Apple does what Jobs would have

By Pascal-Emmanuel Gobry on September 11th, 2013

Here’s what you need to know about Apple’s big hoopla yesterday unveiling its new iPhones. There’s a new fancy iPhone 5S, which is an incremental improvement over the iPhone 5, which is par for the course, as Apple is on a schedule of introducing new iPhone designs every two years, with incremental improvements in the intervening years.

The new thing is the iPhone 5C. The C stands for “cheap.” The arrival of a new, “cheap” iPhone had been rumoured for many months. Apple is famous for secrecy, but Apple’s empire is now so vast that its KGB-like capacity for maintaining secrecy has been outgrown by human nature. The leaks, they come relentlessly, like so many samizdat, in the form of blurry pictures with Mandarin watermarks.

That’s what you need to know, and it’s boring. But underneath, we now have a clearer picture of the direction Apple is headed. So we knew Apple was working on a cheap iPhone, and the question was: how cheap?

The reason it matters is subtle. Apple has always been in the business of making the best product possible, and that meant charging if not premium prices, then certainly premium margins (given that Apple’s various economies of scale now allow it to earn more money than its competitors while charging the same price). This is great, but the problem with is that Apple is really not in the device business, it’s in the software business (“People who are serious about software do their own hardware,” said Steve Jobs), or rather, the platform business.

Apple creates products – Macs, iPhones, iPads – that are software platforms on which people build apps. And the thing about software platforms is that they have network effects. A network effect is what happens when you have a product that gets more valuable as more people use it. A telephone is useful because everyone else has a telephone. If nobody had a telephone, it would be useless, because you couldn’t call anybody with it. Once everybody has a telephone, you practically have to have a telephone (or else you’re a weirdo).

If you are in a business where there are network effects, your market share becomes crucial. Market share isn’t just important in the sense that any business wants to grow. It’s important because if you’re in a network effects business, building marketshare will tend to give you a monopoly. Once you get a marketshare edge, a virtuous effect kicks in: more people use your network, which makes it more valuable, which means more people join, and so forth.

This is what happened to the Mac when the Windows monopoly crushed it. And this is what many people fear is happening to the smart phone business: Android is killing it in market share. Thanks to network effects, it just might destroy iOS. People who point out that Apple is very profitable, whereas Google makes very little money from Android, are missing the point: Apple was also very profitable right up to the point where nobody owned a Mac anymore.

Historically, Apple’s response to this phenomenon has been to ignore it. This would have destroyed any other company, but Apple has managed to pull it off, because it introduced new breakthrough products, which companies rarely do.

Usually, when you introduce a breakthrough product, invent a new market out of thin air, own all of it, but then are relentlessly undercut by competitors and don’t match them, you’re history. Apple’s way out has been to introduce more breakthrough products just as the steam was running out of its previous breakthrough products. Thus iMac begat iPod begat iPhone begat iPad.

Which takes us back to the cheap iPhone Apple just introduced. How cheap is it? Well, actually, it’s not cheap at all. It’s $549 unsubsidised. Now that most people in the rich world have smartphones, the name of the game is emerging markets, where consumers are much more price-conscious and where, in many places, phones are sold unsubsidised.

Under Tim Cook, Apple is doing what Steve Jobs would have done: ignore the haters, ignore pundits and analysts like me who say, “Don’t let yourself be undercut! Go for marketshare!”, and trust that it will all work out in the end, because you’ll be able to introduce a new breakthrough product a few years from now and start the cycle all over again.

And maybe it will all work out in the end. But you can’t help but notice that something is different this time around: Apple doesn’t have Steve Jobs anymore. At least to outside observers, Apple was able to defy gravity because it had a human being who, like no other on the planet, could spring fully formed from his thigh great new products that would change the company’s fortunes for good, all over again.

Steve Jobs is gone. And Tim Cook, who is a very smart guy who very clearly understands everything I’ve just written about, has signalled loud and clear that he believes Apple can still pull off its gravity-defying, breakthrough act in a few years. He’s doing what Steve Jobs would have done: giving the middle finger to sound business logic.

Will Apple pull it off again? Anyone who says they know is either deluded or selling you something. But, in any case, Tim Cook has placed his bet. For those of us who care about Apple and all it’s contributed to the world of technology, that’s more than a bit scary. Who knew an event so boring could be so terrifying at the same time?