Apple and the Challenges of Success
There is plenty of speculation about Apple’s upcoming September event, including the prediction of a revamped Apple TV. My own sources tell me that a much improved device will be announced. More importantly, it will finally feature a new App Store and position itself to compete, at least in a limited way, in the console gaming market.
None of which is much of a surprise to serious Apple watchers. The big surprise is: what took so freaking long?! I remember when I bought my first Apple TV back in 2008 and was utterly baffled why it didn’t include at least a few simple games. Sure, it was underpowered both in terms of processing and memory, with a bare basic remote, but it surely could have played something like Pong or Asteroid, or… what the heck, anything. When the App Store for the iPhone debuted shortly after, and became a big hit, I just assumed the Apple TV would be quickly upgraded to support it too. Nope. Even-though thousands of independent programmers would have leapt in and figured out how to make games for it. And, odds are, even with the old device’s limitations, they could have come up with some great ones.
Supposedly, Apple has been holding back this latest upgrade due to issues of integration with iOS 9, but again, that doesn’t really explain why they’ve waited almost a decade to for an Apple TV App Store. They didn’t hold up the iPhone 6 waiting for iOS 9. While the Apple TV has never been as popular as the iPhone or iPad, a lot of money was left on the table by not having an App Store. Moreover, even a modest App Store, with modest games and other features, could have helped boost the Apple TV’s popularity, which has never been a big seller and has been steadily losing market share.
But that might actually be the real reason Apple has held off. I suspect Apple never wanted the Apple TV to become too popular too fast. When it was first announced, Steve Jobs cagily said that the Apple TV was a “hobby.” Was he trying to keep expectations down? Was he afraid it wouldn’t sell? I don’t think so. I think he was trying to keep expectations low because he didn’t want to sell too many, too quickly.
Apple’s amazing success increasingly requires long term management of the complex relationship between making great products, satisfying customers, and keeping suppliers, content producers and developers happy. Apple also has to give serious consideration to long-term public relations and anti-trust issues. All of this means that swinging for the fences with every product, particularly in terms of market share, is not the best course of action.
This is an important point continually overlooked by Apple bashers who proclaim the company has failed whenever its market share is less than 50% or because a certain product isn’t selling as well as they think it should. Most recently the Apple Watch, the most successful smartwatch ever sold by a large measure, has absurdly been criticized for “only” selling two or three million units in its first few months. The iPhone, despite consistently taking the lion’s share of smart phone profits year after year, is constantly under attack for not having an even larger share of unit sales. Doom and gloom scenarios are illogically floated because Apple isn’t selling enough units in some third world country or isn’t competing in the lowest tiers of pricing, where little profits are to be made. As if making most of the money in the world’s richest markets shouldn’t be its priority.
Some of the negativity is simply standard grade Apple hating. (Another inevitable side effect of success. Haters going to hate.) Some of it is that many disagree with Apple’s publicly stated strategy of targeting the higher end of markets, with quality products that cost more, rather than simply competing in a race for the bottom. Some of it is that hype around Apple can get so huge that reality can’t possibly meet expectations. For example, it was silly to think that every person with an iPhone would buy an Apple Watch. Predictions of tens of millions of unit sales out of the gate was always a fantasy, perhaps even deliberately floated to make the upbeat reality of millions of sales seem like a let down.
But none of the above explains all these years of lackluster Apple TVs. Thanks to Jobs clever pre-positioning of it as a “hobby” (don’t look behind the curtain!) even nasty Apple hating tech pundits haven’t aggressively attacked the Apple TV’s small market share. (Though complaints seem to be picking up in anticipation of an improved version.) Moreover, it’s hard for Apple to claim the older Apple TVs were premium products deserving premium price tags and aimed at the high end consumer. The old Apple TV was kind of okay, but certainly not a “magical” device at an “unbelievable” price tag as Jobs praised the iPad at its introduction. Tim Cook frequently states that Apple’s goal is to create the “best” products that “delight” customers. But that doesn’t seem to describe the current Apple TV, which would fall more under the category of “not too expensive” and “serviceable” compared to similar products. Apple geeks who were serious about media streaming were more likely to spend the extra bucks to buy a Mac Mini and hook it up as a media center. Even die hard Apple supporters, like myself, would be hard pressed to explain why an Apple TV is a better choice than a Roku box or something from Amazon or Google, or why it is generally more expensive. Buying an Apple TV over one of those other devices is not quite in the category of paying a premium to buy Apple brand rechargeable batteries, but close.
Assuming the new device in September is closer to being delightful, magical, or best in class, one might ask why Apple bothered releasing something second rate to begin with. Apple has always stated that they ignored pressure to release stuff before it was ready. For example, they waited before building bigger screened iPhones and were slow to respond with an iPad mini, allowing competitors to complete uncontested in those categories for years. In the case of the Apple Watch, Tim Cook went one step further and stated in 2013 that “the wrist is interesting” when asked about future Apple products. That’s one heck of a poker tell. Cook tipped off competitors to Apple’s intentions and gave them a full two years to try to capture the smart watch market before Apple entered it. I find it very hard to believe this wasn’t deliberate. Apple didn’t want to be the first to market. They wanted to see what the competitors could come up with and wanted the public to fully understand how much better the Apple Watch would be after seeing all the lesser efforts.
In the case of the Apple TV, in 2008, Steve Jobs knew he couldn’t wait. Apple customers simply had too much video content in their iTunes libraries for Apple to refuse to provide an easy, and reasonably cheap, way for them to watch it on their televisions. Expecting customers to play for movies and television shows they could watch on their iPods, iPhones and iPads, without providing a method of displaying them on large screens, would be a public relations disaster. It would open up too big an opportunity for competitors and also promote piracy and DRM breaking.
So why not build something a little slicker and more interesting than the original Apple TV? Cost was a factor, but hard core Apple fans would certainly have paid more for something better. There were technical limitations at the time, both in terms of good connections to television sets (HDMI was just appearing), internet speed issues, processors, memory etc. These days the underlining technology for a set top box can easily fit into a tiny device and be build for under $100. Back then, not so easy. But that still doesn’t explain why there was no App Store and why Jobs went out of his way to undersell it.
There has been considerable speculation that Apple was holding off on the new device to be able to announce deals with content providers like the major television networks. I think that was partially a factor, but I don’t think it fully explains the big picture. In Steve Jobs famous commencement address he talked about how you can only connect the dots looking back. Here is how I think that the dots of the Apple TV connect.
While Apple was forced to release an Apple TV to keep its customers happy, its content suppliers were not happy about it. The big networks and movie studios were extremely wary of Apple’s move into the set top television business. Back in 2008, they were still only providing a limited amount of content, in terms of movies and television shows, to the Apple Store on a trial basis. They were extremely concerned that iTunes Store sales would hurt their broadcast and exhibition markets and threaten their lucrative relationship with the cable industry. Many wanted to be able to “window” content for different devices. Business models were floated where customers would pay more for larger screens. Jobs knew all that was doomed to failure, but making too big a play with the Apple TV, too quickly, might have scared the all content providers off. That’s one of reasons the Apple TV had such low resolution for so many years, to avoid angering content providers who feared high resolution videos would be pirated or cut into other sales (like the doomed Blue Ray format).
Of course, it quickly turned out that selling content, particularly television shows, on iTunes not only make a lot of money for the studios, but also actually helped promote their broadcast business and sales in other formats. Nevertheless, the big film and television studios were not willing to simply hand over all their content to Apple. They did not want to repeat the “mistake” of the major music companies when iTunes and the iPod not only turned out to be a huge success, but basically became the biggest game in town in regard to music.
This is why talk about Apple not having enough market share in any particular product category is silly. I don’t think Apple wants another iPod/iTunes Music situation where it has over 50% of the market. It’s just too dangerous. It invites too much industry and government scrutiny. Content providers are likely to rebel, and the anti-trust issues demand government attention. This is what happened to Microsoft when Windows became too dominant and its hands got tied up in anti-trust settlements just as the internet changed all the rules. I think there’s a good argument to be made that much of Microsoft’s current problems can be traced back to the anti-trust limitations put on it. Apple already went through a big PR nightmare simply by trying to get book publishers to provide it with content for the iPad, and ended up with the Department of Justice crawling all over it even though it had zero share of the market. If the iPhone, for example, did reach 75% of the US market, it’s hard to imagine that Apple wouldn’t face serious anti-trust attacks and lawsuits every time it tried to make any kind of big move, like introducing its new streaming service, Apple Music. (Odds are they will still face investigations and lawsuits.) Moreover, it’s impossible to think that Europe or China would allow Apple to have a large majority share of their smart phone markets. This is why, as Apple’s market share has risen with the iPhone, it has increased prices, not lowered them. Much better to settle for taking the creme off the top of the market.
In the case of the Apple TV, Steve Jobs also knew he faced a huge uphill battle with the cable companies. They not only had deals with the big content providers (and in some cases were content providers), but they controlled most of the high speed internet access. Everyone, and certainly Jobs, knew it was simply a question of time before cord cutting became a serious alternative if not preference for most cable customers. But I don’t think Apple wanted to be at the forefront of destroying that lucrative business and angering those powerful companies.
So I think Jobs, and then Tim Cook, decided to take a slow approach with the Apple TV. I believe the rumors that they tried to work with the cable companies to offer a device that wouldn’t instantly destroy their business. (And that the cable companies were too stupid to take them up on the offer.) I think Apple is thrilled that Netflix is doing so well, and has ended up the primary villain the cable companies blame for cord cutting. Apple is probably pretty happy Amazon is also offering set top devices and cord cutting content like Amazon Instant Video. And I doubt they lose sleep over the success of the Roku.
Of course, there is a small danger that Apple could lose the set top market all together if they go too slow and wait to long to come up with a device that truly is “magical” and best in class. I suppose it’s possible Google might invent something so amazing Apple could get shut out of the market forever. But I don’t think Tim “the wrist is interesting” Cook is too worried about that. There are greater dangers, for Apple, in having something succeed too quickly, even beyond anti-trust issues.
Apple has had its share of of product failures and disappointments over the years. It isn’t perfect and the space between useful devices that delight customers and trendy disposable gadgets is small. But failure for Apple is usually something like the Power Mac G4 Cube, a pretty cool looking device (I loved it) that simply didn’t sell for a variety of reasons. Or something like iTunes Ping that comes and goes so quickly people barely notice it. Or maybe the slow fade of the once groundbreaking iPod as people move to iPhones. But Apple, at least under Jobs and Cook, has managed to avoid big flash in the pan kind of failures, like the Nintendo Wii or Palm Pilot. Both of those products took off and sold like crazy for a moment in time and then collapsed so suddenly they threatened to wipe out the entire company. Nintendo is still kicking but Palm never recovered. The tech industry is littered with those kinds of rapid up and down failures in the cool gadget category.
Apple, of course, is a much bigger, more diversified company. It’s unlikely the failure of a single product line could hurt it much. But it’s clearly something they would like to avoid. Many tech pundits are starting to speculate that the iPad might finally be that flash in the pan. (Though its a pretty big, long burning flash.) Sales of the device rose incredibly quickly, peaked and have been slowly falling. Long term, I’m confident the iPad will recover, particularly with the introduction of the rumored iPad Pro, and Apple might even benefit from serious competitors falling out of the tablet market along the way. (And Apple sure isn’t going to be hurt if it turns out everyone prefers smart phones and light laptops.)
Nevertheless, whether sales continue to shrink, or it simply turns out to be a dip from a longer replacement cycle, Apple probably would have preferred if iPad sales had ramped up a little slower and settled rather than rising and falling. That might be why, in terms of the Apple Watch, Apple seems to have taken deliberate steps to keep sales modest, particularly by its higher price and the serious limitation of it having to be connected to an iPhone. Apple could have easily built a very cool watch, without some features like force touch and the heart beat monitor, for under $200 (maybe even $100) that would work unconnected. It could have sold many, many more. But what would happen to Apple’s reputation if it sold like crazy for a year and then disappeared as many customers got bored with it? Long term, what good would that do? Right now, the Apple Watch is priced high and really targeted toward Apple’s biggest fans. If, in the long run, it turns out not to be a major new product category, no harm no foul. If, on the other hand, it slowly ramps up and gets more and more popular, Apple can begin to lower the price or untether it or even offer an Android compatible version. Worse case scenario would be a flash in the pan where sales for a cheaper, less functional device take off out of the gate and fall quickly when it turns out there is no real need for the toy or competitors offer something much better. (Even worse for Apple, something better and more expensive. Apple can’t allow competition to beat it from above.)
So back to the Apple TV, in addition to a deliberate effort to keep the device low key until cable cord cutting was practical and popular, there was also a chance that an App Store on a not so magical device might have raised and then let down expectations. Let’s suppose the old Apple TV had come out with a few FarmVille type games. Customers might have bought a bunch of them, played the games out, and then the devices could have been shoved away like a Nintendo Wii. While I certainly would have loved to have experimented with a simple games on the Apple TV, and there are programmers that would have liked to have sold them, Apple probably has done the right thing by holding off until it could offer a device with much better specs and with real content options. Even with better specs, the cord cutting aspect will probably be the longer lasting value to customers rather than game play.
Finally, Apple is so amazingly successful it is already taking just about as much money out of its customers’ pockets as they have to spare. Softening sales of iPads probably has more to do with customers shelling out money for the latest iPhones than it does with a lack of desire to upgrade. If Apple Watches aren’t on everyone’s wrists, give people time to get used to the idea of spending $350 for something they might also need to replace next year. Not long ago I could be counted on to buy every major new product Apple came out with. Now I’m finding myself waiting on the new Mac Book to see what happens with the iPad Pro while I try to recover from buying a bunch of extra Apple Watch bands and my new Apple Music subscription.
The Apple TV needs to be priced and serve a function that is compatible with this complicated Apple ecosystem. Apple has reached a point where the sale of an Apple TV might delay the purchase of a new iPhone. Which sale is more important long term for Apple? Right now, in the tech wars, Apple still needs to focus first on making sure it keeps the high end of the smart phone market. This might mean keeping the Apple TV as cheap as possible and playing up its integration with the iPhone, even at the sacrifice of other features. Are there ways the Apple TV can encourage iPad upgrades? Is there a danger if it does some things better than an iPad or even a iMac? Apple frequently says that it isn’t worried about cannibalization of products, but what if a souped up Apple TV leads some customers down a path that dead ends. More and more young people don’t even have televisions. Should a new Apple TV really be a must have purchase? Or simply a reasonable option for accessing the iTunes library for a fading number of old school folks who like watching on a big screen? Does Apple really care if Roku continues to dominate the set top market, particularly with Android and Windows users? Is it possible Apple is more interested in content deals that will support its new iPad pro, and a modest, not too frightening, Apple TV is more likely to get those deals?
I think the Apple TV might be the strongest example of Apple being wary of too much success. But it wouldn’t surprise me if internally Apple has set goals of keeping market share for the iPhone below 50%, or that if Apple Music becomes too popular, it will hold off on offering versions for Android. Why, for example, isn’t Apple taking advantage of the slow down in tablet sales to grab market share by introducing a cheaper iPad? Instead, it appears to be ready to introduce a more expensive one, and is focusing on the higher margin business market, rather than grabbing at more consumers.
Naturally, in September, Apple haters will attack the latest Apple TV regardless of what it is. They’ll say it’s disappointing, or too expensive, or not as good as some other company’s product. They’ll predict it won’t end up in every home and that sales will be modest and it won’t grow Apple’s overall market share significantly. What they won’t say, is that might be exactly what Apple wants.
Me, I just want it to play Pong.