Monday, October 4, 2010

Apple's Business Model is Well Worth Emulating

What is Apple's business model?

I believe Apple's current business model is:

Identify an established product or service, and produce a radical improvement that can be made by applying Apple's unique expertise.


How did Apple arrive at this model?

I would say that Apple's original business model was:

Introduce the world to a new and exciting technology that empowers the individual.

When Steve Jobs and Steve Wozniak produced the Apple 1, the personal computer was new.  It was exciting.  It was not at all well established in the marketplace. With the benefit of hindsight we can say that the Apple 1 was successful in a small emerging market.  The same also could be said for the Apple ][.

The Apple ][ was a step in the direction of defining Apple's unique expertise.  Apple did not stick with single board computers without cases that required technical savvy to assemble.  The Apple ][ had a slick case, and could be plugged in and turned on by a non-techie.  Unlike many of the personal computers of the time, Apple introduced the world to the new and exciting technology of color displays.

Although Apple's product was not the first or only complete personal computer offering color to  non-techie owners, its position as one of the few is sufficient to be consistent with the model of being one who introduces.  Apple did not seek to be an also-ran.  Every product aimed to be different and better from what was already out there in a way that would credibly introduce the new idea to the world.

The Macintosh was another example of introducing something new:  A computer that would let the user compose rich and beautiful documents and drawings and perform computing tasks with power and ease through a slick and graceful graphical user interface.  The package was available at a new,  extremely low price point.

The market embraced the new functionality and particularly the graphical user interface, but was unwilling to pay a premium above the price of Microsoft Windows for the Apple interface.  I believe there was indeed value above and beyond the Microsoft offering but that the mass market did not perceive that value.

Apple is a company that learns from its mistakes. I believe that Apple evolved its business model in recognition of what it learned about what the mass market would and would not pay for.  But before making a radical change to the business model, Apple needed to explore one more push into introducing an exciting new technology to the world:  the Newton.

Clayton Christiansen in his book, The Innovator's Dilemma, gives the Apple Newton as a case study of a disruptive product that was not viewed as successful, even though it actually sold 140,000 units in its first two years. Christiansen uses this as an example to advocate his principle:  "Match the size of the organization to the size of the market."  I think Apple learned that it wanted to stay with products with mass market appeal, rather than to get involved in creating a market for something totally new.

Upon his return to Apple, Steve Jobs killed the Newton but set out on in the current direction. He said, "People hate their cell phones," and set about creating a cell phone people would love.  He succeeded.

Ask anyone, "How do you like your iPhone?"  and you generally get back, "I love my iPhone!"

Mind you, the thing I hated about cell phones was that they did not reliably make telephone calls.  Steve Jobs did not remedy this fault.  Ask people, "How is your iPhone for making calls?" and you generally get back, "I have trouble with calls." You hear some specific example of a call-related hate, and then, "But I LOVE my iPhone!"

Interesting.

The cell phone  was an established product, with a smartphone segment that was significant, but not huge at the time of the introduction of the iPhone.  Through what I would describe as artistic insight, Apple made a dramatic improvement to the established smartphone product, and garnered tremendous profits from doing so.

What should we learn from this?

Aspiring product developers should learn this:  If you want your product to have a big impact, quickly, then you must take an established product and make a dramatic improvement.

We're not talking twice as good.  Twice as good isn't good enough.  It has to be ten times better to get the attention of the entrenched buyers of the old thing to motivate them to overcome inertia and switch to yours.

This understanding seems to elude much of the Free and Open Source community.  Making a free version of something that already exists will not overcome inertia.  Making it twice as good probably won't either.  Seek to make a dramatic improvement.

Emulate the example from Apple's business model.

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