Some of this is standard drama of product launch. What if the iPhone comes out flawed with some problem that didn’t show up in the media build-up? What if the decision to hold it to the single wireless provider blows up? What if Jobs’ media genius has built demand way beyond what Apple can deliver? Will the experts still like iPhone after the launch? Will they call Apple the morning (or quarter) after?
Beyond that, there is a classic hero theme, complete with a tragic flaw, to richen the drama. Apple computer’s history is a business case on mismanagement by stock prices, and — here’s where I get really interested — Steve Jobs’ exile which coincides quite well with the stock-price-driven myopia that nearly killed the company. He was out when that was happening. Jobs was exiled in 1985 just as the addition of practical hard disks made Macintosh the best personal computer in the world. In his absence, instead of using that advantage to build market share, Apple’s post-Jobs management let the stock prices manage its strategy. Stock prices followed margins, so Macintosh pricing stayed high. Apple’s share of the world, which should have gone up because of product quality, went down.
Steve Jobs really knows cool. He called it “insanely great” during the early days of Macintosh. The Macintosh, Steve Jobs’ pet project, made computers cool for the first time ever in 1984. I was around Apple a lot back then, consulting to its Latin America group. The word was that Jobs wanted lower pricing. Jobs wanted market share. Jobs wanted Macintosh for everybody, which the ads called “the rest of us.” And then Jobs was out.
Some blamed Apple’s slide on its decision not to sell system software to other hardware makers, but that was a symptom, not the cause. The real problem, the tragic flaw, was a compensation plan at the highest level that meant key decisions tracked stock prices instead of long-term strength. Almost every manager I dealt with agreed that the pricing was hurting share, and that share would be better for the long term, and that prices should go down. The competitors managed 30 percent gross margin while Apple stayed at 50 percent, meaning that companies like Dell, Compaq, IBM, and HP, charged about $2,000 for what cost them $1,400, while Apple charged $2,800. Apple watchers normally cite this as the biggest mistake Apple made. What they don’t realize is that focus on stock prices was the real problem. The operating system decision was a symptom, not a cause. The stock price fixation was true for a long time. Apple’s premium pricing gave its competition (read: Microsoft Windows) time to catch up.
Before I go on with the drama I should clarify something. I’m not one of those diehard “Apple is good, Microsoft is bad” people. I’m just watching here. My software company develops in Windows and for Windows. I don’t think Microsoft is evil. I do own a Macintosh and several iPods, but I work with Windows. And I don’t think Apple saves souls.
I should add that I have no objection to premium pricing as sound business strategy. It makes sense in a lot of markets. I like high-priced restaurants and expensive cars. What made premium pricing a mistake for the Macintosh, however, was that it constrained unit sales in a business that depends on a community of software developers, hardware developers, accessory makers, retail stores, and broad compatibility for its ultimate success. The iPod wouldn’t have been what it is today if the price hadn’t dropped after the initial surge of excitement. The Macintosh could have been the industry standard if Apple had priced it aggressively enough in those formative years. Some high tech products — computers, entertainment devices, and cell phones among them — depend on a bandwagon (we call it a platform) as part of their success.
I do have an objection to business strategy led around by the nose by short-term fixated stock market prices. As the launch approaches, I’m rooting for the iPhone to succeed, frankly, not because of Apple or Steve Jobs but because it could challenge the impact of stock prices on long-term business strategy. Business lives on its metrics, and the most fundamental metric of all is supposed to be the price of the stock. Managers are supposed to protect the price of the stock. Way too many managers are paid more or less according to the rise or fall of the stock price. And that’s bad. Stock prices go up and down on very short-term factors.
Stay tuned. The best part of the drama is about pricing, and that part is still to come. Yes, I know the iPhone is expensive at launch, but that’s probably planned as part of Jobs’ genius for drama. Keep the price high in the beginning so people like me can pay the price premium happily. But I do hope they drop it over time, like they did with iPod pricing. I want Jobs and Apple to atone for those old mistakes during Jobs’ exile, and show the resolve to build a platform, not a niche. I hope that Apple builds share, and software developer interest, and third-party accessories, and broad compatibility. I want the Apple to do with the iPhone what it did with the iPod, and what Microsoft did with Windows, which is what Apple failed to do with the Macintosh. I want the best product to win in the market, and I want a history of innovative and desirable products to count as much in the stock price as high margins.
I haven’t been close to Apple for years now, but the synchronicity of Jobs’ second coming and the iPod doesn’t seem like coincidence. Jobs’ sense of business is refreshingly clean and focused on the product. He’s always designed for himself. I really enjoyed watching that twinkle in his eye last month while he was talking to Bill Gates: “I just think about being able to get up every day and go in and hang around these great people and hopefully create something that other people will love as much as I do.”