Apple might be one of the most dominant players in the entertainment and technology worlds, but to climb to that pinnacle, it adopted a business model that would make most strategists wince.
Rather than choosing one sector to conquer, the house that Steve Jobs built opted to fight a multi-front war. What’s amazing is that Apple has won so often on so many battlegrounds.
Apple may not exactly be looking to take over the world — but Jobs loves to talk about changing it. Certainly he and his company have expansionist designs on the world’s leisure time.
The recording industry is already firmly reliant on Apple, as it has a 69% share of online music sales and a 27% share of the overall music space, greater than the combined shares of Walmart and Best Buy.
It’s not stopping there. The vidgame industry is nervously looking over its collective shoulder as players abandon traditional game platforms and turn to iDevices. TV and movie content owners are feeling increased pressure to work with Apple. Book, magazine and newspaper publishers are being drawn into the company’s gravitational pull. And Apple’s bombshell product announcements have forced the biggest consumer electronics companies to alter or cancel products before they’re launched to remain competitive.
That’s a stunning reversal from where Apple found itself 10 years ago, when the company was struggling to return to profitability and revive its reputation — and Jobs had just committed to his second tour as CEO.
Today, Apple is the poster child for the digital generation.
“Apple almost cratered totally, but the last 10 years have been phenomenal,” said Gary Shapiro, president and CEO of the Consumer Electronics Assn. “They have redefined categories and they have created new categories. … You cannot point to another company in the world that has higher success at the strategic or execution level.”
Apple vs. TV
With music firmly in its pocket, Apple is now turning its sights on video content. Apple TV, while hardly a market leader at this point, hopes to capitalize on the over-the-top movement and has persuaded ABC, the BBC and Fox that a la carte programming — specifically, 99¢ rentals of TV shows — is a model that can work.
Not all content providers are on board, though. The heads of Time Warner and NBC have categorically stated that such a low price point devalues their content and could jeopardize their companies’ business models.
The disagreement between the congloms centers on a few points. First, television (and film) content makers saw how quickly Apple became a force in the music industry and don’t want to cede that level of control.
“I think a lot of record label executives were blindsided by how much power Apple came to wield,” said Scott Steinberg, CEO and lead analyst at TechSavvy Global. “Network content providers tend to be hopeful, but cagey about how to proceed, because they’ve gotten a taste of how quickly Apple can use a bargaining chip to its advantage.”
And while those content providers are eager to monetize catalog content, they haven’t yet figured out how best to do that and still safeguard their relationships with broadcasters and cable providers.
“Scripted content — whether it’s feature films or series — cannot be profitable based on a single window,” said John Landgraf, president and general manager of FX at a recent Variety Entertainment and Technology Summit. “They need to sell through multiple windows. I think the key to the current flux in the business model is figuring out a windowing strategy that allows some degree of exclusivity for those of us who actually create the content.”
When it comes to gaming, Apple has quite literally stumbled into its success and is only now beginning to realize the potential of interactive entertainment.
Since 2007, Apple has sold 100 million iPhones, iPod Touches and iPads. None of those devices was designed as a gaming platform, but the app explosion opened up the world of mobile gaming. These days, Jobs refers to the iPod Touch as “the No. 1 portable game player in the world” adding that the device “outsells Nintendo and Sony’s portable game players combined.”
Actually, that’s creative math. It conveniently ignores older systems, such as the Game Boy Advance, that are still in use. And while entertainment and game apps have surpassed 1.5 billion downloads on the iPod Touch alone, the raw dollar numbers don’t come close to touching Nintendo’s income from DS games.
Neither Nintendo nor Sony is willing to cede the fight. In March, Nintendo will launch the 3DS, a portable gaming system that features stereoscopic 3D images without the need for special glasses. Also next year, Sony is expected to announced the PSP2, its next generation handheld gaming system.
The window for single-function devices could be closing, though — something Apple is counting on in this fight. It is a hardware-focused company that eschews the razor-and-razor-blade model that’s typical in the gaming industry, where the hardware is a loss leader for sales of the game software.
Apple doesn’t rely on software or other forms of content to make its financials. That’s why it pushes for such low prices with content owners. Those low prices draw in consumers like moths to a flame, and they then are happy to buy Apple’s high-priced, high-margin hardware. That has helped Apple accrue more than $51 billion in cash reserves.
Apple vs. Amazon
The launch of the iPad brought Apple into the fight for the future of print content. Magazine and newspaper editors have so far struggled to find the best use for the device, but many recognize the shift to digital media is inevitable and are figuring out how to adapt. The shining example for many has been Wired, which has shot video specifically for the iPad version of its magazine and offers exclusive bonus content each month.
With iBooks, the company was hoping to assume a dominant position in the eReader space but it hasn’t managed to make a notable dent in Amazon’s position so far. In fact, it has helped secure Amazon’s dominance since there’s a downloadable Kindle app for all iDevices.
Today, Amazon holds 76% of the ebook market. Kindle sales in the past month have already topped the entire fourth quarter of 2009.
But Apple is patient.
A study of the eReader market from Cowen and Co. found nearly 60% of digital book readers on iPad used iBooks. And while Apple only holds a 5% share of the market now, that’s expected to more than triple by 2015, while Amazon’s share slides to 51%.
The final battle in this arena won’t be fought for a long time.
Apple vs. the world
Given its successes, it’s easy to view Apple as a tech juggernaut, but there are forces that could reverse its fortunes.
From an investor standpoint, the company is tied very closely to Jobs, whose health problems have been well documented.
His departure, however and whenever it comes, will be an enormous psychological hurdle for investors and some employees to overcome.
Apple also risks attracting unwelcome attention from regulators. While Jobs tends to run his company as if it were still a pugnacious underdog, Apple’s sheer size and market dominance could attract scrutiny from the U.S. and other governments, who might want to ensure it doesn’t become too powerful. That could prove a distraction, especially for a company that relies so heavily on the guiding vision of its CEO.
Ultimately, though, Apple could become a victim of its own success. With so many hit products over the past 10 years and the strength of Jobs’ so-called “reality distortion field,” onlookers wonder how long the streak can last.
“You can’t own the world — and even if you could, the world is limiting,” Shapiro said. “Steve Jobs, every year, seems to pull a new rabbit out of the hat and I don’t know how many rabbits are left in that hat.”