Hidden Dimensions - A Review of Apple's Strategic Weaknesses

December 8th, 2006

The collective Apple community has been so intoxicated by the iPod, the success of the iTunes Store, MacBook sales, and excellent Mac OS X security that no one is reflecting on the areas where Apple is vulnerable. Perhaps it's unpleasant to think about, but neither do we want to live in a state of denial. So here are some areas where I think Apple should pay more attention.

1. High Performance Computing. HPC is hard work. It requires infrastructure, subject matter experts inside the company who can actually devote 100% of their waking hours to HPC, and it requires deep partnerships with HPC customers. When Apple realized that it would be perhaps a year from the time they announced the Intel transition until Xeon-based Xserves would ship, they pulled back. The best thing Apple has going right now is workgroup computation for bioinformatics and scientific visualization.

Apple could clean up in this area in slightly larger clusters, say 64 to 256 nodes if they put their mind to it. They're no longer constrained by IBM, and customers love what Apple brings to the table in terms of quality hardware and integration with the OS. Bottom line: there is money to be made.

2. Enterprise. Despite an excellent server platform in Xserve and Mac OS X Server OS, Apple doesn't have the infrastructure internally, the business model, or the business software to make a serious assault on the general enterprise market, not because the products are poor but because of the image Apple presents.

For example, does a corporate CEO really want to open up his system preferences and be greeted by an option called "Parental Controls"?

Here's another example. In 2005, Apple stopped providing Internet Cafes for professional conferences. The argument was that seeing Macs lined up in this fashion dilutes the brand. What Apple corporate missed out on, and what the field sales people understood, was that relationships with professional organizations are greased by these Internet Cafes. While the Mac is the best computer on the planet and the brand is strong, there are Apple senior executives who don't get the importance of enduring business relationships. There has to come a point where arrogance and branding give way to actually selling computers in the enterprise.

Enterprise customers just can't get it out of their mind that this is a company without serious business software solutions that is also focused on consumer electronics. As a result, Apple is relegated to and remains satisfied to engage some niche areas like small business, bioinformatics, and audio/video production. But because they're not on the offensive thanks to longstanding road blocks by the competition and Apple's own image, companies that covet those particular markets have a free hand to attack Apple while protecting their remaining business segments.

As Apple becomes more and more distracted by the entertainment side of computers, they risk losing what credibility they have in the enterprise, business and government, where customers desperately want to act like very sober, grown up professionals. But I don't expect anything to change.

3. Music industry. I am more and more concerned about the things I am reading about the music industry being annoyed with Apple. Yes, Apple saved the labels' tushies. Yes, Apple ignited the portable music revolution. Yes, the music labels couldn't have developed their own iTunes Store if C.S. Lewis returned with a legion of angels.

Apple has been enjoying this success and believes that inspiration, perspiration, and innovation will allow them to maintain the iPod mania for a long time. But it's also, in my view, distracting the company from the idea that the time for gloating is over, and it's time to start working with the other players in the industry to further everyone's goals. Otherwise, everyone's goal will quickly become the eradication of Apple.

As I mentioned previously in this column, the Zune is not a device designed to stand on its own merits. Instead, it's a strategic platform that gives Microsoft an entry point into the industry and a ticket to raise havoc with business deals that only Microsoft knows how to do. After all, all the other players want to do is make money selling music.

4. Entertainment industry's plans. There is great confusion but also great ambition in the video entertainment industry thanks to all the new methods of delivery. The Hollywood studios have carefully studied where the music industry went wrong, and they're learning fast. The industry as a whole is working together, and Apple isn't exactly on their Christmas card list.

All factions in the entertainment industry, the content providers and the carriers, are scurrying to make sure that Apple doesn't dominate the movie business the way they did the music business. So far, Apple hasn't made any headway, and it's only the coziness with Robert Iger at Disney that has allowed Apple to make it's first foray into selling movies. But Disney hasn't been standing still either, having overseen an agreement between ABC and Comcast to deliver various video content on demand.

Motorola is working very closely with the cable companies, Comcast, Time-Warner, Cox, et al, to deliver hardware and software that will keep their customers glued to the TV set, not the computer, and keep that cable bill cash flow ongoing.

I suspect that it has been this massive effort by all concerned, the studios, the networks, and the set-top-box manufacturers to make sure their customers have wide choice, workable DRM, and that all of them prosper in this new century. That could well be the reason behind the endless delay of the so-called "true-video" iPod with a full 100 mm (diagonal) screen. Apple can't invest a lot of effort in a portable video platform until they've secured broad agreements for content, and those seem to be hard to come by lately.

5. iPhone stress and meddling. The cell phone companies and the carriers aren't building the greatest, easiest to use, most secure phones one could conceive of, but in aggregate, Gartner says they're on pace to sell one billion cell phones per year by 2009. Verizon, from the TV ads I've seen, has learned some lessons from Apple about how to advertise their LG Chocolate phone.

Meanwhile, Apple is trying to hit a home run on it's first try with a cell phone, and it's causing a delay. Apple has a conundrum. The iPhone will have to be both the Apple of Steve's eye -- can you imagine how many engineering changes must have been made in 2006? -- and be a commercial success because Apple hates losing money on anything. And hates shipping products that people don't swoon over.

Because Americans have so much experience with cell phones, the iPhone's design trade-offs and potential risk has probably caused a great deal of distraction within Apple. Suddenly Apple is struggling to enter the movie and cell phone business simultaneously, both are critical to Apple's future and all this is likely taking up all of the Executive Team's time.

What Does it All Mean?

The distractions I've cited can't be good for Mac Pro, Xserve, Xserve RAID, Mac OS X "Leopard", the developer program, education initiatives, science, or the the enterprise. I will, however, compliment Apple on the recognition that with the success of the iPod, the Get A Mac ads must run simultaneously in order to shore up that side of the business.

Even with that, Apple runs too lean to absorb too many agendas. The structure of the company and the centralized authority must be breaking at the seams. Are they in denial? It's ironic that IBM is the source of one of the best TV commercials ever in this regard. An executive is telling his psychiatrist about a dream. He's being chased down a hallway by ghostly creatures. They're his customers. The creatures demand "everything now!" The executive begs, "what does it mean?"

The psychiatrist tells the executive, "You're too slow. You can't respond. And you're in denial."

The executive blurts "No I'm not!"

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.

Hidden Dimensions Archives.