BusinessWeek: Apple Enters 2006 at a Crossroads

BusinessWeekis Peter Burrows on Monday published a pair of stories that look at Appleis prospects for 2006 and beyond. The first, titled "More Apple Miracles in 2006?" examines the ways in which the company can grow this year, given Wall Streetis expectations for more dramatic revenue gains. The other is a Q&A with Clayton Christensen, author of Seeing Whatis Next: Using Theories of Innovation to Predict Industry Change and a non-believer in the rosy outlooks bandied about by many financial analysts.

In his first article, Mr. Burrows noted that Appleis share value more than doubled in 2005, and many analysts, such as Joel Wagonfeld of First Albany, see the company adding another US$5 billion in revenue this year. "Thatis almost as much as its total sales in 1998," Mr. Burrows observed.

So how will it do that? For one thing, Apple is projected to sell 35 million to 40 million iPods in 2006, and the overall MP3 player market will reach 150 million to 200 million units annually by 2011. "If they can maintain anything close to their current market share, they can maintain extraordinary growth for the next two to three years without having to broaden into new markets," David Yoffie of the Harvard Business School said.

Many observers expect the company to expand its offerings, however, and Mr. Burrows pointed out that Appleis purchase of the domain name could point to the release of its own iTunes phone. Tech consultant Geoff Moore told the columnist that "Apple is well positioned to ride a mega-trend that will play out over the next decade: the consumerization of yesterdayis technology-focused digital markets."

Mr. Moore added: "As the sector formerly known as tech becomes consumer-driven, thatis Appleis play. [Jobs] doesnit have to create markets. He has to consumerize them." However, the big question there, Moore pointed out, is whether or not Apple can maintain a high level of product quality while branching into new areas. And with Mr. Jobs closely overseeing everything the company does, Mr. Moore said: "That model doesnit scale. So as an investment, Apple is a risk not because it will run out of new worlds to conquer, but because it may run out of occupying armies."

The Fork in the Road

One market where Apple could be poised for a stumble is digital music. Mr. Burrows noted that "some pundits question its go-it-alone approach to digital music," which Mr. Christensen compared to the 1980s OS war with Microsoft during his Q&A with the columnist.

Mr. Christensen explained: "During the early stages of an industry, when the functionality and reliability of a product isnit yet adequate to meet customeris needs, a proprietary solution is almost always the right solution -- because it allows you to knit all the pieces together in an optimized way. But once the technology matures and becomes good enough, industry standards emerge. That leads to the standardization of interfaces, which lets companies specialize on pieces of the overall system, and the product becomes modular."

That process is what led to standardization on Windows in the computer market, "and the same thing will happen in the iPod world as well," the author said. He added that "Apple may think the proprietary iPod is their competitive advantage, but itis temporary. In the future, what will matter will be the software inside that lets users find exactly the kind of music they want to listen to, when and where they want to, with minimal effort."

While Mr. Christensen acknowledged that Apple still has the opportunity to learn the lesson from the OS war and apply it to the MP3 player battle, the company is now at "a fork in the road ... If they donit open up the architecture and begin trying to be the iTunes inside all MP3 players, theyire going to have to keep coming up with the next cool thing," he said.

As for Appleis recent market share gains in the computer business, Mr. Christensen dismissed them by saying that he thinks the increase will simply "allow them to survive for a bit longer. I think most people are satisfied with their current PCs (using Windows and based on Intel chips) and find that the performance of their systems is good enough. Sure, there are people at the bleeding edge who want to do more. But a good Dell PC can be had for $500, and it has performance thatis well beyond what most of us need."