Hidden Dimensions - Apple's Magic Sauce for Home Theater

by
September 21st, 2006

There you have it. Apple has thrown down the gauntlet with the iTunes Store, movies and the code-named "iTV." Even so, a lot of analysts and competitors still seem confused about Apple's prospects in the movie download business. From my experience, there are four things to consider.

• Customer inertia
• The power of the culture to influence
• Large software development projects
• Technical leadership

I propose that we've finally come to the point in our Internet technology where the ability of the human mind to comprehend the dynamics of one billion people connected to the Internet has reached its limits. At first, things move slowly, and analysts see signs of failure for new technologies. And then, as the communication grows exponentially, executives who are responsible for estimating trends and analysts who try to track them are caught unaware by exponential technical consensus and momentum.

Then Apple competitors try to catch up, have no vision or leadership, get outside the decision cycle of the Internet (and Apple's) and end up failing.

Apple is a company that understands the elements I listed above. Steve Jobs nailed it when he said that Microsoft is run by salesmen. He didn't mean that these men are incompetent administrators. He meant that any company whose managers are busy running the operations of the company don't have time to understand the forces that influence a billion customers connected on the Internet.

Apple has become adept at sending products (inputs) into the large machinery of the world's technical, consumer industry and gauging the success by sales. Analysts, on the other hand, try to assess the results of Apple's inputs to the system by their readings on the Internet. But there is no technical way to aggregate one's understanding of how Apple's products are succeeding better than the sales themselves. That's why Apple does things in an incremental fashion.

Let's look around the industry and see how Apple's strategy takes into account the elements I listed above, leads to success, and simultaneously confuses competitors and the analysts.

A common factor that confuses analysts and executives alike is customer inertia. It's insane to think that Apple is going to change customer habits overnight. Those who are suspect of Apple's chances for success tend to think in terms of immediate, visible changes. Maybe they're victims of ADD. But it's also insane to to think that new technologies won't start gaining momentum and overtake expectations. One must learn the mathematics of a Gaussian curve.

Today, lots of consumers out there don't have a clue about what Apple is doing. They enjoy going to Wal-Mart on Saturday afternoon, pick up a few cool movies for $7.99, and they work just fine in their DVD player. Even if they have a High Definition TV, a standard DVD player output gets up-converted and looks great.

This will continue for awhile. It's confusing. And then, one day, in a year or so, their children will connect some Apple hardware to the TV and show them how to play any movie one might wish to see. With a few clicks. Suddenly, the trip to Wal-Mart is only for Windex and paper towels.

Lots of people like to show off their technical toys and the media they've accumulated. I call them the accumulators. Massive, cheap storage breeds this kind of thinking. It goes like this:

"Hey, what do you have there?"

"Oh, that's my Zen. I have over fifty songs!"

"Really? Check this out, dude. My video iPod has 12,400 songs. And every episode of Lost. And twenty movies. Wanna see Cars?"

The accumulators, with plenty of expendable income, drive the technology. Their accumulated data set swamps the old one and makes the old set of accumulated data irrelevant.

Even more important than the accumulators is technical chatter in the installed base. Sixty million iPod owners have had a lot of fun messing around with their iPods. Most will want a new one that plays video. These customers are ripe to be thought leaders with home video. Word will get around from people who are already cool to those who want to be cool. People will tell each other about their experiences with Apple, iTunes, movies, "iTV" and their big screen TV. The Internet grape vine will be full of chatter. Jon Stewart will show off his Apple toys. Apple will conduct demos in their retail stores and Circuit City. Apple will fan the flames with TV ads. Home theater magazines will cover it. You'll see the gear show up on TV shows like Eureka and Veronica Mars. And guess what? In time, the popular culture will make a decision.

All of a sudden, the sale of movies on pieces of plastic dries up.

Companies that have sold DVDs and also want to sell movies on-line face massive challenges. Very few companies outside Apple have the in-house expertise. This process is very, very difficult, because companies for which computer software and hardware is not their core competency must subcontract. The only purpose of the initiative is to enter a market and make money. It's not intended to change the world or create something special for the consumer.

It often goes like this.

-- The senior executives have purse strings but don't understand the technologies involved. They know they want to get into this game, but don't know how to do it.

-- Senior managers are then charged to put together a plan. They have to understand how to translate corporate goals into software requirements. The trouble is, all too often the corporate goal is only making money. The customer experience doesn't make the requirements cut.

-- Realizing they don't have the in-house skills, they subcontract to a company to build this delivery system. Another level of bureaucracy and personal disinterest is introduced.

-- Programmers are selected based on skills, but the programmers are even further removed from the original zeal and aren't stake holders. It's just a programming job.

-- Then the programmers find that the original requirements, as implemented, didn't allow for a scalable architecture that could add new features. Separated from the vision, if any, of the original plan, the coders can't afford to lay a broad foundations. A great UI is not in the specs. They have no control over the end user's hardware. They code as fast as they can until, one day, the client asks for something new, and they realize that the new features will have to be shoehorned in. They fall behind schedule. [1]

-- Now the programmers are being prodded and abused. Morale drops. Their managers tell the client that all's well which drops morale further.

-- Poor software ships late, annoys the customers, is insecure and is ripped by the analysts. Half the programming team is laid off. And then the executives, having seen very little return on their investment are forced to decide between pouring in more money or cutting their losses.

Any company that thinks they can throw some money at this market and do a better job than Apple had better think hard and long.

Technical Leadership

I also believe that analysts underestimate the power of leadership in the home entertainment industry.

Today, the home entertainment industry is confusing. Customers muddle through. Some dare to ask questions; some just plug it all in and hope things work. Issues linger: Is my 1080i HDTV already obsolete? What is HDCP, HDMI, de-interlacing, scaling, 802.11n? Should I go with cable or satellite? Will Blu-ray finally win? Should I convert my VHS movies to digital or throw them out and buy DVDs? Is Plasma a fading technology? What is IPTV? Why does my widescreen HDTV still display letterbox bars for some movies?

No one company has stood up, with courage, and said: "We have a vision. This is how to do it. Follow us."

Now, Apple is starting to provide that leadership in home theater. They're defining an architecture, putting the product pieces into place, and developing leading edge products.

But most importantly, Apple is inserting this orchestrated scheme of pre-planned and well defined technology into a massive technology consumption machine fueled by the consensus thinking on the Internet. If it sucks, it's history. If it's cool, it'll be embraced, and any company that tries to force the issue against this massive thinking machine will fail.

For the first time in modern history, waiting for the technical leader to fail and then coming to market with cheaper, knock-off products is a discredited business tactic. By the time the second company comes along, the market has made its decision and moved on. Too much money in R&D, engineering, and marketing is required to catch up.

Meanwhile, movie sales will continue at Wal-Mart. Amazon will sell many downloaded movies to PC users. People will still buy pay-per-view movies. Many will sigh and settle on cheap HD-DVD players and be done with it. AT&T will have, I believe, its tragic adventure with IPTV. The picture will remain cloudy for about another year, further confusing everyone.

And then, one day, in late 2007, it'll all snap into focus and the Internet society will have made its consensus decision for Apple and home video entertainment.

John Martellaro is a senior scientist and author. A former U.S. Air Force officer,he has worked for NASA, White Sands Missile Range, Lockheed Martin Astronautics, the Oak Ridge National Laboratory and Apple Computer. During his five years at Apple, he worked as a Senior Marketing Manager for science and technology, Federal Account Executive, and High Performance Computing Manager. His interests include alpine skiing, SciFi, astronomy, and Perl. John lives in Denver, Colorado.

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