment center that will interact with TVs all over the house -- even in the bathroom.

Gottheil agreed that Apple TV has a lot of promise. "It could be a great recession product -- you don't go out to the movies, you sit at home and watch," he said.

Facing The Down Economy

But Apple also has some unique challenges today, making this an especially critical time for the company.

The economy is a big problem, of course. Most companies are hurting now, to varying degrees, but Apple faces special risks because it makes boutique products, more expensive than the competition.

Budget-conscious users are already cutting back on PC spending. Global PC sales fell for the first time in six years in the fourth quarter of 2008, dropping 0.4% year-over-year, IDC reported. Netbook shipments accounted for about 7% of the market and will likely double in 2009, IDC said. Despite the downturn, PC shipments were up 10% year-over-year.

However, the economy is not as big a problem for Apple as it might first appear to be.

Apple has momentum and money. Apple defied the economic slowdown in its fourth-quarter 2008 earnings report, released in January, increasing both profits and revenue. Mac and iPod sales were up 9% and 3% year-over-year, respectively, while iPhone shipments were up 88%.

But Mac retail sales lagged year-over-year in January, while PC sales gained, according to a report released Thursday from analysts NPD Group. Mac unit sales fell 6%, and revenue was down 11%. Windows PC unit sales were up 13%, while revenue was flat as consumers sought less expensive models.

NPD attributed the Mac slowdown to several factors. Price-conscious consumers are delaying Mac purchases until the economy improves. That's bad news in the short term for Apple -- but not as bad as it could be. The consumers aren't switching to Windows, they're just waiting until they have more money in their pockets. Indeed, Apple chief executive Steve Jobs has said that Apple buyers remain loyal to the brand and tend to delay purchases in hard times.

The iMac desktop line hasn't been refreshed since April, NPD notes, which would also discourage sales. Another reason Mac desktop sales might be slowing: People switching to notebook and increasingly, netbook computers.

That interpretation would explain another report for the same period -- January -- from another company that tracks desktop market share. Net Applications reported that Mac market share increased slightly in January, while Windows market share declined. Mac market share increased for seven of the past 11 months, while Windows market share declined seven months since July. Mac market share was nearly 10% last month, while windows was about 88%.

Gottheil remains optimistic for Apple.

"The challenges facing Apple are less intimidating than the challenges facing anyone else," he said. The downturn will be a challenge but Apple can weather it. The number of consumers with the spare change to buy a premium product will get significantly smaller -- but as long as that market continues to exist, Apple has room to thrive. "If there's anyone in the planet with the wherewithal to buy anything more than the least expensive thing, then Apple will do well. If we're all in deepest, darkest poverty, then we are all in trouble," Gottheil said.

Apple faces new competition from Microsoft. While Windows Vista was a dog (or, at least, it was perceived as one by many consumers -- which was enough to drive buyers to Macs rather than PCs), Windows 7 is looking good in early reviews.

"Windows Vista is the gift that just keeps giving for Apple," Gottheil said. But it's just one factor among many driving Apple success. Others include Apple's superior software, service, its retail network, and loyal customer base. But, in the end, Vista bugs were not a huge driver for Macs.

"Even if Microsoft changes its spots and executes superbly, Windows Vista was a relatively small contributor to Apple's growth," he said.

And Apple faces competition on the smartphone front, from Google, with its Android device, and from the upcoming Palm Pre.

Most threatening of all: Jobs, who led Apple in its years of triumphs, is seriously ill, and stepped aside from day-to-day operations in January. He says he's getting treatment and expects to return to health and get back to work in the summer -- but what if he doesn't?

Can the company continue to thrive without Jobs' unique genius in the head office?

Jobs has been troubled by health problems since 2004, when he went in for cancer surgery. Last year, he appeared gaunt at a summer product announcement, spurring rumors that the cancer had returned. The rumors accelerated when Apple made a last-minute announcement in December that Jobs would not deliver his traditional Macworld keynote the following month. Finally, in early January, after months of denying there was anything seriously wrong with Jobs' health, the company reversed itself, saying he was stepping aside from his day-to-day responsibilities until June to focus on recovering from a problem that was preventing his body from absorbing food.

If Jobs' health is restored and he comes back on schedule, his absence will prove insignificant to the future of Apple. But if he doesn't return, then Apple will be thrust into an uncertain outlook. Apple is an extension of Jobs' vision; can the company thrive or even survive without his unique creative spirit dictating direction? Jobs is irreplaceable, says Enderle. He gets his way by negotiating hard with partners, including music companies, and keeping Apple disciplined behind a few products.

"His hands are on every critical part of the company," Enderle said. "There are too many stories of Steve Jobs getting personally involved and making things happen." Moreover, Jobs is a brilliant pitchman, able to sell Apple's products like nobody else.

Right now, Apple produces only a few, brilliant products. Without Jobs, Apple will likely become like most other companies, producing a broad and confusing array of products, most of which will fail and some of which will succeed. "It would be less fun that way," Enderle said.

But Von Rospach said he expects Jobs to return. "It's my feeling he would not have re-stood for the Disney board of directors if he was dying or seriously ill," he said. After Jobs announced last month that he was stepping back from Apple, he said he plans to stay on the board of directors of Disney, where he is a major stockholder.

"It's an indication that Apple isn't lying when they say he's going to take six months and then come back. But since Apple got itself into lies early in this process, nobody believes them even when they're telling the truth. I think the board has realized now, though, that they have got to deal with this in an upfront manner," said Von Rospach.

Moreover, even if Jobs doesn't come back, the company can continue as it has, Von Rospach said, because Jobs has infused the organization with his vision and personality. In particular, chief operating officer Tim Cook, who is running daily operations at Apple in Jobs' absence, and Jonathan Ive, senior VP of industrial design, are well suited to lead.

"Steve has put out a bunch of people that understand what he expects, and can pull it off and carry it forward," Von Rospach said.

However, Jobs' successors need to stay creative; they can't afford to petrify and institutionalize Jobs' mindset.

He compares Apple after Steve Jobs to Disney after Walt Disney.

"Disney got into the mindset of 'what would Walt do,' and kept reinventing the things Walt did, even though the market changed under them," Von Rospach said. That attitude hamstrung Disney for years after Walt Disney's departure, until Michael Eisner took the helm and provided his own leadership vision. "What Walt did was a lot of what Steve does, which was to fly in the face of the market and take the radical decision instead of the safe one."

With or without Jobs, Apple has a potentially bright future ahead, extending its mission simplifying the computing experience into netbooks and the digital living room. But first, it must navigate short-term threats from the economy, competitors, and Steve Jobs' health.

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