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Is Apple closing the loop?

Michael Kende Senior Adviser, Consulting

On 26 May 2010, Apple overtook Microsoft as the most valuable technology company by market value (and the second largest US stock behind Exxon Mobil). As well as being a stunning development in the history of these two companies in its own right, it also plays out in a larger debate about system strategy that has been underway since the heyday of the IBM mainframe.

IBM developed a closed system around its mainframes, including hardware, software and peripherals, and efforts to maintain the closed system led to antitrust battles in the USA and Europe. What killed the strategy, however, was not the legal challenges, which IBM largely won, but rather a home-grown effort by IBM to create a PC based on Microsoft’s operating system. Although the project itself was hugely successful in creating a new standard for PCs, the benefits went to Microsoft, not IBM.

Microsoft’s strategy of creating an open platform for hardware and software also proved more successful than more closed strategies, notably Apple’s approach. A further rebuke to a closed system strategy came online, when the ‘walled garden’ of the large pioneer online service provider AOL gave way to the ‘Wild West’ of the World Wide Web. While early adopters liked the ease of access and pre-selection of content within the AOL garden, users soon wanted the full variety offered by the web.

The long line of Apple devices, beginning with the iPod, through the iPhone to the recently introduced iPad, combine many of the features of closed systems: they integrate hardware and software in one package, together with a walled garden offering pre-approved applications from one source. Nonetheless, more than 50 million iPhones and 35 million iPod touch devices have been sold in the past three years, and the iPad sold 2 million units in the USA in the first two months – all successes that have helped Apple move to the top of the technology industry.

So, has system strategy come full circle since the early examples of closed systems? Or has Apple succeeded in spite of its strategy?

In part, the answer is that Apple has adapted its strategy to the device. Broadly speaking, PCs can be thought of as ‘input’ devices which have full keyboards and are used in fixed or nomadic settings, in which users have the time to efficiently input and customise software and websites. In contrast, the iPhone and iPad are mainly ‘output’ devices with touchscreens that are optimised for mobile usage – situations where it is easiest to click on a pre-loaded application.

In addition, Apple has adopted a ‘vertical’ strategy in which it provides the entire user experience from device through to content, whereas Microsoft focuses more on a ‘horizontal’ strategy of providing key software for a variety of third-party devices. Apple is using a more closed vertical strategy to ensure an integrated experience, not only for its users but just as importantly for the content owners to develop and monetise apps efficiently. In contrast, Microsoft supports an open strategy to maximise the addressable market of devices for its software; this leads to a proliferation of peripherals and applications, but also creates a more disjointed user experience.

These strategies are about to collide in a new generation of TVs, which in theory could resemble fixed PCs as input devices (favouring an open strategy), but may not appeal to consumers’ desire to rely on the TV for output (favouring a more closed and vertical strategy). The optimal strategy will play itself out against the arrival of Google, which recently entered the TV market with its Android platform. Google’s platform is available for multiple third-party hardware, similar to Windows, but has its own applications, similar to Apple. The winner could yet again rewrite the received wisdom for systems strategy as online computing extends further beyond what the early pioneers could ever have imagined.