2006-02-24

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.

7 comments:

sdatexas said...

I agree that Apple has been primarily a software company for some time, however, they have learned two valuable lessons that will keep them in the hardware business. One is how to reach their market. when they finally gave up on the CompUSA's and Best Buys to sell their computers and began to open their own store, they began to connect with both their current customers and future ones. With no spiffed salesteenager to drag the customer to the latest overstocked PC, consumers can really get the Apple computing experience in an Apple Store.

Second, is content. Apple has provided a plethora of great applications with it's computers for years. The current iLife ones are just the latest and greatest. That keeps the value of their computers high and their margins among the highest in the electronics industry. The iTunes store and the soon to be iFlix version are on this same wavelength, but expanded to include PC users. The iPod is a content mover. Great product for it's time, but it will pass. With VPN and the right phone/network, you will be able to access your music, pictures, videos, movies or files remotely via the "network" without actually carrying them around.

That brings us back to Apple. Software company or hardware company. I say both. It's a moving target and to make the most from every stream of income they will need to control their own destiny. That means hardware. It also means software. iTunes, iFlix and iPods will go both Mac and PC. The home computer/server will remain Apple with and exclusive OS XI.

IMHO

Jon Verda said...

"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?"

Neither.

That you don't understand this is the point of pain for you. People buy Apple products for precisely the integration of HW and SW, not the speration of the two. For proof, look no further than the iPod.

Peter said...

I'm still not convinced of Apple licensing Mac OS X to Sony, Dell, etc.

Let's start with some financial numbers. Apple had revenues of 1.724 billion dollars from selling 1,254,000 Macintoshes. But Apple's margins are generally over 25%. What happens if we apply that 25% number to revenue from Macs? So in theory, Apple made $431 million dollars after paying for the boxes. So if we apply that, Apple would have to sell 4.3 million copies of Mac OS X for Intel per quarter to make the same amount of money they made selling computers. Or in other words, they'd have to sell about 3.5 times as many copies of Mac OS X (at $100 per copy) as they sold computers.

The obvious question is, would they?

First, PC resellers would love it if Apple would do this. Not because of the superiority of Mac OS X or any of that. They'd like Apple to do it because, if it was successful, it would give PC Resellers a great big stick to use against Microsoft. "Hey, cut us a deal!" So Microsoft drops their price to $75 per unit. Apple follows suit--remember, they have to do volume to make the big bucks. So Microsoft goes lower. And it's a race to the bottom.

Microsoft has $43 billion in cash reserves. Apple has $8 billion. Guess which one would lose that race to the bottom? Heck, Microsoft could give away Windows XP after Vista came out, essentially killing off Apple in low-end (where the volume is). Apple would have to shrink pretty dramatically, and I doubt that the savings from dropping the hardware end of the company would make up for it.

Anonymous said...

First off, please stop taking John Dvorak's Apple columns seriously. He makes outrageous predictions just to up his hit count. Second, you should have done more research on Apple before such a lengthy colum. An example: Apple makes very little profit on music and video sales while they make over 20% margins on iPods. Check their latest quarter's figures!
Microsoft has the corporate market, period. Few companies are going to risk changing their computer environment due to the training costs and IT resistance. Apple may sell a few boxes to specialized departments along with some servers due to the legacy of Macs for those employees. Software for PCs would involve enormous support costs just with driver and 3rd party software issues. The vast majority of such sales would be to the same customers who would buy Mac hardware today. It's a big psychological jump for the novice PC user to switch. That would be the same with the OS, only the cost would be much less.
Apple's current education market would likely remain unchanged with much less profit.
Apple could use a support and fabrication partner for corporate markets. HP would be a likely candidate. Unfortunately, control of the end users of those hardware sales would likely be problematic. Apple doesn't have, nor do they wish to have, the culture for corporate support. They will likely remain a "personal" computer company along with digital devices serving other markets.

sdatexas said...

Anon,

Are you kidding? Apple already has enormous inpact in the corporate market, it's just not in the IT department. With Steve-o getting the job done at Pixar and Apple, he's now headed for Disney. It doen't get much more corporate than that.

Apple has a plan for corporate America (and the world), it will hinge on the Intel/Mac package. It's called leadership. Apple has often led the computer industry and will set the pace again with an ever increasing palette of products, software and partnerships that will entice even the biggest corporate holdouts to consider Mac's in their mix of solutions. Business people are tired of the effort it takes to keep their PC's and networks running and reliable. Apple is the only serious contender as an option. With the Intel/Mac and the software to go with it, their will be very compelling reasons to switch. Reliability, compatability, uptime and productivity will win new users in the coming years.

Anonymous said...

Reliability, compatability, uptime and productivity will win new users in the coming years.

Precisely. Which is why it would be absolutely suicidal for Apple to attempt to support the bargain-basement hardware that forms the bulk of the PC market.

sdatexas said...

Anon,

I agree. My reference to the Intel/Mac is Apple all the way. No third party licenses at all. They have the ball and need go with a fast break offense while they are hot. The Mhz issue is gone, support for periphial equipment should increase, MS should offer an upgrade of VPC for the Intel/Mac that will be faster than ever and Apple's design and user experience will win more and more customers.

BTW, I think Apple has only just begun to exploit some of the most interesting features of the Unix OS base. One is simultaneous multi-user capacity. Using VPN, you can run programs on another machine from anywhere in the world that has internet access and it's built into the Mac OS! Another area Apple has yet to move in is an upgrade in the Airport speed. This should happen with the next iteneration of the wireless standard (802.11N, I believe). This will give rise to wireless connections between computer and monitor, stereo, TV, iPod, etc. I would also look for Apple to push a new professional verical market like they have Video, music and photography. What would it be? Video phone is my bet.

IMHO