Several Asinine and/or Risky Ideas Regarding Apple’s Strategy That Boot Camp Does Not Portend

Monday, 10 April 2006

When I wrote about Boot Camp Thursday, I started by observing that while I and many others were initially shocked by Apple’s announcement, it only took a few hours before the idea seemed completely obvious and not really surprising at all.

Boot Camp has opened the door for a lot of additional speculation regarding what this means going forward for Apple. I think it’s only fair for me to go on the record regarding which of these ideas really would be shocking, if they were to come to pass.

Regarding anything related to Apple’s strategy going forward, it’s essential to keep in mind just how Apple functions as a business. It’s not very complicated. Apple now has two fundamental businesses: selling Macintosh computers and selling iPods. And I think if you wanted to, you could argue that this is really one core business, selling computers, and that some of their computers are Macs and some are iPods.

I’m not offering this as anything other than a statement of the obvious, but it’s apparently not so obvious to many of the pundits speculating on Apple’s future plans.

Selling hardware is their business. That’s where their revenue comes from, that’s where their profits come from, and revenue and profit is what defines a business. Everything else they do is in support of this core business. Apple is famous for its software — both the Mac OS and their own Mac applications — but they make way less money selling Mac software than they do selling Mac hardware. And the iTunes Music Store is just the equivalent of “software” for iPods.

And so that’s the prism through which one needs to view Apple speculation. For any idea, ask yourself this: Would it help Apple sell more Macs or more iPods? If the answer is “no”, Apple isn’t going to do it, or, if they do, it’d be a genuinely shocking development.

I forget to do this myself occasionally. On Thursday, I wrote:

All Apple needs to do to be spectacularly successful with its computer business in the next few years is to take just a few single digits of market share away from Windows.

But that doesn’t actually quite make sense, because “Windows” — or the company behind it, Microsoft — doesn’t actually sell PC hardware. If Apple is going to grow a few extra percentage points of computer hardware unit sales, those points must come at the expense of PC makers.

If this growth is driven by Boot Camp (and/or Parallels Workstation, or VMware for Mac, or an Intel-native version Virtual PC, or any other means of running Windows on Mac hardware), Microsoft may not even “lose” anything at all, because customers driven to the Mac for this reason must also buy Windows if they want to run it.

Boot Camp doesn’t pit Mac OS X against Windows, and so it doesn’t pit Apple directly against Microsoft. What Boot Camp does is pit Mac hardware that can run both Mac OS X and Windows up against all other PC-hardware that can only run Windows.¹

Apple Is Going After the Profits, Not the Mass Market

If Apple takes a few additional market share points, it will be at the expense of companies like Dell, Toshiba, Lenovo, and Sony. What’s essential to note is that they’re not just going after any and all of the PC market — they’re going after the high end, which is to say, the profitable end.

Nicholas Carr agrees with me, and he nails it in his analysis of why Boot Camp matters:

As I’ve said many times before (too many, in fact), the consumer PC market has, like other consumer markets before it, split into two basic segments: buyers of commodities, and buyers of premium goods. The money’s in serving the latter. That’s why, for instance, Dell just bought Alienware.

In reference to my line that “Instead of choosing between a Windows PC or a Mac … you now get to choose between a computer that can only run Windows or a computer that can run both Windows and Mac OS X,” Carr continues:

I think that’s the reason the Apple’s stock price has shot up nearly 20% since the Boot Camp announcement yesterday. It’s not that Apple may be able to expand its general market share by a couple of percentage points; it’s that those percentage points are likely to represent many of the most attractive customers in the market.

And that’s Apple’s strategy in a nut.

What would be interesting would be to see computer manufacturers’ “market share” computed in terms of profits, rather than unit sales. Apple almost certainly makes more profit from a $600 Mac Mini sold through one of its own stores or Apple.com than eMachines does from a $500 POS PC sold at Wal-Mart. But in terms of “market share”, they each count as one computer sold.

Whatever Apple’s “profit share” of the PC industry, it must be much larger than its 2-5 percent market share. And Apple’s strategy seems clearly geared toward ramping up profits, not just unit sales.

Why Apple Isn’t Going to Release Mac OS X for Other PCs or License the Mac to Other PC Makers

One contrary view to Apple’s Boot Camp announcement, espoused both by Paul Boutin in Slate Friday and Robert X. Cringely in an op-ed Saturday in The New York Times, along with numerous other pundits and webloggers high on Boot Camp fumes, is that Boot Camp isn’t bold or important at all, and that what Apple really ought to do is release a version of Mac OS X for generic PC hardware. As Boutin puts it:

Instead of a disk that allows you to boot Windows on a Mac, what about a disk that lets you boot OS X on any Intel-powered PC? I don’t want Windows on a Mac. I want OS X on a PC.

The reason this isn’t going to happen — at least not soon — is that it doesn’t fit with Apple’s aforementioned business, selling computer hardware. Boot Camp fits because it makes it more likely that more people will buy Mac hardware, and doesn’t make it any more likely that existing Mac users will switch to buying computers from some other company.

Cringely writes:

This strategy would turn Boot Camp on its head, as the company selling all those $140 [sic] retail copies of its operating system would be Apple. And with hundreds of millions of Windows machines in the world, getting even 1 percent of PC users to switch to OS X would be a huge new business for Apple. It would also create another headache for Microsoft. And that, in the end, is what Apple does best.

The problems with this logic are manifold. For one thing, gaining one percent of the market by selling one percent more of the total computers would be way more profitable than selling that many $130 copies of Mac OS X.

According to Apple’s quarterly financial statements, the company in recent years has consistently hit gross profit margins a tad over 25 percent. Apple does not (publicly) break these margins down on a product-by-product basis, but I think 20-25 percent is a reasonable estimate of their profit for most of their big-ticket products.

So, let’s say today Apple makes $500 in profit on a $2,500 MacBook Pro. Tomorrow, in Boutin’s and Cringely hypothetical world where Apple sells $130 copies of Mac OS X for any PC, they might make about $100 in profit when someone buys a Sony Vaio and a copy of Mac OS X.

Cringely’s statement that “getting even 1 percent of PC users to switch to OS X would be a huge new business for Apple” ignores the fact that it might also completely sabotage Apple’s existing and very profitable business of selling Macintosh computers. Cringely seems to be making the assumption that everyone who’s currently using Apple hardware would keep buying Apple hardware, and that these retail copies of Mac OS X that run on generic PCs would be sold only to new customers.

If that were the case, sure, it would only add to Apple’s success. But that wouldn’t be the case. There can be no doubt that many current Mac users would buy other-branded hardware, costing Apple hundreds of dollars in profits. To make up for each such loss, Apple would need to gain three, four, or maybe even five new customers.

That’s not to say all Mac users would abandon Apple hardware. But hundreds of thousands would, and Apple would need to gain millions of new switchers just to compensate for that lost revenue and break even; otherwise they’d lose money on the endeavor, even while gaining many more users of Mac OS X.

Boutin clearly recognizes that this would in fact happen:

Face it, most of your time at the computer is spent interacting with the operating system and applications, not admiring the case. OS X is an excellent operating system, with a lovely, soothing interface that doesn’t wriggle like a bug. Why not run it on the cheapest computer you can get? If you cracked open a new Mac and took stock, you’d realize you could buy the same computer much cheaper by ignoring its packaging. Once you got rolling on e-mail and Web surfing, you might even forget what your PC looks like. What matters is what’s onscreen.

Leave aside for this discussion the fact that you can’t actually get a comparably-equipped computer from any other company for that much less than Apple’s current Intel-based Mac line-up — you can get much cheaper computers, sure, but not much cheaper computers with comparable components. The point here is that Boutin is right that what matters most is what’s on-screen.

Unlike Cringely, Boutin even acknowledges that Apple tried something like this a decade ago:

Sound crazy? Apple actually tried this, allowing other manufacturers to produce “Mac clones” for two years during Steve Jobs’ absence from the company. “The styling of the Mac clones often more closely resembled that of a PC,” Wikipedia notes accurately, “but the clones frequently offered a lower price and sometimes better performance.” Bill Gates himself proposed the idea in an earnest 1985 letter to then-Apple CEO John Sculley shortly after Jobs’ ouster. Sculley passed on the idea, leaving a successor to try it, perhaps in desperation, 10 years later. Jobs killed the clone program when he retook the helm in 1997. He’s since locked Apple’s software into one different-thinking hardware product after another, from the original iMac to the iPod nano.

But Boutin’s claim makes it sound like Jobs killed the Mac cloning program out of spite. Wrong. Jobs killed the cloning program because it was killing Apple Computer financially. Recall that during the Mac clone era, most of the mainstream press coverage of Apple centered around speculation that the company was on the verge of collapsing into bankruptcy. Apple did not profit from the cloning program, for the same reasons outlined above: many Mac users switched from buying Apple hardware to clone hardware, and Apple made much less money from Mac OS licenses than it did from selling Mac hardware, and there was nowhere near enough growth in the user base to make up the difference.

It’s just not true that most Mac users use Macs because the hardware is better designed. They’re Mac users because of the Mac OS. What the original cloning program showed was that many of Apple’s customers were Mac fans, not Apple fans.

Now it’s true that Apple’s current industrial design is far better than that of typical cut-rate PC makers, and aesthetically it’s even further ahead today than it was a decade ago, when Apple itself was still making “beige boxes”, albeit nice beige boxes. But it’s not that much better than other high-end PCs. Sony Vaios and Lenovo ThinkPads, for example, are fine laptops. And it’s on high-end machines like good laptops and powerful PowerMacs — the machines Apple makes the most profit on — where Apple would be most likely to lose sales. They can’t say, “Here’s a license for Mac OS X but you can only install it on low-end machines”, and nor can they sell Mac OS X licenses for the $400 or $500 profit margins they make on high-end hardware.

The ’90s Mac cloning program was popular with many Mac users because they were able to purchase faster computers for less money.² But Apple was losing money on the cloning program, and no company can stay in business while losing money, no matter how happy their customers are. Without question, if Apple were to offer Mac OS X for generic PC hardware, it’d be an inordinately popular product. What’s questionable is whether it’d be inordinately profitable, or even profitable at all.

I’m not going to say it’s impossible that Apple could be successful with such a plan, but I do think it’s unlikely. And unquestionably it would require completely changing the company’s business model, abandoning the current model that has proven to be consistently profitable for a commodity model of making much less money per transaction and making it up on volume. Anyone who denies that such a plan would be risky either doesn’t understand Apple’s current business model — which is, as repeated ad nauseum herein, selling computer hardware at 20-25 percent profit margins — or is making the completely unrealistic assumption that all current Mac users would continue buying Apple-branded hardware. Remember too that Apple’s current business model is bootleg-proof; unlike Mac OS X installer DVDs, you can’t burn copies of MacBooks or iPods.

Why Would Apple Want to Compete Directly Against Microsoft?

Cringely signs off his op-ed with this claim:

[Licensing Mac OS X for generic PCs] would also create another headache for Microsoft. And that, in the end, is what Apple does best.

Really? Creating headaches for Microsoft is what Apple does best? When has Apple ever created headaches for Microsoft? And before you say “iPod and ITMS”, note that that’s a new market that Apple conquered first, not a market where Microsoft had already gained a foothold. If anything, it’s the other way around: historically Microsoft has created far more headaches for Apple than vice versa.

Microsoft’s biggest headache is the long-delayed Vista, and that’s a self-inflicted wound.

I think what’s happening is that guys like Cringely and Boutin, who are tasked with writing about the computer industry at large, have gotten bored with Microsoft. They still need to write about Microsoft because it remains the biggest, most influential, and most profitable company in the industry, but Microsoft has no threatening rivals. Vista (née Longhorn) is turning out to be one of the biggest debacles in industry history — they’re shedding features and it still keeps slipping further behind schedule. Imagine how far behind schedule they’d be if they were still planning to include all of Longhorn’s originally slated features.

And yet the Vista debacle isn’t really hurting Microsoft at all, other than in the technology press. They’re still making money hand over fist each quarter.

Would it be exciting if Steve Jobs were to stand up at his next keynote address and say, “We’ve decided to license Mac OS X to any computer maker that wants it, and our goal is to put Microsoft out business”? Most definitely. But it’d be exciting in the way that it’s always exciting to watch someone else do something reckless and risky.

It’s not Apple’s fault that Microsoft sucks to write about, nor is it their obligation to put themselves on a collision course against Microsoft just because it would make for good drama, and thus, something interesting to write about on the tech beat.

Cocoa for Windows

One more thing-Apple-won’t-do: release a version of Cocoa for Windows. Back in the ’90s, after Next stopped making its own computer hardware and turned into a software-only company, they developed a version of the OpenStep application framework that ran under Windows (and other OS’s). Shortly after the Apple-Next acquisition-cum-merger, Apple released a preliminary operating systems roadmap in which the application framework we now know as Cocoa was called “Yellow Box”.

The real Mac OS X doesn’t bear much resemblance to these preliminary plans, which (the initial plans) really amounted to little more than a revision of NextStep with a classic Mac OS compatibility layer, which layer was called “Blue Box”. There were no plans for what we now know as the Carbon APIs — i.e. in these initial plans, there’d have been Classic for old-style Mac applications, but there’d have been no way to write native applications other than Cocoa.

Another part of this initial plan was to maintain the cross-platform Yellow Box libraries, the idea being that developers could write (what we now know as) Cocoa applications and have them run both on Mac OS X and on Windows. This wasn’t a pipe dream, Next actually had this working in the OpenStep era.

Much to the consternation of some developers, this plan was soon scrapped as well.

Rumors of its resurrection persist, and while I haven’t seen any high-profile punditry positing its imminent return, I’ve received a bunch of emails from readers wondering if Boot Camp somehow means Yellow Box for Windows is coming back.

Viewed through the aforementioned “keep in mind at all times that Apple’s core business is selling computer hardware” filter, the answer is clearly no. A Cocoa runtime library for Windows might well make developers happy, but it wouldn’t help sell Macintosh hardware.

Quite to the contrary, it’d take away one the main reasons people buy Macs: to run cool Mac applications. If the whole point of the appeal of Mac OS X is that Mac software is better than Windows software — or at least better in the eyes of one segment of the market — what possible good would it do Apple to help that software run on Windows, too?

The continued existence and success of Mac OS X hinges on the premise that it is better than Windows. If all or most of the apps people love on Mac OS X ran just as well (or nearly so) on Windows, it would lessen the degree to which Mac OS X offers a better experience. Cocoa for Windows might well prove wildly popular for some Cocoa developers, but it wouldn’t make money for Apple and could potentially cost them in hardware sales, so it isn’t going to happen.

Please don’t argue that Apple would gain hardware sales because many Windows developers would switch to Cocoa and buy Apple hardware on which to develop their software. Even if we assume it’s true that Apple would gain new developers (which is admittedly a reasonably fair assumption), and that those developers would buy Apple hardware,³ there just aren’t that many developers out there compared to the number of civilian users. It’d be foolish to gain a few new developer customers if it meant losing many times more regular users who decided that Windows-with-Cocoa was good enough for them.

“Oh, but then Apple could sell iLife and iWork to Windows users” isn’t a good argument either, because, repeat after me, Apple’s primary business is selling computer hardware.

And the best way for Apple to sell more computer hardware is to make Mac OS X as much better than Windows as they possibly can; nothing could be further from this goal than releasing a version of Cocoa for Windows.