Getting Hamstrung by Legacy Services and Products

Ben Thompson at stratechery.com just wrote a thought-provoking article titled "Apple's Organizational Crossroads." In the article Ben says Apple should consider organizing its services into divisions with separate P&L's, creating a direct profit incentive to help it create better services and then rapidly iterate/improve these services. This would be a break with Apple's current functional structure, under which the company is organized around functions like design, engineering, marketing, and so on rather than by product division. 

I wrote a pretty lengthy response/rebuttal to Ben's article. Rather than rewrite the response I'm going to quote it in full:

I think Apple does iterate its services independent of hardware releases -- I get regular updates to iTunes and OS and iOS regardless of whether I purchase new hardware.

I like the simplicity of Apple's approach to services: when I buy the hardware I know it's going to come with certain core services I need -- mail, messaging, contacts, calendar, Pages, Numbers, etc. -- and I don't have to worry about getting nickel and dimed for service updates (which is what Apple would presumably have to start doing if each service had a P&L).

Conversely, as an end user I really dislike the way Microsoft is following a nickel and dime approach by trying to funnel me into a yearly subscription for Word, Excel, etc. -- and I'm finding I can get along without state of the art services from Microsoft. Apple's core services are good enough for me. If any core Apple service isn't good enough then I just buy the service/app from a third party -- no big deal.

I think Apple is actually doing a fair job monetizing most of its services through its hardware, iCloud backup, and iCloud storage. And while hardware monetization doesn't provide a direct incentive for Apple to improve its services, it does provide an indirect incentive: Apple wants to make sure its core services are generally liked and used, since that use keeps the buyer purchasing future Apple products.

It's strange but you don't seem to hear as much about Google Docs anymore, despite powerful direct incentives for Google to improve this service (such as collecting user data, generating ad revenue, etc.). I continue to see complaints on Twitter about the limitations of Google Docs. I'm not convinced incentives have to be direct to be effective.

Apple Music may not be as good as Spotify but it's good enough for me, as is the ability to purchase videos through the iTunes Store. Apple Maps is also good enough for me and continues to get better (despite Apple's lack of direct incentives to improve Apple Maps).

I really think Apple's focus on the integrated user experience is appropriate, because this approach puts the focus on the job-to-be-done. Focusing on the job-to-be-done helps keep prevent unused features and non-meaningful improvements to services that are already good enough (again, I'm thinking of Microsoft services here).

And referencing Steve Jobs, Jobs always said you have to start with the user experience and work backward to the technology. You could arguably take this line, change a few words, and say something like: you have to start with the user experience -- which by its very nature is broad and encompasses both a hardware and a services component -- and work backward to a holistic, well-designed solution which isn't tied to whether particular components of this solution are profitable.

This holistic, integrated approach is enabled by a functional organizational structure. I don't think I'd ever want Apple to abandon this approach and go to product divisions/silos and a bunch of separate P&L's where great, integrated solutions/products become almost impossible.

Going forward I believe Apple will try to make a profit on services that don't have to be tightly integrated with Apple hardware. Such services might include: App Store revenues, iTunes music/video revenues, and Apple Music. This list might also include iCloud backup/storage tiers, since this is a backend service that's arguably more standalone. The more standalone nature of certain Apple services may explain why Apple made iTunes and Apple Music available horizontally to users of Microsoft and Android hardware.

Much of this response suffers from anecdotal, first person bias -- my own experiences and opinions regarding the "good enough" nature of many Apple services may not hold true for others. Despite this, I suspect at least some Apple users feel this way.

The Problem with Legacy Products/Services

After mulling around Ben's article and my response, it occurred to me that the Apple services struggling the most -- in terms of quality, complexity, and general cumbersomeness -- are the legacy ones. iTunes and Apple Music are confusing and complex because they still provide users like me with the legacy stuff I bought a few years ago (downloaded music, for example) while also giving me access to newer technologies/approaches like music streaming. iCloud can be confusing and cumbersome because I used to back things up to my computer and iTunes rather than backing up with iCloud. iPhoto can be confusing and cumbersome because Apple is trying to accommodate users who sync with their computers while also encouraging users to start using iCloud to save all their photos and videos.

I don't think the main thing holding up improvement/iteration of these Apple services is the absence of separate service divisions, each with a separate P&L. I think the main problem is the pre-existence of legacy solutions -- e.g., downloading and syncing music in iTunes or syncing photos with iPhoto on your computer -- that were developed before cheap cloud storage and high speed broadband became widely available. These legacy problems would exist regardless of whether Apple used a separate P&L for each service.

The Apple services without significant legacy issues seem to iterate/improve pretty rapidly. Apple Maps has no legacy issues and has rapidly improved. Apple services like contacts, calendar, notes, Pages, and Numbers have few legacy issues and have rapidly improved. iCloud has a few legacy issues related to traditional computer backup and iPhoto, as noted above, but because iCloud operates largely out of sight, it has also improved rapidly. Again speaking anecdotally, I now use iCloud Drive for all my folders/documents on both my Mac and iOS devices. 

The thing I like about Apple is that it's always trying to move users away from legacy approaches toward newer, more efficient ways of doing things. So Apple has abandoned built-in computer disk drives, is encouraging people to backup with iCloud instead of their computers, and is encouraging people to use Apple Music instead of continuing to download music through iTunes. Apple is trying to take care of legacy users who don't want to change while also "getting its foot in the door" by adopting new technologies that improve legacy services like iTunes and iPhoto (with services like Apple Music streaming and iCloud).

Companies that let legacy products and services rule their portfolio -- and don't get their foot in the door by adopting technologies that can improve products and services -- can pay a heavy price. Intel's adherence to legacy x86 chips, and its reluctance to shift to ARM chip designs, is a good example of this.

The author owns stock shares of Apple.

How Outsourcing Can Destroy a Company

In making outsourcing decisions, Clayton Christensen recommends that companies focus on: (1) what capabilities (resources, processes, and priorities) they need to keep in-house in order to succeed in the future; and (2) the type of work subcontracting suppliers will try to do later on. See "How Will You Measure Your Life?" and list of Christensen sources on Concepts page. Subcontractors making cheap, outsourced components don't want to stay at the low end of the market -- they want more sophisticated, profitable product work as they move upstream in search of better margins. As a low end subcontractor moves upstream and acquires new capabilities, it often displaces the company it formerly worked for. The original outsourcing company creates its own demise at the hands of a more cost efficient low end competitor (that formerly served as a subcontracting supplier).

Christensen notes that Dell outsourced its way to mediocrity by subcontracting more and more work to component suppliers like Asus. As a result Dell gradually lost its capabilities, while Asus gained new capabilities and eventually started making Asus-branded computers. Dell ended up just stamping its brand name on computers designed and made by its subcontractors, losing its ability to create innovative new products. Outsourcing: (1) retarded Dell’s ability to create compelling new products; and (2) hampered meaningful sustaining improvements to Dell’s existing products.

Consistent with Christensen's recommendations, Apple seems aware of the need to protect its future by keeping key technologies and capabilities in-house. The following quote from Steve Jobs is revealing: "One of our biggest insights [years ago] was that we didn't want to get into any business where we didn't own or control the primary technology because you'll get your head handed to you." Tim Cook has said the same thing. And Cook's expertise in supply chain management gives him the ability to create a unique supply chain where Apple avoids outsourcing too much. Apple keeps the following key technologies or capabilities in-house: industrial design, hardware and software engineering, mobile chip design and engineering, fingerprint authentication, Siri, and retail sales and service. Apple also maintains ownership or exclusive control of certain key manufacturing equipment/processes (through agreements with companies like GT Advanced, which is producing sapphire for Apple). 

Outsourcing is great for a company’s return on net assets, since it reduces the net assets denominator, but it can destroy the capabilities needed to make: (1) meaningful product improvements; and (2) innovative new products. The outsourcing company gives up control of its destiny: lacking in-house capabilities, an outsourcing final assembler is at the mercy of the supplier's ability to continue making meaningful innovations at the component level. 

If component suppliers can't continue making meaningful improvements, the outsourcing company’s business is vulnerable to more integrated companies with strong in-house capabilities. These integrated companies are better positioned to improve existing products and come up with new products. And that's exactly what’s happening right now with Apple taking more and more business from traditional PC makers. Intel and Microsoft are no longer making meaningful improvements to key PC components, leaving PC makers like HP and Dell vulnerable to integrated companies like Apple. 

Integrated companies are well-positioned to create innovative, affordable new products that disrupt overserving modular products. The conventional wisdom is that modular companies sell more affordable products. Dell, HP, and Asus sell standardized, modular PC's at very affordable prices. Outsourcing has caused a modular, price-focused "race to the bottom" in the PC market. Yet an integrated company — Apple — created the iPad. And the simpler, more affordable iPad has disrupted modular PC's, which overserve many users. 

Somewhat ironically, integrated companies may be best at creating disruptive, affordable products for new and low end markets, since outsourcing causes modular manufacturers to lose the capabilities needed to create this type of offering. When a modular, snap-together product starts to overserve, the final assembler/manufacturer lacks the capabilities needed to do anything about it. In this situation, an integrated company can swoop in and design, engineer, and manufacture an affordable alternative that isn’t overserving, and that squarely addresses the job that needs done.

And this is a big, long term problem for modular assemblers/manufacturers. At some point meaningful innovation at the outsourced component level dries up. Component suppliers start making improvements that aren’t meaningful, resulting in a final product with overserving product attributes. This leaves the modular final assembler vulnerable to integrated competitors with strong in-house capabilities. These integrated competitors are well-positioned to create affordable new products that: (1) don’t overserve; (2) squarely address a job that needs done; and (3) appeal to new and low end markets, thereby disrupting modular, overserving alternatives.

The author owns stock shares of Apple.

The Importance of Adopting Meaningful Product Improvements

Earlier today I posted an article titled "Corning, Apple, and Other Musings," which discusses Intel's reluctance to adopt ARM-based chip designs for its mobile chips.  Intel has continued to push its own mobile chips (the Atom line), which are based on Intel's x86 architecture.  x86 chips typically have some computational speed/power advantages over ARM chip designs, while ARM designs typically deliver better battery life.  The problem with Intel's decision to push x86 chips for mobile devices may be the consumer's desire for better battery life instead of enhanced computational power, at least when it comes to cell phones and tablets.  With mobile devices, Intel is focused on functional improvements in the wrong area:  chip speed/power.  Chip speed/power for mobile phones is arguably "good enough," while battery life is not.  By failing to adopt ARM chip designs for mobile devices, Intel has failed to make sustaining, functional improvements in the area that's still not good enough:  battery life.   Incumbents that fail to make sustaining improvements to product elements/attributes that aren't yet good enough get left behind by competitors that are making these improvements.  See Concepts page and discussion of Clayton Christensen.  In Intel's case, one of those competitors is Qualcomm, which has successfully embraced ARM chip designs for mobile devices.

The functional performance of any product can be measured across any number of elements/attributes.  With computer chips, these elements include speed, power efficiency, size, and so on.  Regardless of industry, companies that fail to make sustaining improvements to functional elements/attributes that aren't yet good enough, and continue making improvements to elements/attributes that are more than good enough, eventually lose market share and become irrelevant.  To stay relevant companies must adopt or create meaningful product improvements that users will value, and that will truly enhance the user experience.

The author does not own stock shares of Intel.

Corning, Apple, and Other Musings

Corning, which I posted on a few weeks ago, makes Gorilla Glass for products like the iPhone.  Apple recently announced a major manufacturing contract with GT Advanced, which makes sapphire for products like the iPhone. So the question is, could sapphire -- which is harder than Gorilla Glass -- ultimately be produced in volume, and inexpensively enough, to move downmarket and damage Corning's Gorilla Glass business?  

And the short answer to that question is probably no, at least according to disruption theory, because incumbents typically adopt sustaining technologies that improve on existing offerings.  See Concepts page and discussion of Clayton Christensen.  If sapphire is functionally superior to Gorilla Glass, and can ultimately be manufactured in volume at a reduced/attractive cost, then Corning will -- or at least should -- adopt the processes needed to manufacture it.  

If Corning fails to adopt sapphire technology as it becomes more cost effective/feasible, it's probably making a strategic mistake -- incumbents that fail to swiftly adopt/co-opt sustaining improvements lose market share and relevance over time.  Intel's failure to adopt ARM technologies for mobile chips is a classic example of this.  ARM-based chips lack some of the computing power of Intel's x86 chip architecture, but they generally facilitate better battery life, which is one of the most important performance characteristics for mobile devices.  As a result, ARM chips are a sustaining improvement for mobile devices.  Intel has been reluctant to license ARM chip architecture, losing market share to companies like Qualcomm as a result.  Intel's approach may slowly be changing:  the company recently announced that it would make ARM-based chips for Altera, functioning purely as a chip foundry.  Altera makes processors for the medical, military, and communications industries.

As a more expensive, functionally superior product (at least in terms of breakability), sapphire also doesn't meet the criteria for a low end or new market disruptive product.  When introduced, disruptive products are functionally inferior to existing offerings -- they then slowly move upmarket, taking more and more market share from existing, functionally superior offerings.

The author does not own stock shares of Corning or Intel, but does own shares of Apple.