Apple to License OS X to other Hardware Vendors (a prediction)

I general, I find myself agreeing with John Dvorak, the maverick pundit at PC Magazine. This time, however, he's wrong.

In a recent column, he outlined the theory that Apple was going to migrate from OS X to Microsoft Windows.

He has it backwards, however. My prediction is that Apple will eventually get out of the Mac hardware business, or at the very least, revisit the practice of licensing the Mac OS to other hardware vendors.

Before I go any further, let me say I am not interested in taking sides in the Windows versus Mac holy wars that seem to inevitably erupt in any of these discussions. There is value in both platforms, and problems with both. Today, I am more interested in the various business models, rather than any question of technical superiority.

To begin with, Apple products have a great reputation for simply working together. Whether that reputation is deserved or not is beside the point. Apple tightly controls their compatibility requirements, tightly controls their software requirements, and by making their own desktops, knows exactly which pieces of hardware need to work.

Microsoft has done an incredible job of making Windows work on hundreds of thousands of different hardware configurations from vendors around the world that they cannot control. People may snicker, but I can walk into nearly any computer store and know that 90% or more of the products are likely to work with my Windows machine, whereas if I walk into an auto parts store, a significantly smaller percentage of components will work in my Subaru. The broad compatibility in the computer industry is amazing.

Last year, Apple announced it was going to launch computers based on the popular Intel architecture, and at Macworld 2006 in January, they actually announced their first machines based on the new Intel Core Duo platform, the latest iteration of Centrino Mobile Technology.

To back up for a moment, we now have Apple running its OS on the same Intel platform that Windows runs on. Apple developed a utility called Rosetta to allow older PowerPC (previous Apple CPU Architecture) applications to run on the new x86 Intel architecture.

When Apple introduced OS X several years ago, they made a key change. They based the core parts of the OS on Unix. At that point they had the key elements in the OS to support running it on multiple platforms.

So now, the OS can run on the Intel Platform. Most of the applications can run on the Intel platform. New hardware is based on the Intel platform.

Here's where Dvorak and I begin to disagree. He takes the stand that Apples is a hardware company with a great user interface. He suggests they will abandon their core software and just maintain the interface running on top of Windows.

To preserve the Mac's slick cachet, there is no reason an executive software
layer couldn't be fitted onto Windows to keep the Mac look and feel. Various
tweaks could even improve the OS itself. From the Mac to the iPod, it's the GUI
that makes Apple software distinctive. Apple popularized the modern GUI. Why not
specialize in it and leave the grunt work to Microsoft? It would help the bottom
line and put Apple on the fast track to real growth.

There are a couple problems with this.

First of all, I don't see Microsoft licensing Windows to Apple if Apple is going to hide the Windows interface with its own. Apple would probably have to go to the Department of Justice and claim antitrust issues, and it would take years to work its way through the courts.

Second, I don't see Steve Jobs "caving" into Microsoft after all these years and essentially saying that Apple isn't as good as Windows. Even though Apple no longer runs the "switch" ads on TV, they still maintain that messaging on their website. Whether abandoning the Unix core of the Mac OS it right or wrong from a technological point of view, I don't see it happening because of the egos involved.

There is another key point that is problematic for a switch from Mac OS to Windows on Apple computers. Dvorak says:

Apple has always said it was a hardware company, not a software company.
Now with the cash cow iPod line, it can afford to drop expensive OS development
and just make jazzy, high-margin Windows computers to finally get beyond
that five-percent market share and compete directly with Dell, HP, and the
stodgy Chinese makers.

Historically that may be true, but some interesting things have happened.

First I think it's a tad myopic to look at the iPod business as primarily a way to get Windows users to switch to Apple hardware. iPod hardware is successful in its own right, but the real money isn't in the hardware. It's in iTunes. And it's in the video content that Apple is now selling.

Content is nothing but ones and zeroes. After setting up the infrastructure, there are very few costs associated with selling this content. Sure, there are the royalties that get paid, but those costs are only incurred when there is a sale. The true profit in the iPod business will come from selling digital content today and in the future.

It's the same strategy Microsoft employs with the XBox 360, or Sony employs with the Playstation. It's not about selling the console. It's about selling the software and the content.

Going back even further, is the strategy Gillette employed in the 1800s to sell razors. Sell the razor cheap so you can sell blades down the road. Afterall, that's where the real money it.

Thus, my prediction (finally). Apple will release its OS to other manufacturers. One day we will see and HP, Sony, or Dell computers running OS X.

If the Apple OS works on the PC (Intel) platform, and the Apple applications work on the Intel platform, then why should Apple maintain it's own hardware platform?

Dvorak claims Apple can surpass its 5% market share and compete with Dell, HP, and others and produce high margin Windows machines. That doesn't make sense to me. There are very few high margin Windows machines, and that market isn't getting bigger.

Average selling prices have been dropping for years. Margins have been getting tighter. That isn't going change just because you can get a piece of Apple hardware with Windows in it.

Here's a secret most people may not realize about computer hardware. Computers and computer components in stores, warehouses, and shipping containers are like rotting vegetables sitting in the supermarket. Every day they are worth less.

If a computer maker or retailer doesn't sell it today, they get less money when they sell it tomorrow. If you don't build or order enough units, you lose a lot of opportunities. You can't simply order more of the same thing because product development cycles are too tight. They will arrive too late.

The bigger problem is when you overestimate demand, however. You build too many of a machine and it doesn't sell fast enough. Now you have to drop the price. But you still have to pay for your components. If you build too many, you are in big trouble, and can lose a ton of money.

The most successful PC companies have developed expertise in managing demand and inventory, and that is a very tough business.

So far, Apple has been fairly immune to that. If they underestimate demand on a product, they can adjust their own release calendars until the hardware sells. They really aren't competing with other PC makers.

Why would Apple want to focus primarily on the hardware business?

Becoming solely a software company can be a much more lucrative opportunity. If you release your OS to vendors, all you are physically sending them is a few DVDs. If you underestimate demand, you don't have shortages. You can sell an infinite number of licenses, which, really, are just permission to use the software. If you overestimate demand, you don't have millions of dollars in sunken hardware costs and unsold pallets of machines sitting on shelves.

Apple's expertise in in software and interface design. It's in making it easier for people to use their machines without thinking about how they work. By licensing the OS they can focus on this and free themselves from the hassle of managing physical equipment.

Apple can then limit their hardware sales to selling other vendors' computers through the Apple stores around the country. They already sell other vendors' hard drives, digital cameras, scanners, printers, and iPod accessories. Other manufacturers' computers and notebooks are just a small step.

Further, consider the other users that you know. Are people more likely to buy a Mac Powerbook that runs Windows XP, or are they more likely to buy a Sony notebook that runs Mac OS X?

The future for Apple is clear. Sell more ones and zeroes. Sell less physical stuff. Develop new software and interfaces. Let someone else deal with the challenges of hardware. Then you will see Mac OS market share grow.