Over the last few days, you have been treated to a heads up debate between noted Apple Death Kneller Rob Enderle and myself. Hosted by our friends at MacNewsWorld.com, Mr. Enderle and I answered three questions from MacNewsWorld, and then had the chance to rebut those answers. Today I wanted to point you to Rounds 3 and 4 of this debate, which centers around the question "Is Apple a hardware company that sells software, or a software company that sells hardware?" (See also the first question, as well as our rebuttals to that first question.)
When I originally wrote my answers, as well as the rebuttals, I thought they were going to be published all at one time, which is why I waited until today to point you to rounds 3 and 4. To me, the responses make more sense when taken as a whole, but Mr. Enderle and I wrote so much that publishing everything at one time just wasn’t possible.
In any event, Round 3 has our original answers Me: Apple is both a software and hardware company, duh. Mr. Enderle: Apple is a software company that is "exiting the hardware business."
If I spoke fluent Italian, I would let forth a beautiful sounding, but ugly, stream of invective. Alas, I shall settle for the White Boy general response of "Are you on crack?"
Let me offer some quotes:
Me: This is an oft-asked question — one that many people simply don’t understand for the most part because they can’t understand any other business model besides Microsoft’s.
Apple is both a hardware and software company. This comes back to the "whole widget" issue I mentioned earlier. Apple sells hardware that uses an OS that Apple makes, and Apple makes software to help sell that hardware. It’s not that it’s a vicious circle. It’s that the two are interrelated.
Rob Enderle: Apple is increasingly a company that sells software, services and accessories. It is exiting from the traditional PC hardware business.
When was the last time you saw an Apple PC ad? How about an ad for iTunes, the iPod, Final Cut Pro or Garage Band? Apple has been pulling support from traditional hardware marketing ever since its "switcher" campaign failed.
Mama mia!
Me: Apple has indeed diversified its product strategy. The company is selling more software and has introduced profitable services to its mix as well. However, there is no evidence that Apple is "exiting the traditional PC hardware business."
None.
In fact, it’s one of the most unsubstantiated things I have yet heard Mr. Enderle say.
As I have said about Apple’s overall direction [in the final round, which has yet to be published by MacNewsWorld], the company does indeed have a major gap in its Mac marketing (in that it isn’t properly marketing the Mac), but Mac sales still form the vast majority of its revenue.
Rob Enderle: Ah, I see. I actually answered the question, and Mr. Chaffin took what was likely the better path and basically restated it to point out that Apple (Nasdaq: AAPL) is a platform company more similar to IBM (on servers and mainframes) and Sun than Microsoft and Intel. Or, in other words, it is tied to a rapidly-declining model that was created in the 1950s and not tied either to the model created in the 1980s (Microsoft) or the emerging model that IBM and Microsoft are now chasing, which is more services-based.
I think Apple, particularly if you look at its iTunes/iPod-driven financials, could actually be driving more rapidly into the Web services model than either Microsoft or IBM. While this certainly showcases that the company is leaving its hardware, and maybe most of its software, behind, it also suggests that, having missed the interim change, it may be better able to move to the now-current model and resurge — albeit as a different company.
There’s more of that in the full rebuttal, if you can stomach it. As I did for the first round, I wanted to take a second to do a quick follow up deconstruction of Mr. Enderle’s rebuttal, since MacNewsWorld is not hosting that sort of follow up. I recommend that you read both articles before plowing ahead.
Apple is a heading towards being a Web services company: Are you kidding me? Based on what, the iTunes Music Store? I’ll spot you .Mac, and still laugh at the idea. If anything, the iTMS (and .Mac) only make my point more clear. Apple develops and sells software to support hardware. In fact, the iTMS is the embodiment of this notion, as Apple makes very little money on downloads, but instead uses the iTMS to promote iPod sales. This couldn’t be more clear.
Apple makes more money per customer than MS, therefore hardware sales don’t support software development: In my original answer, I said that Apple uses profits from hardware to subsidize much of its software development, citing iLife ’04 as a prime example. I say that Apple could not afford to develop that incredible suite at the price it is offering it (US$49) if it wasn’t for the fact that it knows it makes a profit from related hardware sales. Mr. Enderle’s rebuttal is to say that Apple makes more money on software sales per customer than Microsoft, thereby negating my argument. He says that this is true even though Big Redmond has volume on its side.
This is frankly absurd. Completely and totally absurd. Apple has sold some 400,000 copies of iLife, at something less than US$49 a piece counting retailers’ cuts. US$20 million in sales is indeed impressive, but is nothing compared to the tens of millions of copies of Windows XP or the millions of copies of Office XP that Microsoft has sold at substantially higher costs.
Looking specifically at Mac OS X, Apple gets US$129 (retail) for OS X, while Big Redmond gets US$198 – US$299 (retail) for Windows XP, yet Microsoft sells exponentially more copies of its higher priced OS. This very basic examination shows that Microsoft’s development costs as a percentage of revenue are miniscule compared to Apple’s.
That Apple gets more money per customer for software than Microsoft is utterly irrelevant to any serious debate about hardware and software sales. The fact is that Microsoft gets more money per copy of just about everything it sells. Even "Microsoft Plus for Windows XP," a set of add-ons that has nowhere near the development costs of iLife, sells for US$39 a copy. I guarantee you that Microsoft is making far more money per copy on that than Apple is making on iLife, but Apple knows it is also getting profits from selling Macs to people who want to run iLife. Mr. Enderle’s argument holds no water.
Apple should dump hardware to sell software: Not only is this yet another tact from Mr. Enderle (in his other responses he talks about marrying Apple’s industrial design skills to the "industry standards" of Windows and Intel), it ignores the fact that Apple’s software is terrific, and offers a terrific user experience, because it is running on Mac hardware and a Mac OS. As I have repeatedly demonstrated, it is the control that Apple has over both software and hardware that allows for such a great experience. It befuddles me how Mr. Enderle can praise the Mac experience, as he has done, while completely ignoring the factors that lead to that experience.
Adobe is rated more highly by some Wall Street rater more highly than Microsoft, Dell, Apple, etc.: Who cares and how is this relevant? It’s not. It’s a completely unrelated fact that Mr. Enderle tosses out as a red herring. The same goes for Sun, a company that Mr. Enderle notes that also pursues a similar hardware/software strategy to Apple’s, and is struggling. This is irrelevant. Sun and Apple compete in different markets, with different technologies, different strategies, and a different business model. It’s not at all relevant to Apple’s overall success or failures as a software and hardware company.
Steve Jobs also recently was placed on a list of overcompensated CEOs: I have demonstrated repeatedly that Mr. Jobs inclusion on these "lists" (and doesn’t Mr. Enderle make it sound all official?) of overpaid CEOs is flawed at best. I won’t rehash it all here, but will say in brief that Steve Jobs got a ton of stock in one year that was intended as compensation not only for several previous years, but also as compensation for upcoming years (9 years in total). None of the "lists" take this into account, instead pretending that Mr. Jobs got umpteen gazillion dollars for a single year. It’s tabloid journalism trying to ride a wave of sensationalism, and that’s all. See my most recent column on this subject for more information.
More importantly, however, what does this have to do with this debate? It’s another bit of FUD that Mr. Enderle throws in to cast doubt upon Apple’s direction because the facts don’t actually support his other assertions. Throwing this into a discussion about whether or not Apple is a hardware or software company is pathetic.
Apple’s software, accessories and services are carrying Apple’s hardware: As I demonstrated, this closing from Mr. Enderle is simply not true, and is not supported by the numbers or any other facts. Apple’s hardware provides the revenue to support all of its other operations, including development of products like the iPod that have been very profitable for Apple.
Apple is both a hardware and software company.