I’m fascinated by strange facts and broken trends. If you remember, Apple initially drove the Personal Computer market, but Microsoft took it from them by licensing out a similar operating system to Apple’s, and Apple almost failed. Then a little over two decades later Google attempted something very similar and rather than Apple being put at risk, PC makers are mostly out of the smartphone business; almost everyone, excluding Apple, is struggling and some, like HTC, are on death watch.
There are four big differences: there is no IBM-like company on the Google side, consumers—rather than businesses—are driving growth, there is no marketing funding mechanism, and the market drove to low margins too quickly. This last point is particularly interesting because Apple remains a firm with massive margins. Google just destroyed the margins for their licensees, but while they initially hurt Apple, Apple rebounded.
Let’s talk about why.
The Importance of IBM
IBM shifted the focus of the market from personal computing to business, particularly big business computing. Initially it was focused on users and consumers with firms like Commodore and Atari first taking the market share lead from Apple. IBM tried the consumer angle with the PC Junior, a machine they crippled to assure it didn’t cannibalize their business lines and Apple, seeing the IBM threat, abandoned its hobbyist initial focus and shifted to business as well.
So the key element was that a very powerful company, and at the time in business computing there was no firm more powerful than IBM, convinced Apple (and everyone else) to shift from users to businesses and then failed to execute properly itself, handing the market to Microsoft. This last part is important to history but not to this trend.
Now if we look at what Apple did with smartphones, they had returned to power with the iPod but everyone was focused on business with the smartphone. Apple, now a power with consumers—arguably the most influential company in the segment—brought out a consumer/user focused phone and got everyone else to chase them pretty much applying the same core strategy that IBM had executed against Apple, Palm, RIM, Microsoft, and Nokia.
The market pivoted. Google attempted to steal the market by taking a clone of iOS and making it available to licensees, but they didn’t pivot the market, and they remained focused on consumers where Apple was preeminent. This suggests that if you want to take the market from someone as dominant as Apple you have to pivot the market, get consumers/users to look at the devices differently (as being out of touch). Google didn’t do this, and subsequently failed.
This suggests that a business-focused product with substantial backing or some other decidedly different approach might work as well, but that chasing Apple from behind with a similar product will continue to fail.
Google’s Second Mistake
One of the core aspects of Microsoft’s model was an ingenious concept called MDF. I have no idea where this idea came from. But part of Microsoft’s licensing revenue was returned to the OEMs to fund marketing. When you have a common platform, firms will compete on price, driving margins out of the segment. And marketing, being a staff function is seen as optional and often cut to a point where it is ineffective as a result. By returning MDF to the OEMs Microsoft assured they had the funds they needed to make people aware of their offerings and drive demand.
In addition Apple was able to establish itself as the only true premium vendor and the product consumers aspired to.
Google gave their Android platform away for free so OEMs drove prices even lower and didn’t have the money needed to drive people back to their differentiated products. Another unfortunate side effect was that Google didn’t consider the OEMs customers, more like dependents, and that made it very hard to focus on what was important to drive their platform forward as well. The Google model was flawed and if Google didn’t make most of its money from ad revenue that wasn’t related to Android the platform would have failed.
But it forms a barrier against anything else entering because who can compete with 'Free'? Can you imagine going to a VC and arguing you want to build a platform or product to compete with Apple or Google, let alone both?
Now the market will eventually pivot whether it is to a new business or other focus, or a completely different product—eventually the market will move. However if it is going to move soon it needs someone with the power, vision, and capability to make it happen. If they continue to chase Apple and Google remains unchanged as the platform provider, the economics of competing with Apple just won’t make sense and the result will likely be seen as a failure.
I should add that for a short time Samsung had a differentiated product and funded an effective marketing campaign at several times Apple’s budget and they took share. But Apple made bigger phones and Samsung couldn’t sustain the marketing expense and the market flipped right back, proving the market can be made to move, and that it just requires someone to revisit the old IBM/Microsoft strategy or the Steve Jobs strategy to make it happen. And no one is willing to do that.
I think, suddenly, many of us are looking at Lenovo. They’ve bought in, they have a business core in ThinkPad and they are in the most powerful market in the world. This week they had a coming out party and showed potential.
President and Principal Analyst, Enderle Group
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