Apple has an opportunity to dominate booming personal-computing-related sectors for the next decade—but it will be an expensive, bruising battle. Apple’s resources should be focused on the potential of winning future battles rather than rewarding investors for its past victories. And, lest we forget, Apple's future success is not guaranteed. Apple pioneered an earlier generation of personal computing with the Macintosh but, within a decade of its early dominance, was a marginal player on the edge of insolvency.
The immediate battlegrounds are smartphones and tablets. Apple’s rich profits and sky-high valuation come from its leadership position in those sectors. But today’s smartphone and tablet markets are paltry compared with how big they might grow.
Over the next decade, smartphones will become the dominant communication appliance for most people on the planet. So, instead of selling 93 million iPhones out of a total of 1.6 billion mobile phones—as Apple did in 2011—imagine an Apple shooting for 900 million units or more in annual sales in 2021.
Additionally, as Tim Cook forecasted in Apple’s recent quarterly call, tablets will overtake PCs as the dominant personal computing device. In 2010, total PC sales reached almost 350 million units. In 2011, total iPad sales reached only 40.7 million units. That’s a lot of headroom for Apple’s overwhelmingly dominant tablet—if the iPad stays dominant.
The story gets better. Given the intertwining of devices with content, commerce, communications and entertainment, Apple’s dominance in smartphones and tablets should yield advantageous positions in a number of massive adjacent markets, including advertising, promotions, streaming video, music, publishing, gaming, voice and text communications, and payments.
In some key ways, however, the shape of Apple’s coming battles mirrors the personal computer war that it lost. In both smartphones and tablets, Apple is relying on the design elegance and simplicity of its closed systems to beat a rougher-edged, multi-company open system. Apple is again going it alone, and it has to out-innovate the open Android ecosystem. Apple has the early lead—just as it did with the Macintosh—but remember that it was not able to out-innovate the open Wintel ecosystem...
To keep its lead, Apple must successfully marshal all its resources in six key areas (beyond continually producing great iPhones and iPads):
1. Win the cloud wars. The migration to the cloud is perhaps a larger technology transformation than the emergence of smartphones and tablets. Apple’s iCloud, which Tim Cook called “a strategy for the next decade,” is Apple’s attempt to guide user transition to the cloud while locking them into Apple-only devices. Can Apple deliver enough simplicity and functionality to make customers accept the lock-in? Amazon, Google, Dropbox and a host of competitors are betting “no.” 85 million customer signups for iCloud thus far signal “maybe,” but it will be expensive to scale iCloud to billions of customers.
2. Keep the Apple retail stores humming. Apple now has 361 retail stores, and its retail strategy seems to be humming—both in terms of sales and brand value. There’s a lot of room for expansion, especially internationally, which will be expensive. Perhaps more expensive will be the need to continually refresh and enliven the stores, as they are perhaps the most visible symbols of Apple’s cool factor. This challenge will be heightened by the loss of both Steve Jobs and Ron Johnson, who built the Apple Stores from the ground up but recently left to be CEO of JC Penney.
3. Shine up the supply chain. Recent reports in the NY Times highlight both the power of Apple’s supply chain and its vulnerability to the actions of suppliers and partners in its larger ecosystem. One commentator characterized the revelations as “painting the iPhone and iPad as modern-day blood diamonds—items that consumers demand, regardless of the terrible toll they may take on those making them.” As Apple grows into (and battles to maintain) its role as the world’s most valuable company, it will have to take responsibility for its entire ecosystem—both to maintain the flexibility that it needs and to protect its carefully cultivated reputation.
4. Dress up Siri. Siri, the voice-activated personal assistant, helped to make the iPhone 4S a smashing success. But Siri offers only a tantalizing glimpse of the next generation of artificial-intelligence capabilities waiting to be incorporated into smartphones and tablets. Siri also raises the bar on the coming competition. As I discussed in an earlier post on the Knowledge Navigator and the iPad3, early smartphone and tablet wars have been mainly fought around hardware features, such as screen size and camera quality; future differentiation will revolve around software capabilities, such as intelligent personal assistance, deep voice integration, data analytics and robust simulation.
5. Tackle the telecom weak link. For a company so focused on the end-to-end control of the user experience, Apple has a glaring weak link: the telecom operators that sit between it and its mobile customers. Poor bandwidth, connectivity and service on this front not only spoil the Apple device experience but also limit Apple’s own strategic choices. Imagine what Apple could do with iCloud, iTunes, Apple TV, etc., if it were not constrained by the strategic considerations of its telecom partners. Before his passing, Steve Jobs pondered whether Apple could launch its own mobile operator but decided that it was too complicated and costly. With inevitable technology advances and a large enough war chest, Apple will be able to revisit this option within the next five years.
6. Avoid distracting or fatal acquisitions. Strategy is just as much about what companies choose not to do as it is about what they do, and I hope Apple will continue to reject major acquisitions. Unfortunately, there’s no splashier way for a CEO to make his or her mark than through major acquisitions. And there’s no lack of suggestions about how Apple might put its $100 billion war chest to work in this way. Among the acquisition targets being bandied about are Facebook, Cisco, Sony, Eastman Kodak, Netflix and Sprint. Steve Jobs, however, was adamant about avoiding anything but small, tuck-in acquisitions. Let’s hope Tim Cook will heed his predecessor’s advice.
Apple is leading in a race with massive rewards to the winner. But, as my friend Mel Bergstein likes to say, the race will be a marathon, not a sprint. Paying dividends now would be like celebrating at the 5-mile marker. Apple needs to save its resources for the rest of the race.
What would you do with Apple's $100B if you were Tim Cook? Please share your thoughts below.
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Chunka Mui is the co-author of “Unleashing the Killer App” and “Billion-Dollar Lessons.” Follow him on Twitter @chunkamui
