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Comment: Unlocking Apple's secret formula

Posted: 26 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Apple sales success? market downturn? multicore processor?

How does Apple Inc. remain on top at a time when most of the industry!and the economy!is going down?

Tim Cook, Apple's chief operating officer, provided one answer when he fielded a question on how the company would move forward if CEO Steve Jobs was not able to return from his current medical leave. Cook shared a corporate credo he said is deeply embedded in the company, not just in Jobs' head.

"We believe that we are on the face of the earth to make great products. We believe in the simple, not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution," he said.

"We believe in saying no to thousands of projects, so that we can really focus on the few that are truly important and meaningful to us. And frankly, we don't settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we're wrong and the courage to change," he added.

Impressive an affirmation as this is, I'd suggest it is a partial answer to the reason Apple is currently defying gravity with its latest quarterly report.

Customer satisfaction
Apple certainly has developed customer loyalty with a handful of well engineered products focused on simple but satisfying user experiences. And it does not carry the costs of competitors who maintain a full product portfolio.

Implicit in these values is the fact that Apple aims to capture a high-end slice of mainstream markets. It refuses to play the industry's race-to-the-bottom game of delivering the lowest cost MP3 player, phone or computer.

Indeed, that's why Apple is not participating!so far!in the current netbook craze, the latest in ultrasmall and cheap laptops pioneered by Taiwan's AsusTek.

Cook said Apple is "watching the space and we have some ideas, but right now we think existing products won't satisfy customer needs." That's because today's systems are underpowered, have poor software and cramped keyboards, he added, possibly pointing to a high end mini Macbook in the lab. Think bigger volumes, higher margins.

It's in that light I see Cook downplaying the AppleTV which he said Apple "still considers a hobby," although its sales have tripled. But "we fundamentally believe there is something for us there in the future," Cook added.

I suspect Apple engineers are tinkering with many prototypes for a bigger volume, pricier, snazzier iTV on the horizon.

Apple chips in the works?
Cook's comments about how Apple wants to "own and control the primary technologies behind the products," probably refers to its software. After all, he described the iPhone "as a software platform business" that is made valuable by code written by Apple and third party application developers. "We think the software is the key ingredient," he said.

What's less clear is to what extent the company will extend that vision to silicon with its acquisition of low power processor startup P.A. Semi and attempt to hire IBM chip guru Mark Papermaster. Cook offered no updates on those efforts.

My colleague, Peter Clarke, makes the wise observation that Apple could lead the way in low power multicore ARM processors. Such CPUs would be potentially high margin, high profit chips, but only for Apple's internal use.

Cook was keen to note that Apple was the beneficiary of the race-to-the-bottom among others in the hardware component industry. Falling spot prices for DRAMs, LCDs and NAND flash raised Apple's gross margins in the quarter.

Everyone will take advantage of that edge. Similarly, part of Apple's success stems from something everyone is doing!going global.

For example, iPod sales actually shrank three percent in the United States in the quarter ending Dec. 31, 2008. But Apple reported a historic high of 22.7 million iPods sold due to sales outside the United States.

About 46 percent of Apple's sales come from international markets, not a huge fraction compared to many companies, but a number it aims to expand. It now ships its iPhone in 70 countries, and half the new Apple retail stories it will open this year will be outside the United States.

No one, not even Apple, is immune to the recession. "The economy may slow adoption rate of smart phones because customers may not sign up for higher priced contracts," said Cook.

And Apple's desktop sales shrank in the last quarter even more than the industry as a whole, in part because it has not updated those products since 2007.

In the end most companies will not be able to leverage some of Apple's key success factors!its focus on a few excellent high-end products with a fully proprietary software stack tailored for simplicity. But they do need to embrace the philosophy it shares with many others!the only way out of a downturn is through investing in compelling, new products.

- Rick Merritt
EE Times

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