Apple Sets Off War of Tech Giants

05/07/2010 8:56 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

By controlling its products from OS to storefront, Apple has built a model its competitors are scrambling to replicate. Each has parts, but none has the total package yet.

It's war. All-out war. Savage-your-former-allies war. To-the-victor-go-the-spoils war. To-the-death war.

It's Google (Nasdaq: GOOG) against Hewlett-Packard (HPQ) against Microsoft (Nasdaq: MSFT) against Dell (Nasdaq: DELL) against Lenovo (OTC: LNVGY) against HTC against Amazon.com (Nasdaq: AMZN) and, of course, everybody against Apple (Nasdaq: AAPL).

Apple hasn't left competitors any choice. Its iPod, iPhone, and iPad have completely disrupted the Windows-Intel model that once ruled the computer world. The disruption has been so thorough that Apple has replaced the old model with its own. Now companies must compete on Apple's terms or become irrelevant.

Need some proof? On April 28, Hewlett-Packard announced it would buy wireless phone pioneer Palm (Nasdaq: PALM) for $1.2 billion—a premium of 23% over the share price. For its money, Hewlett-Packard would get a phone maker headed to bankruptcy with a revamped product line that no one is buying—and what is, by all accounts, a really good operating system, webOS.

For all intents and purposes, HP, a longtime partner with Microsoft that had for years built PCs, laptops, and notebooks on Microsoft's Windows operating system and that was set to roll out an iPad-killer tablet also built on Microsoft's operating system, spent that $1.2 billion to buy an operating system.

That's how much Apple has changed the terms of battle. To stand any chance of surviving, let alone winning, a computer company can't just be a repackager of commodity chips and software anymore. (I'm still not a big fan of Apple's PC strategy, by the way. I think the company could be grabbing more market share in that sector than it is. For more, see my blog post "Has Apple blown it?")

A company now must own its own operating system and build its own hardware, but not to make computers easy to use. Instead, it must make innovative consumer devices that get upgraded with new models as if they rode (and created) fashion trends. The company must then own a retail channel that sends consumers back again and again to its products.

Nobody in the sector is very well equipped to compete with Apple on these terms. Putting together hardware and software teams that would rank in the industry's top ten at a single company isn't exactly easy. Apple has been working in this direction for a decade. Further, tech companies aren't accustomed to running retail stores of either the glass and stainless steel or virtual type.

But Hewlett-Packard's planned purchase of Palm, Google's attempt to make its own cell phones, Microsoft's perhaps mythical tablet and just about everybody's attempt to build an applications store are all testimony to the industry-wide conviction that the old model had reached a dead end and that Apple's iPod and iPhone finally killed it.

In the old model, device makers bought chips from Intel (Nasdaq: INTC) or one its competitors, licensed an operating system from Microsoft and engineered them into a PC, phone, or whatever. The model had its advantages: Intel's huge scale and manufacturing prowess kept driving the price of chips down and the power of chips up. Company engineers building the devices and consumers using them had a uniform operating system to learn.

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From Irrelevant to Unstoppable

But the model has a flaw that Apple has turned into a huge vulnerability. Because engineers at device makers were working with purchased processors and licensed operating systems from two separate and independent companies, no company ever got a processor or operating system precisely optimized for the device it was building. PCs, phones, and other devices worked OK, but increasingly, they worked like what they were: Commodity devices built out of commodity parts.

They even looked like commodities. In a world colored gray, black was considered a style breakthrough.

Apple's PCs were different. They ran Apple's own operating system. They were in many ways easier to use. (I'm speaking from personal and observed experience. I own both Apple and Microsoft-based machines.) Apple's even came in colors and occasionally broke a rule or two (like putting the guts of the computer behind the screen instead of in a separate box).

But with Apple's market share shrinking toward 4% and threatening to go lower, nobody in the PC industry cared what it did.

And then came the iPod. Introduced in October 2001, the device had racked up unit sales of 100 million by April 2007. By September 2009, the figure was up to 225 million. And Apple dominates the portable player market. Nine years after the iPod was introduced, it held 74% of the market for MP3 players.

And it's not as if no one else has tried to take a piece of that market. Microsoft's Zune MP3 player hit the market in 2006, for example. But by September 2009, Microsoft had just a little more than 1% of the MP3 player market. Flash memory maker SanDisk (Nasdaq: SNDK) was Apple's nearest competitor, with 7.2% of the market.

Proving that was no fluke, Apple then did the same thing with the iPhone, launched in June 2007. By September 2008, the company had sold 13 million units and, by revenue, it was the third-largest mobile phone maker in the world, behind only Nokia (NYSE: NOK) and Samsung Electronics. The total is now up to 45 million iPhones sold since the product's launch. Last month, Apple beat out longtime champ Motorola (NYSE: MOT) to become the biggest US maker of mobile phones. (To keep these sales numbers in perspective, Nokia, based in Finland, shipped 127 million phones in just the fourth quarterof 2009.)

It's not only the number of iPhones sold that sent a shiver through the competition. It's Apple's extraordinary ability to seize a market, create a high-margin business, and then keep the bulk of the market share that it originally claimed. Technology products aren't supposed to work like that. They're supposed to become commodities quickly, as competitors attracted by high margins jump in and release competitive products that eat up those margins. (For a global perspective on why that is, in general, happening faster than ever, see the January 18 edition of Jubak's Journal.)

And then there's the way Apple has been able to integrate hardware, software, and a retail strategy, the App Store, into products that create an immense, perhaps insurmountable, first-mover advantage.

For example, in the hand-held game market, there are 607 games available for the portable version of Sony's (NYSE: SNE) PlayStation, 3,680 games available for the Nintendo DS, and 21,178 games available through Apple's Apps Store for playing on the iPod Touch, the iPhone, and now the iPad. Developers want to write for Apple's products because that's where the consumers are. And each new app for the iPod, iPhone, or iPad becomes another reason for consumers to prefer those products over the competition. And for developers to write new software.
In the current market, application developers write code for the iPhone, then Android, then BlackBerry, Windows Mobile, and Nokia's Symbian. That pecking order is one reason Apple has 200,000 apps in its App Store.

It's not that Apple's competitors don't know that they have to figure out a new strategy for competing in the marketplace as Apple has redesigned it. It's just extremely difficult.

Nokia, for example, has its own operating system and has launched music and apps stores, but the company just can't get the magic right in hardware. Its smartphone designs over the past two years have been late to market and just not very exciting.

Google has a mobile operating system—Android—and has launched what is, as of right now, the most competitive app store to Apple's, but its partners haven't been able to build hardware that matches the "cool" of the iPhone. And Google's own Nexus One phone has been a sales laggard.

Dell is still searching for a strategy. And Microsoft seems thrown completely back on its heels. Microsoft took a long time to update Windows Mobile, and the company may or may not have killed its iPad competitor—depending on whether a prototype named Courier was a product intended for the market or not.

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Not a Killer, But at Least a Competitor

To disrupt Apple at its own disruptive game, a competitor is going to have to bring something new to the fight.

Hewlett-Packard poses a serious threat. It now owns a good mobile operating system, and it has long been the best, from my perspective as a consumer, in the PC world at integrating software and hardware into relatively easy-to-use products. (Granted, ease of use in the PC world isn't a tough bar to jump, but if you've, say, set up a Hewlett-Packard printer and one from Epson, you'll know what I mean.)

That gives Hewlett-Packard a reasonable shot at assembling an Apple-like strategy. But HP comes to the battle with strengths in the sales channel that Apple can't match. Hewlett-Packard is sold everywhere (and with none of this building glass-and-steel magnet stores—that's great marketing, but it's also expensive). Hewlett-Packard can use its sales volumes to sell products at a price that Apple couldn't match if it wanted to, although there's no sign that Apple wants to compete on price, thank you very much. At this moment, HP is the one PC maker that I take seriously as a potential competitor for Apple in the tablet market.

Of course, Hewlett-Packard doesn't yet have a tablet product to sell. Silicon Valley was sure that Hewlett-Packard was about to launch a tablet, named Slate, in the very near future, but that was before the company bought Palm and its webOS. Now the betting is that Hewlett-Packard will delay the product, dump its Microsoft Windows operating system, and come out with a new Slate running the Palm operating system. When might that be? Good question. The end of the year, maybe?

If I can judge by Apple's actions, the competitor that it's watching most closely is Google. Some of Apple's most recent acquisitions seem to have been designed to keep technology out of Google's hands. For example, Apple's recent acquisition of Intrinsity keeps that company's technology for building speedier devices away from Google. (Apple is moving deeper and deeper into chip design, too. The iPad runs on an Apple-designed A4 chip, although chip mavens say that much of the technology in the chip actually comes from other companies.)
Google's acquisition strategy returns the favor. On May 3, Google bought Toronto's Bump Technologies, the developer of BumpTop software, which enables a desktop to go 3D. The thinking is that this software will get bundled into the next edition of Google's Chrome operating system and will be used on a tablet designed to go up against the iPad by year's end. (For more on their apps battle, see my blog post, "The Other War Between Apple and Google.")

And I certainly wouldn't count Nokia out. I know the company looks like an also-ran if all you see is the North American market, but in the rest of the world, Apple is chasing Nokia for market share. And it's only a matter of time before Nokia manages to blunder on a smartphone design that, if not cutting-edge, will be good enough to close the coolness gap. The company has the deep pockets and the patience to win any competition that turns into a slugfest.

Unfortunately for these competitors, by the time they figure out how to compete by the new rules, Apple will be well beyond the one million iPads that it has sold so far and into the second or third generation of that product. (I'm betting that the Justice Department's recently launched antitrust inquiry won't materially damage Apple's competitive advantage. The investigation is looking at whether Apple unfairly uses its market share to discourage developers from writing applications for other platforms.)

Apple has the great advantage of not having to invent a new strategy -- and then acquire the pieces to execute it successfully -- but just to execute what it does so well over and over.

As Steve Jobs said to a Wall Street analyst at the company's September 2008 conference call: "From everything I heard, Babe Ruth had only one home run. He just kept hitting it over and over again."

At the time of publication, Jim Jubak owned shares of the following company mentioned in this column: Microsoft.

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.

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