Apple's Quandary
Jan 16, 03:28 PM—Micah Wylde
At the World Wide Developers’ Conference last June Apple’s charismatic CEO Steve Jobs gave a keynote outlining the company’s long-rumored move to x86 chips produced by Intel. Also at that conference the first machines which could run the x86 version of Mac OS X which had been secretly in development alongside its PowerPC counterpart for years were made available to developers. The machines, which included generic PC hardware along with a trusted-computed (TCPM, TPM, Palladium, etc.) chip which allowed the operating system to verify that the machine was truly a dev kit and not a generic PC.
Immediately crackers began working at the protection, and in September the first releases began pouring out. The crackers not only disabled the TCPM protection in the operating system, but also modified the graphics code to allow it to run on CPUs without SSE3, an instruction set allowing for expanded use of the CPU for graphics processing. This was inevitable, and Apple surely knew it; it is even possible that Apple leaked the developer DVD themselves, hoping that the crackers could act unpaid security testers, so that the final version’s protections could be made stronger. As evidence for this, shortly after easily-installed versions of the dev DVD became available, Apple released 10.4.2 for x86 which locked out the previous cracks, as well as causing new binaries compiled with their compiler to not run on 10.4.1. This was again quickly cracked, as was 10.4.3 when it was released. The most interesting part of this arrangement is the release date of the dev kits; fully a year before the first x86 Macs were supposed to arrive, and six months before they actually did. If the porting of a complicated and ancient codebase was supposed to be doable in a weekend (as Steve’s keynote guest Stephen Wolfram, whose company makes Mathematica. claimed to have done), then what was the point of releasing dev kits so early, especially in light of the high interest amongst cracking groups?
What if Apple wanted crackers to get a hold of early versions of OS X86 not in order to lock it down, but to work as unpaid technicians finding and fixing problems of PC compatibility?
Though Steve has claimed again and again that Apple has no desire to see their beautiful OS defiled by running inside a boring, beige box, he has become known as a pathological denier of things immediately around the corner, even by Silicon Valley standards Examples of this include the switch to Intel and the movie-playing 5G iPod. But what would be accomplished by such a reversal, and what would threatened? The promise is there for Apple to become a software company who dabbles in consumer electronics, supplanting Microsoft.
But first some background. Microsoft currently holds over 90% of the personal computer market, with Mac OS holding less than 5%, and the remainder made up of various *NIX systems. Microsoft is also the largest software company in the world, with its incredibly profitable Windows and Office product lines financing their moves into other markets which they do not dominate. Could Apple, the company which just ten years ago Michael Dell said should be dissolved and its money returned to its shareholders, displace Microsoft? If they are planning such a move, no time would be riper than the present.
Apple’s name is synonymous with hip. According to Brandchannel.com, which conducts an annual ranking of the most popular brands, in 2004 Apple nudged over Google to take the top spot on their listing. Its iPod music player holds over 80% of the hard drive music player market, while the iTunes Music Store accounts for over 90% of all digital music sales, despite the purchased songs being restricted to the iPod. AAPL is currently valued at over $85 a share, double what it was a year ago. Microsoft is also in its weakest position in years. Its Vista operating system has been delayed nearly two years past its original ship date, and when it ships later this year many of its highly touted features will be missing. Meanwhile Windows users are hounded by security lapses in both the operating system itself and its highly-vulnerable browser, Internet Explorer, allowing malware to infest computers. So with Apple and Microsoft at their respective strongest and weakest points in years, the time for such a move is now.
But Apple doesn’t seem to want to let go of their margins, even in search for market share. They showed this with the Mac Mini—a severely underpowered computer designed as a loss leader—still retailed at what was probably a hundred dollars over the cost of its components. Apple reportedly makes margins of over 30% on its computers, compared with 6% for Dell.. Apple’s margins are insane in an industry rapidly becoming commoditized. And while the Apple faithful will continue to pay that tax, significant change to the Apple platform will not happen at the current prices.
Apple is a hardware company. They write software, but it exists solely to sell their hardware (excepting, possibly, their pro apps.) Most of it they give away for free, for example OS X and iLife. What would it take for Apple to reinvent themselves as a software company, and what would the risks be? They already have a cutting edge operating system, the most recent version of which, Tiger, included many of the most highly-touted features of Vista a full year and a half before the latter is expected to begin shipping. They have a suite of digital living apps, iLife, which allows computer neophytes to do everything from managing photos to recording and arranging music and video. They have most of a productivity suite, with the recent release of iWork: a word processor and a slideshow program, leaving out only PIM and spreadsheet apps (and their recent trademark application for “numbers� leaves open the possibility of them developing the latter.) As Microsoft has built their empire on these two things, an OS and a suite of productivity applications, the potential for Apple to do the same is extant.
But what about the risks? There are several important ones, which Apple must bear. Firstly, the threat that Microsoft, seeing their empire in trouble, will withdraw Office for the Mac. This is precarious because, as the business world revolves around Word’s proprietary .doc format, Macs could potentially become useless in a business context. Apple is potentially skirting this issue by firstly, as noted above, building a suite of productivity apps themselves which can interpret the Office file formats, and secondly because dropping support could get Microsoft in a lot of hot water with regulators. The second is that people could stop buying Apple’s hardware and at the comparably low prices of their software they would not be able to stay afloat. This is compounded by the fact that once the decision is made to release OS X for commodity PCs they cannot revoke it. This is less of an issue than it might appear, though certainly a potentially dangerous one: Apple could get stuck between not having huge hardware margins and not selling a lot of software. This seems less likely, though, given the fanatical nature of much of Apple’s customer base, many of which would likely buy the overpriced Apple hardware even if generic solutions were available for a fraction of the price; the computer world has a place for Ferraris, just as the automotive one does. A third issue, and perhaps the most problematic, is that Apple would no longer control all the parts comprising their systems, potentially losing the purported “just works� nature of their operating system that they have so highly touted. This is certainly the most discussed problem, though it is again appears not so large when evaluated. Dell—or whatever OEMs begin selling generic Macs—would be responsible for the customer support issues that would result from incompatibilities with hardware, not Apple, and those who chose to build their own systems would be on their own as they are in the Windows world. Apple would only be responsible for the components used in their own computers, not their licensees. Component manufacturers would be responsible for drivers, further de-obligating Apple themselves. Many component manufacturers already include Mac drivers, and if there was a rapid swell in market share, many more would do so immediately.
The potential riches for taking some of the PC market from Microsoft are enormous; in quarter one of 2004 alone Microsoft brought in revenue of $9.1 billion, with a net income of $2.9 billion. Apple had a quarter of that revenue in Q4 of 2004, with profits of only $106 million, and though their earning have soared on the back of the iPod (on which they are supposed to be making 50% margins), it is wishful thinking to believe that this current monopoly on the PMP market will last forever. Apple has been in this position before. In the early ‘80s, Apple had released the original Macintosh, which was a huge hit and propelled Apple to heights similar to the ones it is reaching today. But the Macintosh was fundamentally closed, and lost out to the open, extensible (not to mention cheaper) IBM clones, causing a drastic fall that left them with share prices just above $6 a few years ago. The designer hardware market is a volatile one, and with its move to Intel chips Apple has even less to distance theirs from their competitors’. Nor can they forever rely on the iPod to bring in the insane margins that have pushed the stock prices to unprecedented levels. The only way for Apple’s to ensure their continued success is to license Mac OS X. The market is there, as is the opportunity for Microsoft’s first real threat in nearly a decade to be realized.
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