Monday, 17 September 2012

Apple's Innovator's Dilemma

Like the iPhone 5, a more evolutionary note today. Before I plunge back into building my Bloomberg model, I want to expand on some of the points raised at the end of my last post framed through the lens of the Innovator's Dilemma 

Why too many lampreys are a very bad thing

Anyone for the lamprey pie?
Henry I of England memorably died from "a surfeit of lampreys". Apparently he was  of which he was so fond of this medieval delicacy that one Christmas he gorged himself to death on them.

That's a lot like an Innovator's Dilemma - its kind of a nice problem to have, but it could ultimately kill you.

I wonder if Apple is showing some symptoms.

Three challenges facing Apple

1) Apple's installed base restricts how revolutionary they can be.

Now the dust has settled after the iPhone 5 launch, two things are clearly. First the damn thing is going to sell like hotcakes. Second its actually a bit dull.

Now the "meh" factor was partly due to the torrent of leaks we've seen over the past few months. But it was more because this was a clearly evolutionary design. The design language and software are largely unchanged since the iPhone 4 in 2010 - this year's model is just a little bit longer and faster.

Apple's evolutionary approach, interspersed by occasional revolutionary leaps such as the iPad and the original iPhone, is often held up as a virtue. But as its installed base continues to ramp up, it is also becoming a necessity. With and installed base of over 400m iOS devices Apple find it harder to make dramatic jumps (think of it as a "non-burning platform").

I think the new iPhone's screen evolution is a good example of this. Apple clearly had to bump up their screen size this generation, but took the unusual step of making it longer but keeping the same width:

"Do I look skinnier in black?"

Why? Well there's a lot of bullshit bandied around about one-handed operation (I can use my 4" Atrix fine with one hand thank you). I think its actually more to do with installed base inertia.

If they had made it wider they would have either had to sacrifice pixel density, or accept some sort of crappy up-scaling solution for the long-tail of App Store apps which don't update. This is because, unlike Android (which has always pushed for resolution independent apps), Apple devs have historically only coded for 2-3 different screen resolutions.

Keeping the screen width the same but letter-boxing the ends of legacy apps is an elegant solution, but is ultimately a compromise. It means Apple is not playing in the market for 4"+ mobile devices (and believe me there is a market there - just ask Samsung). This is the Innovator's Dilemma in a nutshell - drag from the installed base (ensuring legacy apps look good), restricts Apple's ability to access new markets (big-screen smartphone users).

2) Apple's hardware-led model makes it harder to roll out new features

Building on what I wrote in my last post, Apple's hardware-led model has one great weakness. It is that they need to ruthlessly segment their products to push customers towards newer (and higher-margin) devices over older more commoditised ones. In the absence of significant hardware innovation, this means that the differences are likely to revolve around software features. Siri - originally restricted to the iPhone 4S despite running perfectly well when hacked onto the iPhone 4 - was a good example of this.

Free Turn by Turn - Unless you're running a '4!
This year there were more signs of this. In particular devices older than the iPhone 4S will not receive turn by turn navigation. As with Siri there is no hardware rationale behind it (lower-specced Android phones have been running turn-by-turn since 2009). It is a pure business decision.

Now that is good practice in terms of product segmentation if you are a hardware vendor. However it is bad practice if you are a software vendor fighting an eco-system war. For example with the latest price drops the original iPhone 4 could well be Apple's secret weapon attacking the budget market. However stripping it of this feature makes it less competitive versus budget Androids.

Similarly Siri. If Apple really thinks its ready for prime time they could put it into the hands of 400m iOS users at the flick of a switch, but the need to maintain hardware segmentation means they just can't do that.

Again we are seeing the Innovator's Dilemma at work here. Apple is held back from doing things that are good for its future prospects (building a stronger software eco-system), by the need to defend its existing hardware-led business model (making the latest models more desirable).

3) Apple ends up looking capricious

Apple's Innovator's Dilemma has unintended consequences. One obvious one is that they end up looking capricious, destroying goodwill with end users.

I first noticed this when iOS 3 rolled arrived in 2009. One of the useful new features was to show exact battery-life percentage at the top of the homescreen, rather than a craptastically imprecise icon. It was one of the small things that would actually be damn useful on my year-old iPhone 3G. Good on Apple I thought:

Battery indicator... Before and after.

Then I installed the update and found that the percentage meter was iPhone 3GS only. My 3G remained stuck with the craptastic icon. Now there was clearly no technical reason for this - it was an entirely arbitrary decision, presumably made to further the segment the identically-looking 3GS from its predecessor.

At that point Apple looked entirely capricious.

Now that's different from being arbitrary. Often Apple are completely arbitrary because they believe they know what's best for the user. Steve Jobs famously dismissed the user of focus groups because "people don't know what they want until you show it to them". Part of the implicit social contract for an Apple customer is "I'll enter your walled garden and do what you tell me, because I trust that you are acting in my best interests".

In contrast being by capricious Apple is openly acting in their best interests against the consumer. Agency Problem 101.

This is precisely what has happened with Apple not bringing Siri and Turn-by-Turn to older devices. And as tensions between Apple's hardware legacy and software future continue, I think we will see this more and more.

What does this mean for Apple?

  • This quarter? Not much. The iPhone 5 will still sell like hotcakes. Apple will still be able to bulldoze low-balled Street numbers. Full steam ahead.
  • This year? A window of opportunity for Android: If the Innovator's Dilemma makes Apple less able to innovate between its big disruptive cycles, that's good for Android. It creates a window of opportunity for fast-followers like Samsung to catch up (ditto Microsoft in tablets) and overtake Apple. In real terms the iPhone 5 has reaffirmed the status quo, but the problem is the status quo is one of Android bringing out better and better products and piling up market share (although more at the expense of low-end featurephones).
  • Longer term? Risk! The key question is whether the Innovator's Dilemma only affects Apple's ability to evolve products with a category, or if it affects their ability to bring new categories to market. I would like to think Apple are smart enough not to fall into this trap. However you do have to wonder now that the stakes are higher. In 2007, when Apple release the iPhone, iPod revenues (which the iPhone would potentially kill) were 44% of total. In contrast today revenues from iOS devices (and I'm lumping iPhone and iPad together here) are close to 80% of group revenues. You do start to wonder if the fear factor might creep in...
Right, now back to building my financial model of Bloomerg LP!


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