" We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. "
-- Roy Amara
Trends that appear to be continuing unabated to extremes often become unstable and unsustainable. If that happens in the business world, a company either seizes control or fate dashes its hopes. That's why Apple is planning now for the product line of the future.
CEOs get paid to anticipate changes in the industry. Rupert Murdoch thinks he knows how to stem the financial losses of his publications. Whether he's right or wrong, he's trying to anticipate the future and avoid cruel fate.
It's also the responsibility of CEO Steve Jobs to think about what his company will look like in five years. Certainly, thinking now about a product means working prototypes in a few years and sales a year after that. Just what will Apple look like in five years?
Looking at the Sales Data
One clue comes from Philip Elmer-DeWitt. On August 5th, he did his math and looked at the profile of Apple's income over the past few years. His first chart shows the contribution of the iPod to Apple's Total revenue. For example, back in 2006, the iPod sales had risen so far, they contributed more than half of Apple's income: 55+ percent.
Some executives would have taken that to mean that Apple should have changed its name, again, to "the iPod Company" and discontinued the Mac. (Well, a few anyway. We know who they are.) Instead, Apple's executive team realized that the dedicated MP3 player was an endangered species. That's because they knew: 1) the market would saturate, 2) they knew about their own plans for the iPhone, and 3) they knew that eventually, foreign ripoffs would drive the market prices into the cellar. I took this picture recently of a 1GB MP3 player for $10 at a local supermarket. Notice any similarities?
iPod ripoff. It even has the collar clip.
Now you know why the new iPod shuffle looks and operates the way it does.
Back to Mr. DeWitt's charts. Notice how, as the above items would predict, the iPod sales have steadily dropped except for spikes during the holiday quarter. Even so, the trend is downward.
Well, we know all this you say. Tim Cook and Peter Oppenheimer at recent earnings reports have reminded us that Apple knew this would happen, introduced the iPod touch, let it cannibalize sales and competed with itself before someone else could. So far so good.
What that doesn't tell us is where Apple is going next. The third chart shows how, in a relative* comparison, the contribution of the iPhone, and how it is quickly taking on more and more of the percentage of revenue. However, once again, no product can expand unrestrained. Apple isn't going to become "the iPhone Company" either. Instead, it will continue to leverage off its technologies to develop, as it has in the past, state of the art products that take the place of former products, just as the iPhone and iPod touch are supplanting the stand-alone MP3 player, the standard iPod.
The iPhone, too, Will Pass
In a previous Hidden Dimensions, I argued the merits of a tablet device and provided plenty of reference links to back up the argument. For now, I won't dwell on the features of the rumored iTablet. That'll come later. Instead it's first important to recognize what forces could slow down the iPhone bandwagon and lead to a successor product. For example:
- Competition. Other smartphone makers getting more clever. I won't say smarter. But they will tend to close the gap on the leading edge iPhone and drive prices where Apple doesn't want to go.
- Commodity prices. Apple has about $280 worth of parts in a phone for which they get paid about $500. As commodity prices go down, Apple can either cram more features into that relatively tiny device or, instead, leverage the available hardware into a next generation product that, again, leaves the competition behind. In other words, don't look for the iPhone of 2011 to have a Geiger counter, smoke detector and close-range radar. Instead, consumer needs and behavioral patterns will dictate the introduction of a new product category -- even if it does use the iPhone OS.
- Technology enabling. What is impractical now with 3G may become routine with 4G/LTE. For example, we've heard rumors of a Netflix app for the iPhone, but limited to Wi-Fi. Why? The mass watching movies in an iPhone app via 3G would crush the AT&T 3G data network. As a reminder, I just downloaded Mac OS X 10.5.8, 759 MB, in about 12 minutes. Five years ago, that would have been only a dream. Accordingly, one has to plan for products by anticipating what the infrastructure of the future will hold. That's why CEOs chat on the phone or meet for lunch and have drinks.
Gauging the Future
Arthur C. Clarke often referred to Amara's Law, quoted in the preamble above. The observation means that we get overly anxious and then pessimistic when short terms technology gains don't pan out. For example, we might hope that personal, petabyte drives will be upon us next year. Well, no chance. But when they do come along in, perhaps, eight to ten years, we'll be taken by surprise. Just like we're amazed today about 2 TB personal drives for US$150.
So any technology CEO has to strike a middle ground in this regard and also understand his customer needs, the changing profile and age of his customers, and the infrastructure available when the product ships.
Here's an example, I think, of a technology writer who is taking a short-sighted view of the tablet technology. As I said in that previous Hidden Dimensions, the Apple iTablet, if and when it comes out, won't be designed by or dictated by crusty tech writers who are immersed in Netbooks, Windows XP and Excel spreadsheets.
Instead, the next generation product by Apple will seamlessly leverage off the iPhone and cater to a new generation of young people with different views, habits and values. In other words, what ever Apple introduces, by definition, we won't see it coming. We tend to get wrapped up in the needs of the moment while Apple looks to the future.
What I do know is that Apple was in a funk in the 1990s. It struggled to make the Mac a success by a visionary, Steve Jobs, who also struggled to make a brilliant but flawed NeXT computer a success. In time, the company looked around and said: instead of beating a dead horse with Mac OS 9, it's time to use modern technology and open standards to attack and solve problems for consumers.
MP3 players in 2001 were crap. Apple did something about it. Smartphones in 2006 were crap. Apple did something about that. Today, the high definition TV market is a whirlwind of confusing cables, competing sources of content, old fashioned thinking and non-technical executives. It makes sense for Apple to move us all into the 21st century for movie and TV watching at some point. Is there a different, better, more appropriate technology market for Apple to make its stand than book reading and video watching?
Maybe it will and maybe it won't be a 10-inch screen personal video iPod super touch tablet Macbook, but we can be sure Apple is planning for the next leg of its product portfolio. And once again, it'll take our breath away and leave the competition gasping.
Next time: What might the specifications of this next generation product be?
* Note that even though the relative contribution of the Mac to overall revenue has gone down, the absolute sales, in numbers and revenue, have gone up during the iPhone era.