viewpoints

Vdoi:10.1145/1831407.1831418 Michael A. Cusumano Technology Strategy and Management Platforms and Services: Understanding the Resurgence of Apple Combining new consumer devices and Internet platforms with online services and content is proving to be a successful strategy.

n May 27, 2010 the technol- In terms of platform leadership, and telephony. The latest transforma- ogy world experienced a Apple has become more like archri- tion began during 2001–2003 with the remarkable passing of the val Microsoft, but Apple remains a iPod and iTunes music service. Apple baton: Apple went beyond far more innovative and pioneering then gained speed from 2007 with the Microsoft to become the product company as Steve Jobs and iPhone and App Store. In 2010, the Oworld’s most valuable technology com- his team have successfully blended innovations continued with the iPad, pany in terms of stock market value. It computers with consumer electronics which can run existing iPhone ap- was also on that day the second most valuable U.S. company overall, behind Microsoft and Apple financial comparison, 2000–2009. Units: $million, % only Exxon Mobil.a Given Apple’s strug- gles with operating losses and a steep decline in market value in the early Microsoft Apple 2000s, this resurgence is extraordinary. Operating Year-End Operating Year-End Revenues Profits (%) Market Value Revenues Profits (%) Market Value It reflects not only a series of product 2009 $58,437 34.8% $267,323 $36,537 21.0% $190,980 innovations but also a shift in strategy that takes advantage of two important 2008 60,420 37.2 149,769 32,479 19.3 118,441 trends in the world of high technology: 2007 51,122 36.2 287,617 24,006 18.4 74,499 the rising importance and value of an 2006 44,282 37.2 251,464 19,315 12.7 45,717 industrywide platform company with 2005 39,788 36.6 233,927 13,931 11.8 29,435 a large and growing global ecosystem 2004 36,835 24.5 256,094 8,279 3.9 8,336 for complementary innovation (versus 2003 32,187 29.7 252,132 6,207 (loss) 4,480 a standalone product company that has 2002 28,365 29.2 215,553* 5,742 0.3 4,926 to do the lion’s share of innovation on 2001 25,296 46.3 258,033* 5,363 (loss) 7,924 its own); and the rising importance and value of services, especially auto- 2000 22,956 47.9 302,326* 7,983 6.5 5,384 mated services that deliver the digital 1995 5,937 35.3 34,330* 11,062 6.2 4,481 content and software applications that Notes: Fiscal year data. Market value is for calendar year, except when marked with asterisk, then make these hardware products and fiscal year, and except for 2009, when market value is as of February 12, 2010. platforms so valuable to users. Source: M. Cusumano, Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Unpredictable World (Oxford University Press, 2010), p. 38. Derived from company Form 10-K a M. Helft and A. Vance, “Apple is No. 1 in Tech, annual reports. Overtaking Microsoft,” New York Times, May 27, 2010, p. B1.

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plications as well as elegantly display also has criticized Apple’s program- famously with the Macintosh, intro- digital content, including books, mag- ming rules for the iPhone and iPad that duced in 1984, but continued this azines, and video.b prohibit application developers from strategy with the initial versions of using Google’s advertising technolo- the iPod, iTunes, the iPhone, and the Access, Control, gy.c In my terminology, these kinds of App Store. Nevertheless, the Apple and the User Experience restrictions make Apple‘s platforms ecosystems are now as vibrant as any We have seen Apple rise even though neither fully open (such as Linux) nor in high technology. Not only are there its products and services remain under fully closed (such as a propriety system thousands of applications and acces- tight corporate control compared to owned and dominated by one compa- sories available for the iPod made by more “open” platforms championed ny), but rather “closed, but not closed,” a wide variety of companies. There by Microsoft and Intel (the Win-Tel OS or perhaps “open, but not open.” That were also some 225,000 applications and PC device), the Linux community is, the platforms are based on proprie- for the iPhone as of mid-2010, many (Linux OS), Nokia and the Symbian al- tary technology, and Apple controls the of which work on the iPod and iPad liance (mobile OS and cellphones), user experience as well as what appli- as well as the Macintosh. Apple also and Google (Android, Chrome, and cations or content or service contracts was receiving some 15,000 submis- the Open Handset Alliance for mo- can operate on its devices. At the same sions for iPhone applications each bile applications as well as the Google time, though, Apple has been gradually week in 30 languages and approving OpenSocial APIs for social networking loosening up access for outside appli- about 95% within seven days.d By con- applications). For example, Apple has cation developers and content provid- trast, Google’s Android community barred some applications from run- ers, especially during 2009–2010. had only built approximately 50,000 ning on the iPhone, including Google In an earlier column (‘The Puzzle applications as of mid-2010. To be Voice. It does not permit its devices of Apple,” September 2008), I admit- sure, Apple and Google both trail by to run the most common technology ted to being frustrated by Apple’s far the millions of applications built for handling video on the Internet— historical reluctance to open up the for Microsoft Windows since the early Adobe Flash. Legal use of the iPhone programming interfaces to its new 1990s. But most computing devices remains limited to official Apple part- products and provide easier access are now mobile phones, and that is ord f ners such as AT&T in the U.S. Google to its services or to license its supe- where the action lies in software ap- rad B rior software operating system. It plications development. pursued this “closed” approach most b This article is based on Chapter 1 of M. Cu- sumano, Staying Power: Six Enduring Principles d G. Hora, “95% iPhone Apps Approved in for Managing Strategy and Innovation in an Un- c S. Morrison and I. Sherr, “Google Blasts Apple 7 Days,” Cooltechzone.com, June 7, 2010;

ustration by stuart certain World (Oxford University Press, 2010), over iPhone Ad Changes,” Wall Street Journal, http://www.cooltechzone.com/2010/06/07/95-

Ill 30–31, 34–44. June 9, 2010; http://online.wsj.com/ iphone-apps-approved-in-7-days/

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Synergies and Network Effects to force semi-open or semi-closed plat- It is possible that Steve Jobs planned forms to “open up” so that it can get un- all along to open up the iPod and In the long run, restricted access to information on user iPhone programming interfaces and the most valuable behavior through searches and thereby allow more open use of the iPhone be- sell more and better targeted ads. Apple yond a few select partners. The reality part of the Apple is also clashing with Adobe, refusing is that Apple finally seems to have fig- franchise might to support the Flash technology on the ured out how to create synergies and iPhone or the iPad, even though Flash powerful network effects across its end up being its is used for the vast majority of videos products and complementary services online services and advertisements on the Web. The (see my earlier column “The Evolution U.S. Department of Justice and the Fed- of Platform Thinking,” January 2010). and content eral Trade Commission are reportedly The iPod, iPhone, and iPad devices, platforms (iTunes reviewing Apple’s restrictive policies to as well as the iTunes service, all work see if they violate antitrust laws.e Apple particularly well with the Macintosh and the App store). has near-monopoly shares (approxi- computer, and have some interoper- mately 70% or so of the market) for both ability with Windows. And providing digital devices (iPod) and digital con- its own essential complements—like tent services (iTunes). But, for the mo- Microsoft has always done for DOS ment, users continue flocking to Apple and Windows—has become critical to products because of their elegance and Apple’s success. Apple’s products, de- and then mobile phones, Apple’s rev- the superior user experience. spite their elegant designs and unique enues have risen several times faster Apple is still less profitable than Mi- user interfaces, are not very valuable than the overall PC industry. Its sales crosoft because hardware devices are without external digital content such jumped from $6.2 billion in 2003, with more expensive to replicate than soft- as music and video files and a variety an operating loss, to over $36 billion ware products. Apple also has dropped of applications and accessories. Apple in 2009, with a 21% operating profit its prices to counter copycat smart- cleverly found a way to provide the key margin. In addition, Macintosh com- phone products from Nokia, Samsung, complementary platforms itself—the puters in 2009 made up only 38% of HTC, and other firms. In the long run, iTunes Store and the Apple App Store, Apple’s revenues, down from 72% in the most valuable part of the Apple and now an iBooks store. Moreover, 2003. The iPod accounted for 22% of franchise might end up being its online these are automated services, with low 2009 revenues, music products 11%, services and content platforms (iTunes costs and high potential profit mar- and the iPhone approximately 18%. and App Store). The hardware products gins. Apple is being smart and encour- Software and services as well as hard- may simply become platforms to drive aging the ecosystem development by ware peripherals generated the other revenue from selling or aggregating sharing most (about 70%) of these rev- 12% of sales. It is striking how Apple’s high-margin automated digital prod- enues with the content owners and ap- market value remained less than its ucts. Apple’s acquisition in December plication developers. annual revenues for so many years 2009 of Lala, the streaming Web mu- Apple’s financial break with its past while Microsoft’s market value was sic service, also provides “cloud-like” is truly astounding (see the table on 8 to 13 times revenues. But here too, technology that could enable Apple the preceding page of this column). In by 2005, the tide had turned. Apple’s customers to store their music, photos, 1995, Apple was nearly twice the size of value has continued to rise, reaching or videos and listen to or view their con- Microsoft in annual revenues (approxi- five times revenues by the end of 2009 tent from different devices, anywhere mately $11 billion to $6 billion) but its and then finally surpassing Microsoft, and anytime. In short, rather than in a market valuation was only about 40% of whose value has been flat or dropping Microsoft world, we are clearly now liv- revenues. By contrast Microsoft’s value for a decade due to commoditization ing much more in a world defined by was nearly six times revenues—reflecting of PC hardware and software and its Apple as well as Google, Facebook, and Microsoft’s greater growth prospects as inability to move much beyond the PC. other firms that have successfully mar- well as operating profit margins that In particular, Microsoft’s attempts to ried new consumer devices and Internet were also about six times Apple’s (35% emphasize tablet computers as well platforms with a variety of online servic- versus 6%). Indeed, Apple shrunk in as copy the iPod with the Zune digital es and content. subsequent years whereas Microsoft’s media player and compete in smart- sales exploded as Windows 95 became phones with Windows devices have e J. Kosman, “An antitrust app: Apple may be in the basis for a new generation of desk- failed miserably. the eye of a regulatory storm,” New York Post, May 3, 2010; http://www.nypost.com/ top PCs as well as Internet-enabled con- sumer and enterprise products. Current Situation When iPod sales began to surge in Not everything is completely smooth for Michael A. Cusumano ([email protected]) is a professor at the MIT Sloan School of Management and 2005, Apple’s revenues, profits, and Apple, however. The company has been School of Engineering and author of Staying Power: Six Enduring Principles for Managing Strategy and Innovation valuation also began to surge. In fact, clashing with Google and its rival mo- in an Uncertain World (Oxford University Press, 2010). by moving beyond the computer busi- bile OS (Android). Google is the cham- ness and into consumer electronics pion of open systems and always tries Copyright held by author.v

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