Apple Shouldn’t Cross That Road Till They Come To It

Part 1: Argument

On April 19, 2016, Ben Thompson of Stretechery wrote: Apple’s Organizational Crossroads. If you haven’t read it already, I highly recommend you read it now. In a nutshell, Ben Thompson’s contention is:

1) Apple employs a (rarely used) functional organizational structure; ((“(T)he very structure of Apple the organization — the way all those workers align to create those products that drive those exceptional results — is distinct from nearly all its large company peers.” ~ Ben Thompson))

2) This organizational structure has served Apple well;

3) However, Apple is moving toward Services;

4) To do both iPhones and Services well, Apple needs to move from a functional organization to a divisional organization; and

5) Ben Thompson is not sure if Apple can successfully make the transition.

It’s very difficult for a publicly traded company to switch,” Bezos said. “So, if you’ve been holding a rock concert, and you want to hold a ballet, that transition is going to be difficult. ~ Jeff Bezos

This is a very rudimentary outline of Ben Thompson’s position. Again, READ THE ORIGINAL ARTICLE.

Divisional Organization

Most companies, especially large companies, work off a divisional structure. If Apple were divisional, they would have divisions for the iPhone, iPad, Apple Watch, iPod, etc.

Divisional organization has many advantages — which is why almost every company, save Apple, uses it. However, one of its disadvantages is difficulty in letting go of the old and transitioning to the new. Why? Because each division is a self-contained fiefdom and division mangers — and those in their charge — are highly incentivized to protect their fiefdom’s interests, even if it means putting their company’s overall interests at risk.

[Of course, no one consciously tries to harm their own company but, as Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”]

Most discussions of decision making assume that only senior executives make decisions or that only senior executives’ decisions matter. This is a dangerous mistake. ~ Peter Drucker

Microsoft, for example, had Windows which was a cash cow that rightfully dominated the company for ~30 years. However, the Windows division was so large and so powerful that it became the end rather than the means. In other words, the company existed to support Windows rather than the other way around.

The worst enemy of major consumer electronics companies is not suddenly weakening sales, which sometimes shake firms out of their stupor. It’s that last, big, almost obsolete blockbuster that gives executives a reason to avoid change. ~ Tero Kuittinen

Any internal efforts to replace or displace Windows were quickly squashed. Microsoft worked very, very hard to diversify in the 2000s, but everything had to be made compatible with Windows. And so, a series of ambitious experiments with televisions, gaming, computing in living rooms, tablets, phones, etc. all had their reach constricted because they were tethered to Windows. They had no chance of becoming the next big thing because they were tasked with supporting the current big thing.

The worst place to develop a new business model is from within your existing business model. ~ Clayton Christensen on Twitter

Idle observation: Apple is basically working though failed Microsoft products from 15 years ago and doing them right. ~ @BenedictEvans

Functional Organization

Apple, on the other hand, is famous for taking an approach that is the polar opposite to Microsoft’s. Instead of protecting their money makers from internal competition, Apple is a serial cannibalizer of their own products.

The Macintosh devoured the Apple II, the iPhone consumed the iPod. The iPad even competed with the MacBook and the recent MacBooks have returned the favor.

If you don’t cannibalize yourself, someone else will. ~ Steve Jobs

If anybody is going to cannibalize us, I want it to be us. I don’t want it to be a competitor. ~ Steve Jobs

Apple’s more expensive, higher-margin device continues to cannibalize the cheaper, lower-margin one. ~ Benedict Evans on Twitter

Can’t accuse Apple of not cannibalizing itself. Strongest competitors to the iPad are the iPhone 6+ and the new Macbook. ~ Benedict Evans on Twitter

How does Apple manage to transition from money-maker to money-maker so (seemingly) seamlessly? They are set up with a functional, rather than a divisional, structure. Those functions consist of marketing, engineering, finance, etc.

Whereas divisions are incentivized to compete with one another and disincentivized to cooperate with one another, a functional organization has no incentive to compete (or actively sabotage) the efforts of others and every incentive to coordinate their efforts within the company. Engineers within Apple can work on the iPhone or the iPad or the Apple Watch and know that they are helping the company as a whole.

However, being a functional organization is no panacea either (else everyone would do it). The very strength of a functional organization is also its weakness. While it’s true that the employees of a functional organization aren’t incentivized to compete with other parts of the organization, they are also not incentivized to compete at all, i.e, there are few external incentives to motivate employees to benefit the corporation as a whole. How do you motivate employees who are not directly benefitting from a product’s success?

Call it what you will, incentives are what get people to work harder. ~ Nikita Khruschev ((Excerpt From: Steven D. Price. “1001 Smartest Things Ever Said.” iBooks.))

Further, functional organizations lack accountability. When a division fouls up, you know who to blame. When the iPhone fouls up, who exactly do you blame? Who do you hold accountable? Marketing? Engineering? Finance? They may all bear part of the responsibility, but none of them bear all of the responsibility.

Dysfunctional Services

Ben Thompson persuasively argues that:

1) Apple is bad at Services. For example, all of the following services could be much better than they are.

— App Store search
— Apple Music
— Cloud Services
— Apple Pay
— iMessage
— Siri

2) Apple is moving towards being a Services company;

3) The functional organization that makes it possible for Apple to create superior hardware is the same organizational structure that makes it impossible for Apple to create superior services.

I will not repeat Ben Thompson’s arguments in support of this thesis because 1) He makes them so much better than I can; and 2) for the third time, you should READ THE ORIGINAL ARTICLE.

Never, ever, think about something else when you should be thinking about the power of incentives. ~ Charlie Munger

Ben Thompson’s entire article is a great but, in my opinion, his spot on explanation of why Apple’s services can never hope to match their hardware prowess under Apple’s current organizational structure is the crème de la crème. Truly outstanding analysis. (Have I mentioned that you should really read the his original article?)

Your current business model limits your strategic options because that’s what business models do. ~ Saul Kaplan (@skap5)

Part 2: Rebuttal

DuPont Analogy

Ben Thompson points to DuPont as having been in an analogous situation to the one Apple is in now. DuPont made gunpowder. They decided to diversify into paint because the processes for creating gunpowder and paint were surprisingly similar. However, upon entering the paint business, DuPont discovered that the very business model that made the sale of gunpowder so successful was also the very business model that made the sale of paint so unsuccessful. In other words, the processes for making gunpowder and paint were similar but the business models for successfully promoting them were were dissimilar. So what to do?

DuPont solved the problem by breaking the company into two different divisions, with two different business models, tailored to create and promote two different products. Ben Thompson argues that the iPhone is DuPont’s gunpowder, Services are DuPont’s paint and Apple — like DuPont before it — needs to break these two very distinct business products into two very distinct business divisions.

The problem for Apple is that while iPhones may be gunpowder — the growth was certainly explosive! — services are paint. And, just as Dupont learned that having a similar manufacturing process did not lead to similar business model, the evidence is quite clear in my mind that having iPhone customers does not mean Apple is necessarily well-equipped to offer those customers compelling services. At least not yet. ~ Ben Thompson

I’m not convinced that DuPont is analogous to Apple. DuPont added paint to its gunpowder lineup because it wanted to diversify. But Apple doesn’t diversify. They cannibalize.

— When Apple created the Macintosh, they weren’t diversifying from the Apple II.

— When Apple created the iPhone, they weren’t diversifying from the iPod.

— When Apple creates whatever-the-heck-they-create-after-the-iPhone, they won’t be diversifying from the iPhone.

The Macintosh and the iPhone weren’t diversifying products, they were SUCCESSOR products.

Solution Or Strategy Tax?

Ben Thompson proposes the following solution to Apple’s services problem:

The solution to all these problems — and the key to Apple actually delivering on its services vision — is to start with the question of accountability and work backwards: Apple’s services need to be separated from the devices that are core to the company, and the managers of those services need to be held accountable via dollars and cents.

It’s true that if you broke Apple into an iPhone division and a Services division, each division would be incentivized to follow the path that best served their respective purposes. But it’s also true that neither division would be incentivized to work with each other or for the company as a whole.

Currently, Apple’s Services exist to serve the iPhone. Services may be huge, they may make gobs of money, but they exist not to be huge and not to make gobs of money but to support the iPhone. This would not be the case if Services were broken into a separate division.

A separate Services division would inevitably compete AGAINST THE INTERESTS of the iPhone instead of supporting it. Why? Because that’s what divisions do. Unlike DuPont — whose two different product lines could both simultaneously strive for success without competing against one another — the iPhone and Apple’s Services are inextricably intertwined.

Further, if Apple used divisions — just like everyone else — Apple would become — just like everyone else. Apple would lose one of the attributes that makes it unique and uniquely successful.

My Frustrating Conclusion

Ben Thompson is right to say that Apple’s hardware focused business model makes it impossible for Apple to excel at Services. In other words, Apple’s services will always be “meh” because Apple’s business model is tailored to create hardware on a periodic timetable and services require one to focus on, and build up expertise in, an entirely different set of iterative processes. However, I think the proposed solution — breaking the iPhone and Services into seperate divisions — is a cure that would be worse than the disease. Breaking Apple into two divisions would not create one excellent hardware division and one excellent Services division — it would, instead, create one conflicted and dysfunctional company.

As frustrating as this may be, I think Apple should continue to be so-so at Services so that it may continue to be so, so great at hardware.

Part 3: Counterargument

Self-Disruption vs. Self-Cannibilazation

Industry observers ((Not Ben Thompson. I’m speaking in generalities.)) often say Apple disrupts itself.

It doesn’t.

Disruption is not about products, it’s about business models.

Products don’t get disrupted, businesses (and people) do. ~ Horace Dediu (@asymco) 12/6/14

Disruption is about business models, not technology. ~ Ben Thompson (@monkbent)

Incumbents are rarely disrupted by new technologies they can’t catch up to, but instead by new business models they can’t match. ~ Aaron Levie (@levie)

Apple doesn’t disrupt itself — that would require a new business model and Apple’s business model has remained constant throughout its 40 years of existence. Apple cannibalizes itself and obsoletes others.

— The Macintosh did not compete with the Tandy Radio Shack TRS-80, The Commodore PET, Atari, Texas Instruments TI 99/4, IBM PC, Osborne, Franklin or even the Apple II.

— The iPod/iTunes combination did not compete with existing MP3 players.

— The iPhone did not compete with feature phones.

You don’t obsolete a product by making a slightly better, or even a much better, product. You obsolete a product by making it easier to do what that product does without having to use that product. You obsolete a product by creating a wholly new category in which the old product can’t compete.

[pullquote]Apple creates new categories[/pullquote]

The Macintosh, the iPod and the iPhone weren’t better versions of existing products. They weren’t incremental improvements. They were paradigm shifts.

When a paradigm shifts, everyone goes back to zero. ~ Joel Barker

Apple doesn’t outrace their competition. They start an entirely new race and then get such a big initial lead that no one else can catch up.

Apple doesn’t create new products. They create new product categories.

Milking The iPhone

Apple does not seek to move from gunpowder to gunpowder and paint — from iPhone to iPhone and Services. They do not seek diversification. They seek succession. They seek to move from gunpowder (iPhone) to the next explosive product category. And Services are most definitely NOT the next big thing.

If I were running Apple, I would milk the Macintosh for all it’s worth and get busy on the next great thing. ~ Steve Jobs [Observation made when running NeXT]

If I were running Apple, I would milk the iPhone for all it’s worth and get busy on the next great thing. And that’s exactly what I think Apple is doing.

Apple shouldn’t divert resources toward services. It’s the other way around. Services should be directed toward supporting the iPhone — even if that means that Services will never reach their full potential.

But perhaps you’re asking, “Why should the iPhone be prioritized over Services?” Why? Because, as I wrote two weeks ago, the iPhone dominates smartphones and smartphones are the most dominate tech product of our time.

Ever think about an old friend and wonder what they’re doing right now? They’re playing on their phone. Everyone is playing on their phone. ~ Jazmasta on Twitter


Remember, I’m not saying Apple won’t create a Services division. I have zero knowledge of what Apple is going to do. And Ben Thompson makes a pretty compelling case for why Apple should move in that direction. But I don’t think Ben Thompson is actually arguing that it would be great if Apple created a new services division. I think he’s arguing that Apple should create a new services division if they want Services to be great. Ben Thompson is doing what good analysts do. He’s not giving us the right answer. He’s asking us the right question.

The value of analysis lies less in answering questions than it does in questioning answers.

Frankly, if Apple created a Services division, I would fear for Apple. I don’t think creating a Services division would be a sign that Apple was acknowledging the path they were already on. I think it would be a sign that they had strayed from the path and lost their way.

But I don’t think that’s going to happen. We’ve already been down this road with Apple Retail. John Browett — Apple’s fired head of Retail — wanted to make Apple Retail a bigger money maker.

John Browett seemingly made the mistake of seeing Apple Retail as something to optimise rather than cherish. Wrong. ~ Benedict Evans (@BenedictEvans) 4/21/16

John Browett didn’t understand that Apple’s goal is not to help make Apple Retail great. Rather, the goal is for Apple Retail to help make Apple great. The same holds true for Apple Services.

So many companies don’t know why they succeed. ~ Ben Thompson (@monkbent) 12/4/14

So very many companies don’t know why they succeeded. Apple always has. Ben Thompson says Apple is at a crossroads. And maybe they are. Me? I hope they stick to the straight and narrow.

Published by

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?

121 thoughts on “Apple Shouldn’t Cross That Road Till They Come To It”

    1. Thank you for your comment, Joe. I too (as you can probably tell) value good analysis. Some of my favorite quotes on “questions”:

      “By doubting we are led to question, by questioning we arrive at the truth.” ~ Peter Abelard

      “The wise man doesn’t give the right answers, he poses the right questions.” ~ Claude Levi-Strauss

      “Judge a man by his questions rather than his answers.” ~ Voltaire

      1. Of course, I’d say a quote is the opposite of a question, a ready-made answer, about as savoury as a ready-made meal ;-p

        1. You and I don’t agree on much and we most certainly don’t agree on the value of quotes.

          “Why should I give my Readers bad lines of my own,” Franklin once asked, “when good ones of other People’s are so plenty?”

  1. Interesting, thank you.

    I indeed wondered, upon reading the Stratechery piece, how a separate Cloud division made sense. Apple’s cloud sole raison d’être is serving iDevices. If Apple’s Cloud had cross-platform ambitions, the issue would be different, but it mostly doesn’t. Plus Apple mostly needs “good enough”, not class-leading, cloud, the purchase drivers are the devices. Most users will stick to the defaults and get locked-in as intended anyway.

    Also, Apple only serves one market: Consumer IT. All devices, apps and services are very similar, homogeneous, in concept, and Apple is selling them to the exact same customers (not even the same demographic, but the same individual people; no soldiers vs painters). Moreover, the goal is to make services device-transparent, one more reason to not have them separate. If Apple got serious about Enterprise (how old is that forgotten wastebin “pro” Mac ? 3 years ? Did they ever officially rescind their “we’ll make servers” commitment ?), or if cars or health materialize, those would be better reasons to divisionize.

    I don’t agree about divisional organizations killing innovation though. IBM was very much divisional when they created the PC, they just had to set up skunk works to isolate the PC team from other divisions. Something MS never did: any invention or innovation had to go through MS’s “does it help Windows” filter.

    1. “I don’t agree about divisional organizations killing innovation though. IBM was very much divisional when they created the PC, they just had to set up skunk works to isolate the PC team from other divisions.”

      Steve Jobs did the same with the Macintosh. But you’re kind of making my point. The only way to create new in a divisional organization is to shield the new from the old.

      EDIT: Please don’t take the above as a criticism of your comment. I think we’re using different words, but our conclusions are the same.

      1. Chicken, meet egg ? The reason why divisions make sense to start with is to foster new and different: just make a new division for it. Apple is not really doing “new and different”, if we think of markets instead of products.

  2. Nuther good one, John. What we call disruption is really market eruption. It isn’t planned and it isn’t pretty. And we sort out the so called geniuses only afterwards.

  3. Great article John. I wonder though what you think about Apple pivoting to highlighting services on their last earnings call. I get the feeling that was less about a pivot and more about there wasn’t really a compelling iPhone story (flat YOY sales growth for the quarter and YOY growth decline forecasted for fiscal q2). I also get the feeling Apple is pushing forward this services narrative to try and nudge Wall Street to value the stock differently. Honestly I don’t get the point. If Wall Street by now doesn’t understand (and value accordingly) that Apple has a multi billion dollar recurring revenue stream from the hundreds of millions of iOS and OS X device owners they never will.

    1. “I wonder though what you think about Apple pivoting to highlighting services on their last earnings call.”

      Like you, I think Apple is assuaging the (irrational) fears of Wall Street. But I could be wrong. Maybe Apple really does think Services are all that. But I hope not.

    1. I know. You have sharp eyes.

      I couldn’t find a cross road image that I liked. And then, as sort of an in-joke, I decided to stick with the fork because perhaps Apple isn’t at a cross road. Perhaps they have to go one way or the other. 🙂

  4. Yeah, I thought that Stratechery article was putting the cart before the horse. Apple’s services exist to sell hardware. Promoting them to be an entirely separate division of the company is to grossly overestimate their importance to the company.

    And really, when we say Apple’s services are not as good as we would like them to be, or not as good as Google’s services, we’re really talking about “software over the internet” — nobody’s complaining about apple’s waranty services or their in store tech support services.

    Which means discussion of how to improve Apple’s services brings us back to the question of problems with the quality of Apple’s software. Not the alleged decline in the quality their of OS software, but the tension between device focused coding and app focused coding.

    Apple is very organized about shipping devices. Not hardware, because that’s a false distinction in the modern era — the hardware and software are fused into one thing, a device amalgam that is greater than the sum of the parts. So, amalgam devices, which are part code, part atoms. The code must be ready by the ship date. The code has to work or the device won’t work. And because the code is part and parcel of the device, you are very much engaged in a “get this out the door and then on to the next thing” mentality, because that’s how physical devices work — you spend huge efforts to make sure that you get it correct because you can’t go back and make changes once you’ve built them.

    So, apple is very good at this kind of project-focused, “finish it and it’s done, move on” coding. Coding teams get built around products, then taken apart when the product has shipped, and the personnel get reassigned to the next product.

    But the style of coding that builds good amalgams is antithetical to creating good quality in the other kind of software, the atomless software, standalone apps and internet based services. Atomless software requires a constant slow steady amount of attention and care — there’s no endpoint, just a gradual process of refining and improving, getting customer feedback and making the next version better at meeting their needs and making them happy.

    Amalgam coding works well with temporary one off teams. Atomless coding works well with stable, steady teams that stay together for years, even decades.

    So, my argument is that the problem apple needs to address is not one of company organization, but rather of using an amalgam coding approach to building standalone apps. From the outside, this results in apps and services (iwork, ilife, final cut, the infrastructure of the app stores, etc) that look like they suffer from neglect. It makes it look like Apple is spreading itself too thin, so some of their products and services don’t get the attention they deserve.

    The solution is not corporate reorganization, but rather creating permanent teams devoted to working on apple’s standalone atomless products. Just a few percent of the total personnel need to be assigned to these teams, but they need to not be poached every time there’s a crisis in getting the latest amalgam product out the door. Maybe that means setting up a separate software shop (or two, one for over-the-internet apps and one for traditional apps), or maybe it means just carving out a head of services and a head of apps and let them (or make them, depending) work in a different style, more suited to atomless coding.

    1. I like, and agree, with all of your reasoning regarding how Apple works. What I liked about Ben Thompson’s analysis was how he pointed out how you can’t be good at everything. The very things that make you great at this inevitably and unalterably makes you bad at that.

      1. The secret is to try to improve what you’re bad at to some degree, without damaging what you’re good at too much. Finding an acceptable balance between sucking and excelling.

        My idea about compartmenting off certain software teams within apple is one possible method to change the mix of suck vs excel within Apple.

        The key, and the thing Stratechery missed, is that there’s no one right way to do things. It is not required that you excel at all things, just that you manage to not suck so much that you damage the rest of what you do. Does apple need to make better standalone code? It would be nice. It would help them, especially with their professional customers and with their developers. But it’s not 100% necessary.

        If you aren’t good at something, you either do it yourself and put up with the inferior quality, or you hire expert help to do it for you. Apple’s ethos of self reliance means they are loath to hire outside expertise, and that costs them. How much it costs them is something they need to be aware of — you can get away with doing something badly so long as it doesn’t harm the rest of your activities. But that means being aware of how much you suck, and being aware of the degree to which sucking at something is a thorn in your side.

        To the degree that this is a problem for Apple, I think it’s due more to hubris, to not truly realizing that they suck at certain things and being blind to the need to find ways to mitigate that suckage. That hubris was very much part of Apple under Jobs, I think. It’s possible that cook is more aware of the problem and is doing something to address it — time will tell — it takes years for corporate culture to evolve.*

        * there are pundits who point out that it’s really hard, almost impossible, to change corporate culture. Which is both true and false. Like all cultures, corporate culture is constantly evolving. Change is inevitable and natural, but it’s also slow and incremental. It can be guided, even sort of steered, but don’t try to force it, or speed it up, or make it undergo an abrupt metamorphosis.

      1. Sort of. If I understand it correctly (and there is no guarantee of that) the difference is truly organizationally and how divisions are measured. Divisional organizations, each division will have their financials broken out, at least internally. Their measure of success will be their financials and P&L.

        I think there is a difference between teams who are given a focus vs departments that can have little interaction and even conflicting goals and vision. I’ve worked in both in arts organizations. There seems to be this automated thinking that the larger the company the more it needs to be departmentalized. Then everyone is fighting for their slice of the financial pie vs everyone supporting one artistic vision.

        People talk about “measure what you treasure”. Few consider the systemic affect that results in actually treasuring what is measured.

        Or I could have totally missed the point.

  5. About creating a new division: I’ve never been comfortable with an electronics company getting into payments, and making a car would be driving off the road completely.

    1. “making a car would be driving off the road completely”

      I thought making an MP3 was a strange choice for a computer manufacturer. I still feel that way (which is why I write about successful companies instead of running a successful company).

      The iPhone? I thought that was right down Apple’s alley.

      The car? Don’t think “car”. If Apple make a car, I hope it will be as different from a car as the iPhone was different from a desktop computer.

      1. Sorry John, my idea of a car is something with an engine or motors that takes someone down the road, has seats, windows, and four tires, and performs the same basic function as Henry Ford’s invention.

          1. Yes. A car is a vehicle that is built to take a person where they want to go. That is a very long way from Apple’s business.

          2. Yes, Henry Ford didn’t invent the car, he invented a better (cheaper, faster) way to make a car — and revolutionized the industry and the world. Disruption comes from unanticipated quarters.

        1. “my idea of a car is something with an engine or motors that takes someone down the road, has seats, windows, and four tires”

          Thinking of a car that way is like saying a ship has to have sails or a plane has to have propellers.

          They say the companies who ran trains got into trouble because they thought of themselves as train companies instead of transportation companies. Trucks came along and the dominance of trains was pretty much over.

          With Uber/Lyft, driverless cars, computers, etc, the only thing I can predict is that the future of transportation will be very different from the present.

          1. Driverless cars have motors to take someone down the road, and seats, windows, and four tires, and perform the same basic function as today’s cars.

            Some say that driverless cars will reduce congestion, but there will still be the same number of people needing to get from point A to point B every day, and they’ll use cars to do that, same as now.

            In freight, the railroads are as busy as ever because one train with 3 people to operate it can haul a load much cheaper than 150 trucks with 150 drivers.

          2. “Driverless cars…perform the same basic function as today’s cars.”

            No, they won’t. If they come to pass, they’ll revolutionize the world in ways we can’t imagine. Parking lots will disappear. Car ownership may disappear. The cars may become mobile conference rooms or gaming centers. They seats may face one another or big screen TVs. Who knows? The possibilities and beyond my imagining because I’m tethered to the present.

          3. And by the same token, Exxon Mobil, Shell, BP, et al should stop thinking of themselves as oil companies but rather think of themselves as energy companies, and use their heaps of cash to develop alternatives such as wind and solar on a scale as yet unheard of.

          4. “And by the same token, Exxon Mobil, Shell, BP, et al should…”

            Excellent take, R. Bruce.

          5. To be done when current supply is fully milked…

            Please forgive my cynicism, your idea is correct. It kind of reminds me of the Vietnam War argument that if we dropped half the weight of bombs as bread, we would never have to fear Communism. Sadly, there too, one needed to follow the money…

  6. By the way, how does Amazon fit into this divisional vs functional model? Because the accounts I’ve read say that Amazon is another oddball company, where every single little thing is a standalone service, where the company buys these services from itself, and thus the company as a whole is poised to sell all kinds of things to anyone who might something that they developed in house to meet their own needs.

    I guess that puts Amazon as sort of an extreme version of a divisional company, where everything is its own division, and thus everything the company does can potentially be turned into a product for sale. It sort of avoids the “warring fiefdoms” and “we can’t sell product x because that would compete with our product y” problem of other divisional companies by breaking the fiefdoms down into such tiny bits that none of them can ever be all that important or all that influential to the overall course of the corporation.

    1. That’s a good point, except that Amazon Web Services is pretty important to the corporation (because of the amount of money AWS generates).

    2. “how does Amazon fit into this divisional vs functional model?”

      Actually, several weeks ago in his podcast, Ben Thompson brought up the topic of organizational structure when he was discussing why the the Amazon Echo was so good and Siri so mediocre.

      My knee-jerk reaction was that the Echo was a huge mistake. Clearly Amazon had no talent for hardware. But some people love the Echo. Ben Thompson thinks it’s not so much the hardware but the nearly instantaneous voice responsiveness that makes people like the Echo so much.

      Amazon isn’t my bailiwick, so I’m taking a wait and see attitude.

      1. Amazon has no talent for hardware? The Fire Phone was a huge mistake. But the Kindle and the Echo have been very popular so even though I hate to see the Echo getting better reviews than Siri, I think Amazon does have a talent.

        1. “Amazon has no talent for hardware?”

          That’s my point. I got it wrong.

          I still think the Kindle is kinda meh, and the Fire Phone a poorly conceived disaster but Amazon clearly has something going with the Echo.

          1. What’s interesting is that Amazon got to hardware from a perspective exactly opposite Apple’s: as a conduit for their services and content. They’ve succeed in that, along the way creating the only Android fork viable is the West.
            I wouldn’t call them talentless in hardware. Their talent is sourcing OK machines for rock-bottom prices. If the Fire had the PlayStore, I’d be recommending it half the time; me and my iBrother almost shared a six-pack for handing around at Christmas, but Clash of Clans killed that project.
            The Kindle is unimaginative, but rather more solid than competitors, both on the HW and SW sides.
            They had a major miss with their overpriced, under-branded, under-designed, weird phone, but they could probably be a standard-bearer for the low/mid range if they saw increased ancillary sales in that.

            To build on the analogy, Amazon only has to be as talented in Hardware as Apple is in Services.

          2. “What’s interesting is that Amazon got to hardware from a perspective exactly opposite Apple’s: as a conduit for their services and content. ”

            When you think about it, that’s what most devices essentially are: a conduit for services. In the last earnings Call Tim Cook & Luca went to lengths to emphasize services. Maybe this is the way Apple will view their products going forward.

          3. “To build on the analogy, Amazon only has to be as talented in Hardware as Apple is in Services.”

            In my opinion, this is exactly the right way to think of it.

  7. I think structure – divisional or functional – may miss the point when it comes to innovating in large organizations. As companies grow in size, there is a tendency for them to be less effective in creating new innovations. The solution has been to spin off new divisions or workgroups and isolate them from the company organization, regardless of the type of organization it is – divisional or functional. I have found small is usually better, using a team of experts, and getting away from the bureaucracies that come with large companies. So while divisional vs function is one axis, small vs large is the other axis and even more important. Perhaps that explains why Apple seems to be less innovative, more risk adverse, and more plodding than it once was.

    1. “We’re organized like a startup. We’re the biggest start up on the planet.” ~ Steve Jobs

      “Perhaps that explains why Apple seems to be less innovative, more risk adverse, and more plodding than it once was.” ~ Phillip G. Baker

      Pretty much every company in the world wishes they were “plodding” along the way Apple is.

        1. “less innovative, more risk adverse, and more plodding than it once was”

          Maybe so, maybe not. But there hasn’t been a single year in the past 40 when Apple hasn’t been accused of being less innovative, more risk adverse, and more plodding than it once was. So I’ll remain skeptical until I see something more.

  8. Would love to see divisions.
    Each competing and innovating.
    Would create stand alone companies
    and expose now hidden value.

  9. All this discussion is based on the premise that Apple services are organized around functions, but this is incorrect from what we know. Maps, Siri, iTunes are products with their own organization in charge of the server and client side. And this is likely the issue. Apple need more functional approach, not less.

    1. A functional organization can’t be simultaneously focused on both hardware and services. It’s like saying you’re going to simultaneously focus on your left and on your right.

    2. I agree. Throwing the services components of iOS over the fence to the services divisions is the problem. The same group that writes the software should design the services (or at least collaborate with experts on the design). There’s no reason that component needs to be tied to a long release schedule, or great secrecy. You can still have a scaling/manufacturing function which is somewhat separate, just as there is for hardware.

  10. There’s a major fact that’s been missed, though: Up through the mid-’90’s, Apple *was* a divisional organization.

    The Apple /// and the Lisa and the Newton have also been conveniently left out.

    In the late ’70’s Apple had groups working on multiple computer projects. The first one that got completed was the Apple ///, released in 1980. It was a disaster, for multiple reasons. One reason was that the first units had a nearly 100% hardware failure rate. They were recalled, and a revised version was reintroduced in the second half of 1981.

    The second reason is more relevant to this discussion, though, which is that while the Apple /// had an Apple II-compatibility mode, it was intentionally crippled. It was limited to only 48K of RAM, and it didn’t support any of the enhancements that current Apple II owners were using to get 64K or more RAM, lowercase capability, 80 columns of text (instead of just 40), and more. The Apple II was selling well to professionals, who were adding all those features to their computers and using them to run fairly capable (for the time) business software. But Apple’s executives didn’t want those people to be buying Apple IIs any more, and they didn’t want them to continue running that Apple II software on Apple ///s (with lowercase text, 80 columns, and even more RAM built in) instead of buying new software that was written just for the Apple ///. (Does that sound familiar?)

    Meanwhile the Apple II division kept chugging along.

    Then came the Lisa, in 1983, and the Mac, a year later in 1984. Steve Jobs was famously forced out of the Lisa group, and he took over leadership of the Mac group. Remember the pirate flag that the Mac group flew from the top of their building? It was even in the news recently as it was brought out for Apple’s 40th anniversary. That flag was a sign that the Mac group wanted to do things their own way, in opposition to the rest of the company.

    Surprisingly, the Apple /// kept getting sold, even after the introduction of the Macintosh, until April 1984.

    Meanwhile the Apple II division kept chugging along. An enhanced Apple II, the Apple IIe, was introduced at the same time as the Lisa, in 1983. It wound up eventually being an equal or superior to the Apple /// in every way. A year later, Apple introduced the Apple //c (actually on this date, April 24th, 1984). Two years after that, in 1986, Apple introduced the Apple IIgs.

    For years after the Mac’s introduction, profits from the sales of Apple IIs subsidized the Mac’s existence within Apple. And there was resentment. Apple II people wished it could get some support and attention. There was still a thriving community of Apple II users, developers, and makers of add-ons (accelerator cards, RAM cards, video cards, sound cards, SCSI cards, networking cards, etc.–even a PC compatibility card called the PC Transporter). Mac people wanted the Apple II to go away, thinking it was a drag on the company, even though the Apple II division was a cash cow that was more than paying for itself through the late ’80’s.

    Then there was the Newton, in the mid ’90’s (1993 to 1998), which became a very independent division that *almost* spun out into its own company.

    And Claris, which *was* spun out as a separate company in 1987, and always remained a wholly-owned subsidiary. Even after renaming itself to FileMaker Inc. in 1998 it’s still a wholly-owned subsidiary.

    So, it’s a mistake to think that the Macintosh wasn’t a diversification in products for Apple. It totally was. At the time of its development Apple had *four* different, almost totally incompatible computer systems in production or under development (Apple II, Apple ///, Lisa, Mac). The Mac wasn’t even initially supposed to be a proper computer with a full OS, it was just supposed to be a simple and cheap appliance. This is why Mac OS had so many problems being extended and updated later in its life, and eventually had to be replaced. The Lisa, on the other hand, had a full OS on day one, with preemptive multitasking, memory protection, device drivers, etc. The Mac on day one, as Steve Wozniak puts it, had “a program that simulated an OS” in place of a real OS. Every new application that was launched would kick that program out of memory and take over the whole machine. It was a lot like a game console in that way, except that it had a large library of ROM-based routines to make many things easier to develop and more consistent between programs.

    Apple also did keep trying to diversify, with things like the PIE (Personal Interactive Electronics) division that was meant to develop standalone electronic devices, the aforementioned Newton, servers based on AIX rather than Mac OS, the canceled Apple Interactive Television Box, the Pippin game console/set top box, etc.

    Since at least the early ’90’s Apple has fervently wanted to be “more than just a computer company.” The iPod in 2001 really wasn’t a singular unusual device, outside of Apple’s normal business of selling computers, that luckily turned into a hit. It was actually just the first *extremely successful* non-computer product out of a long string of others that Apple had been attempting to diversify with over the preceding decade or more!

    The reality in the end is that Apple only became a truly functional organization after Steve Jobs returned with the NeXT acquisition in 1996. At the time, that’s what was absolutely necessary, to drastically shave products, divisions, headcount, and any other costs, and focus the entire company like a laser onto a single product, the Mac. That’s how Apple was saved, and that structure was later stretched (successfully, thankfully) to grow Apple to the size that it is now. The question now, IMHO, is whether that structure is actually flexible enough to grow even further to encompass products like cars, and what kinds of plans Apple’s executives have in mind for managing this. They are, after all, extremely intelligent people, and there’s no doubt that they’ve thought about it and have their own plans.

    1. Steve Jobs hid the “pirates” of the Mac team away from everyone else precisely because the other divisions would have — and later did — try to compete with it. The Apple II team used to say that the Macintosh got all the headlines and the Apple II got all the profits.

      Divisions compete. That’s what they do. Divisions motivate people to improve the existing products, but they also motivate people to protect and preserve existing products, even at the cost of destroying promising future projects.

  11. There’s been some expectation that Apple may make a car. Right, and Apple may start selling wine, or garden tools. Steve Jobs is having a good laugh in heaven.

    1. “There’s been some expectation that Apple may make a car. Right.”

      Well, the phone guys scoffed when Apple entered the phone business too so maybe we should maintain an open attitude toward cars.

      “We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.” ~ Palm CEO Ed Colligan, commenting on then-rumored Apple iPhone, 16 Nov 2006

  12. I’ve said before that I’m pretty sure Jobs was a pragmatist, and it seemed to me Apple was organized or focused with pragmatism in mind (do what works best and is most practical). Asymco wrote a good article recently with this nugget:

    “My simple proposal is to think of Apple (and actually any company) as a customer creator. It creates and maintains customers. The more it creates, the more it prospers.”

    Apple understands that they deliver value within the user experience (which helps insulate them from disruption), and that encompasses both hardware and software. Services is part of that. I don’t see a fork in the road ahead, or a crossroads. I see a path that Apple has chosen and is moving forward on, and that is to create and maintain customers (we see evidence of Apple’s alignment with customers in many places). Now that computing is finally, truly consumer-facing, Apple’s enormous success should come as no surprise.

    Of course, there will be difficulties along the way, some aspects of what Apple is doing need a lot of improvement, and many of those tend to be in the services area, but I see an iterative process taking place, I’m not concerned that services won’t improve. And I don’t see the need for a separate Services division. As long as Apple remains pragmatic and focused on the customer, I expect things will be fine. More than fine actually, there’s a lot more I could say about what is likely to come in the next five to ten years, but I’m short on time.

  13. “I’m not convinced that DuPont is analogous to Apple. DuPont added paint to its gunpowder lineup because it wanted to diversify. But Apple doesn’t diversify. They cannibalize.
    — When Apple created the Macintosh, they weren’t diversifying from the Apple II.
    — When Apple created the iPhone, they weren’t diversifying from the iPod.
    — When Apple creates whatever-the-heck-they-create-after-the-iPhone, they won’t be diversifying from the iPhone.”

    John I haven’t finished the article but this thing doesn’t add up. The examples you’ve listed are all hardwares related. But Ben’s argument, what I’ve understood, is that hardware and services are different animals that’s why you need different models for them. And his argument lies on that notion that if Apple wants to be a service company.

    1. You are exactly correct. Ben Thompson is arguing that if Apple wants to diversify into services, they need to create a separate division for services. I’m arguing that Apple should NOT diversify into services. That services currently serve the iPhone and they should continue to do so.

  14. One question. Wasn’t the iTunes Music Store (on both Windows and Mac) a very successful service?

    I would say Apple has had several mishaps, but generally has been quite successful with services. At the very least, I think a careful assessment of whether Apple’s services are good or not, should be a prerequisite for any discussion on this topic.

    1. No question it was/is a successful service, but is it particularly better than anything before or after? How successful would it have been (or still be) if it did not evolve to be mandatory and exclusive on the iPod, and subsequent devices?

      The iPod carried iTunes on it’s back.

      1. I understand that as a hypothetical question, but I am not sure that it is relevant in the real world. Few services are independent.

        The easy case is Dropbox. The simple idea of syncing a local folder with a remote one has resulting in everybody from Apple, Google, Microsoft, Amazon and even Adobe to integrate it with their service. Whether or not Dropbox has the best service is getting less and less important.

        You can make a similar discussion with Google Docs vs. Office 365. Microsoft has the upper hand, not because their services are better, but because they have great offline clients which are the de facto standard.

        You can go on with Facebook Messenger or Google Hangouts or iMessage. None of these are competing on their own merits, but on the merits of being built into a larger platform.

        Going into Gmail and other online email services, the race is not about creating the best email service, it is about creating the best “free” email service. Given enough resources, there are likely many other companies that could create a similar service with a similarly large storage quota. However, Gmail wins because it is free. And it is free because of Google’s huge advertising platform.

        So really, I don’t think that it is useful (other than for theoretical reasons) to discuss whether any service is better than a previous one, or whether it is independent or not.

        1. The question was whether iTunes specifically is a successful service. The answer is yes. It is artificially successful in the sense that it rides on the success of the iPod, and now iOS. On these devices, it has no competitors, those have been locked out. It’s the baton on the relay racing team, it’s there for the ride, and no other baton exists. Though the team is good, it does not mean that it’s a premium baton, any other merely adequate baton would have fared as well.

          I think it’s both useful and important not only for theoretical or philosophical reasons, but for practical ones as well.

          a) Having the freedom and ability to use “best of breed” software and services on a given piece of hardware is a good thing for the user.

          b) iTunes is downright awful, but successful. It matters.

          c) iMessage and Facetime are an exact homologue of MS leveraging the OS to establish standards on the platform. One major difference, iOS can and does forbid applications. It matters.

          1. Every company with large assets tries to leverage these to succeed in new services. Amazon, Microsoft, Google, Adobe, you name it. Just as iTunes rides on the iPhone’s popularity, Google Play music rides on Android’s. Amazon rides on the popularity of their e-commerce platform and cheap Kindle devices. Only the newcomers like Spotify do it as independent services.

          2. True, but specifically for the iTunes service, competition is not allowed on the platform, so successful is not a meaningful measure.

          3. On iOS, I can stream music from Spotify. I can watch videos from Amazon. I’m not sure what you mean by “competition is not allowed”.

          4. Steaming services are different from iTunes. Only iTunes can manage your iPad’s apps, and music library. For all intents and purposes iTunes is the filesystem.

            Oh, and you can only get the Spotify and Amazon apps from iTunes.

          5. Even now the only thing I need iTunes for is to back-up my i-device to the computer. Although I am sure if I dug around enough I could even find something else to do that. I don’t need iTunes to get any app for iOS.


          6. There are many iTunes alternatives which manage many different aspects of your iOS devices, some are focused on music or exposing the file system, some are full on replacements for iTunes. I’m fairly sure if you want to avoid iTunes 100 percent, you can. Although I’ve never had much trouble with iTunes, I actually like it.

          7. As I said to Joe above…. After the Real lawsuit, I gave up on such hopes. Maybe things have changed.

            If things have changed, and another iTunes alternative can be developed and marketed as such, and it’s allowed to exist, then iTunes will indeed have competition on the platform. Until then, it’s success is a de facto success based on iOS regardless of it’s merits.

          8. We had this discussion already (months ago, maybe longer), there are many iTunes alternatives and have been for years. As jfrutal noted, you need to get out more, and get your head out of your bias.

          9. There was absolutely nothing biased in my comment, in fact I left room to be shown differently. You were given the opportunity to serve up at least one example. You have not, thanks for coming.

            “We had this discussion already” yes, and it wasn’t resolved.
            Anyway, it’s incumbent upon me the user to see if the censor has changed positions? That is bias, and it’s been earned.

          10. “You were given the opportunity to serve up at least one example. You have not, thanks for coming.”

            Seriously? You can’t *use Google*? We did resolve this discussion previously, *with examples*. Is your ego so wrapped up in ‘winning’ in the comments that you refuse to do your own *very simple* research by opening a web browser, going to, and typing “itunes alternatives”? Don’t be a child, do your own homework.

          11. It’s you that chose to defend Apple, so when one makes a case one brings evidence.

            Now you happen to be right, I did run my own Google search (even without you telling me), and it does appear that there are indeed iTunes alternatives as you contend. That piques my curiosity even more, because if them, why not Real? I intend to see what lies beneath the surface.

          12. I’m not defending Apple, I’m defending the truth. Your “Apple baaaad” prattling is tiresome.

          13. I’m not being sarcastic, but how do you sync music, media, and apps with your PC? What else does it?

          14. That all happens “in the cloud” these days. I’ve not done a hardware sync in, heck, I don’t know how long.


          15. Exclusively though iTunes, unless as Space Gorilla says there are other ways. After the Real lawsuit, I gave up on such hopes. Maybe things have changed.

          16. Thinking back, I’m not sure I can remember a time when there weren’t alternatives to iTunes. You are simply misinformed. You should also learn more about the Real lawsuit.

    2. I think part of that, though, is how they viewed services. The services they have implemented, both successfully and less than successfully, up to recently have always been viewed as features of hardware products, not products in and of themselves. That was Jobs’s take on Dropbox—it is a feature, not a product. IMHO, that’s what makes Beats/Apple Music so extraordinary. Unlike iTunes and even iWork, which were created to support hardware products, Apple Music is expected to be a product on it’s own.


      1. At one time, I did think Apple Music was expected to stand on its own, with the profitable goal of selling subscriptions on PCs and Androids. But I’m not so sure anymore. Apple might not be expecting a profit. One, they might be thinking of Music as marketing for their devices through getting people to experience Apple during the 90-day free trial subscription. Two, they might have expanded to PCs/Androids to enable a better network effect for the Connect portion; it may have been part of the package to get musicians/labels on board for streaming at lower rates.

        1. I think the difficulties Apple Music is having goes right to the heart of both Ben’s and John’s articles.


      2. Even with Apple Music though, it’s value added to the hardware. Buy an Apple device, get Apple Music. Easy. Done. And it’s pretty good. My four teenagers all use Apple Music as their primary music app/service now.

        Long term I see an opportunity within Apple Music for connecting artists with consumers, directly. But that’s going to take years I think.

        1. Unless Apple’s goal was to let Apple Music for Android whither on the vine I don’t think it was ever _just_ for Apple device added value. As for adding value to Apple devices, all it has done for me is unnecessarily complicate the music experience. They need to either commit to it being an Apple device _feature_ or commit to it being a stand alone product. Trying to make it be both is constricting its potential. But then, as I mention to Mark, the difficulty it is having, I think, is the point of both articles.


          1. Apple Music can add value to my Apple devices and be on Android. I think it has to be cross platform for the long term play which I suspect Apple is moving towards. Some people will dig it more than others. We really like it, and we use other music services, but most often we just fire up Apple Music.

      3. Different companies view services in different ways.

        Yes, Apple generally views services as a part of the “Apple Experience” which is mostly monetised through sales of hardware. However, similar arguments could be made for Google or Facebook because neither monetises their services directly. Nobody is paying for the services that Google or Facebook provide. None of their services is a product “on it’s own”. As is often said, the products that Google and Facebook sell are their customer’s private information.

        To find a service that is standing on its own, you would have to look at services like SalesForce, DropBox, Slack, Spotify, etc. Given that Salesforce is probably by far the most profitable of these, maybe we should compare Apple’s services to Salesforce. And as someone who is forced to use Salesforce right now, I can say that their UI is pretty awful. Apple’s services are much nicer to use.

        We could also look to Amazon as another service company. However, I would argue that Amazon is not a “service” company, but instead a huge retail and logistics operation. Their service does not stand “on it’s own”, any more than Apple’s does. People buy stuff on Amazon first and foremost because of the merchandise. The “web store front-end” is just added value. Of course, the discussion would be different with AWS.

        So really, I have to wonder if this discussion (including what Ben Thompson has written) has any merit.

        1. I think you make some great points, but still miss the point. Or I could be missing the point. Obviously, if I understood it better myself I would be writing these articles.

          From my limited understanding what is being analyzed is a systemic influence on behaviour vs behaviour driving a system. That you seem to think either article lacks merit does not surprise me since you deliberately steer clear of cultural influences in your analysis.


          1. John Kirk has conveniently summarised Ben’s article at the beginning of his. From the bullet points, it is very clear that there is an assumption that Apple is not doing services well.

            Hence if Apple is in fact doing just fine in services, then the argument is pointless. The whole discussion breaks down. Culturally Apple might be different, but there is no point in discussing it unless we can show that it has had a detrimental effect.

            Financially at least, Apple’s services are doing superbly well. People are actually paying real money for Apple’s services.

          2. I have to agree, after reading both articles, there is the assumption that Apple needs to change in order to get better at services. I’ve already said I don’t believe Apple needs to change, and I already see much improvement in services. Apple seems to be organized pragmatically, and I think that works just fine for both hardware and services. But beyond that there is the other assumption that Apple isn’t doing well in services, and while many Apple detractors don’t like some Apple services, or don’t like how Apple delivers services, the evidence seems to tell us Apple is doing very well in services.

            I found that report about service margins also, from Piper Jaffray, it would seem service margins for Apple are in the 40 percent range and should creep into the low 50s in 2017. That’s much better than I would have guessed.

          3. Yes. Profits for services should have gone up significantly as it scaled up and server costs etc. went down.

            I don’t mind people doubting whether Apple’s services are good or not. What annoys me is when the conveniently ignore factual data. In this case, the revenues that Apple’s services are generating.

            Steve Jobs, when questioned about the decision to drop Flash from iOS, said that people would vote with their wallets.

            That seems to be the case here.

          4. “What annoys me is when the conveniently ignore factual data. In this case, the revenues that Apple’s services are generating.”

            You’re just being as ornery as Obarthelomy at this point. It is precisely that data, particularly as communicated by Apple and their goals driven by the data, that is spurring this conversation. Did you actually read Ben’s piece?


          5. Sorry to jump in at this point, that’s almost a necro, but I think the service issue is multifaceted:

            1- services can be either lock-in or revenue oriented, especially for Apple that’s hugely focused on hardware still. Having all Apple services limited to Apple hardware makes switching away harder, but closes up the non-Apple market. Apple’s are clearly set to lock-in, not revenue. I’d say services are an extension of iPhone the same way iWatch is.

            2- There’s a management bandwidth issue. Functional means top management is involved in decisions about everything (products and services) in the portfolio. Because time is limited, some, or a whole category, will always be second-class citizens. Since services have a fairly low ceiling (Apple owners), and have a huge home court advantage, I don’t think they’ll be a priority for Apple until they lag so much they become a reason not to buy iPhones, and the Maps episode makes it clear that floor barely exists.

            3- Apple’s strategy seems to be to milk their user base, which is the juiciest one: monopoly on apps, licensing on peripherals, huge home court advantage on content, now embracing and extending into financing the devices and payments made with them, locking out 3rd-party repairs… I think this will intensify (get more Apple owners to use those services) and diversify (add more services: health monitoring, home security, I’m surprised Apple isn’t an MVNO yet…)

          6. Most smart companies usually look to existing customers first to increase revenue. The cost of “stealing” customers is usually too high. Even trying to leverage a casual customer can be too costly. I’ve mentioned this story before, but Stu Leonard’s (a small—and at one time only one—boutique grocery store chain based in Connecticut) always held customer focus groups with customers who were already their best customers. They were the ones already predisposed to spend more at the store.

            Apple’s services strategy has done well enough up to now. They could continue on and still be fine, imo. The issue is if they really see services as their best option for revenue _growth_ then more needs to be done. Whether they are organizationally in a position to level up is ultimately the question trying to be discussed, with lessor or greater success.


          7. That’s not _exactly_ what the summary says:

            “4) To do both iPhones and Services well, Apple needs to move from a functional organization to a divisional organization; and”

            Two things: 1) I don’t know anyone who argues that Apple does services as well as they do hardware, much less the iPhone. They do services well enough, and that only well enough to serve Apple hardware. If there are people who use iTunes without any Apple hardware (Windows users) the numbers have to be so small as to be insignificant. Even if they use it for Apple Music, that furthers the point that iTunes is not anything without serving another Apple product. And Apple Music is not a hardware product.

            2) To me the real tell would be how Apple Music is doing on Android post-Beats, since that is the only service that is not playing supporting role to Apple hardware.

            Your point about Google is a good one, actually. I think that shows a shift from divisional organizational services to functional. Each service used to live on its own. Then Google pulled them all together a couple/few years ago, even amongst customer complaints. But my question to you, regarding data vs services as the product—which came first? Search or ads?


          8. Apple is the world’s best company when it comes to hardware for tech devices. If Apple were to do services as well as they do hardware, they would have to be at least Facebook, AWS and Google search combined. Indeed profit-wise, that probably would still not add up.

            No, I don’t think the authors intention was to suggest that. The just meant that Apple’s services are (in their opinion) below par.

            Not quite sure what you mean by your last question. Regardless of whether it was paid for by investors or by advertisers, search was never an independent service, because users never paid money for it. It was always paid for by someone else.

          9. There are no ads without search because there is no data to sell otherwise. Search, even as a “free” service, is integral to selling ads. Regardless of who is paying for it, Search is the service because without it, there is nothing.


          10. “No, I don’t think the authors intention was to suggest that. The just meant that Apple’s services are (in their opinion) below par.”

            No. The point is for services to be a principle focus for growth (as Tim Cook and Luca Maestri both communicate) then the services need to come out of the shadow of hardware. For them to come out of the shadow of hardware requires a different organizational structure.

            Although just re-reading Ben’s piece, I would say services are suffering from more of a divisional mindset anyway. As he points out Apple Pay should be more integral to other Apple services. But since Apple Pay is not seen as anything but an added value feature for hardware there is no priority or urgency for it to be anything else. A functional organization would pull all that together, I would think.

            They just need to get their services to all play ball with each other as much as with hardware.


          11. It baffles me as to how you can so confidently assert that Apple Pay is but an add-on for hardware.

            Where is the evidence for that?

          12. Can you use it without Apple hardware or with other Apple services?

            But how much better it can do is the point of Cook and Maestri, thus the article by Ben, and subsequently, John.

            Again, did you even read Ben’s article?


          13. Here’s a key point in Ben’s article that I think is quite wrong:

            “You only get one shot to get a device right, so all of Apple’s internal rhythms and processes are organized around delivering as perfect a product as possible at a specific moment in time.”

            Ben goes on to describe how services are iterative and not like hardware. But he’s missing that both processes are iterative, it is simply the time frame that differs. Apple never gets the iPhone right and is always iterating and improving it. Services is much the same, but the iteration can happen much faster.

            This is part of why I think Apple’s pragmatic approach as an organization works for both hardware and services. There also seems to be an assumption that services must be available outside of Apple’s ecosystem to be considered good or successful. Why? I don’t agree with that assumption.

          14. Ben Thompson does not have access to data or industry insiders like the other Ben here. He makes up for this with brilliant writing skills and attractive generalisations. He is a good thinker, but the caveat is that you can only get so far in an armchair.

          15. Agreed. To be clear, I don’t mean to say Apple’s services are all great and best of class. There’s lots of room for improvement, but I am certain that can take place, and is taking place, within Apple’s current organizational structure, and I see that structure as founded in pragmatism.

          16. I mostly agree with you, but there is definitely a problem if services need to improve (as in the best opportunity for revenue growth at this point) as Apple articulates. Whether that is a systemic or management problem is indiscernible at this point.


          17. Yeah, about 5 times now. It’s painful but I suppose I have to.

            Please tell me why I have to use Apple Pay with the App Store, for example, when it already authenticates with my finger?

            How can Apple implement a security solution that requires some extra hardware, on devices that do not yet have that hardware?

            And contrary to what you or Ben might assert, services is not about reaching the widest audience possible, even if it is mostly fixed cost. For Apple at least, it is about making money, and newspaper paywall experiments suggest that these two are very different things.

            When The Times introduced a paywall, the number of people looking at their digital service dropped by 98.7% (from 22m to around 300,000), yet the switch was a huge financial success.


            Applied to the current discussion, it is more important now for Apple to create the best possible payment service with the tightest integration possible. They should strive to create a payment solution that is so good that customers will actually be willing to pay the Apple tax for it. Just like newspapers should focus on writing stuff people will pay for, instead of stuffing in annoying ads to reach the widest audience in a financially viable way.

            Compromising security by broadening hardware support is the worst thing Apple can do. Maybe when more Android phones come with the necessary hardware, but not now. It will take time.

          18. “And contrary to what you or Ben might assert, services is not about reaching the widest audience possible, even if it is mostly fixed cost. ”

            I certainly have asserted no such thing. I have asserted that in order for Services to drive more growth as Apple has communicated, they would do well to integrate their services more. I disagree with Ben that a divisional organization is needed.

            And I think I disagree with John that services can’t excel in a functional structure. As I mentioned, I think Google has moved all their services to a functional organization and quite successfully. I think it is a divisional mindset that will be the greatest hinderance to growth. And at the same time, Google/Alphabet has moved to a larger divisional structure so all those other projects don’t get in the way of their bread and butter until they are ready.

            This has nothing to do with how well services are doing. It has to do with how well Apple has said they want services to do, above and beyond what they are currently doing. Ben contends that a divisional structure is the best way that can happen. John contends that would be bad and best avoided. Because, systems.

            I agree with John (and actually you and S.G.) that the services do well enough. But if Apple sees services as the best opportunity going forward for growth, then they need to do more than what they are now doing. And that is Apple’s contention as well. Else they wouldn’t focus any more on it than they are doing.


          19. “For them to come out of the shadow of hardware requires a different organizational structure.”

            I would say this is an assumption that is not supported with good evidence.

        2. Speaking of Facebook, I saw a recent tweet about Apple’s Services revenue being $20 billion in the past year, while Facebook’s total annual revenue was $18 billion. And I think Apple just reported that Services revenue has increased another 20 percent. Some other report I saw said Apple’s Services revenue also has very good margins. I thought Services was close to break even, but perhaps not.

    3. My assessment is that most of Apple’s services have been good; they just haven’t been the best. (iTunes was arguably the best for a time during the iPod days. There have been some clunkers.) For the most part, they handle the basic, most prevalent use cases. However, they don’t evolve to the next level (deeper work flow, or more specialized use cases); they don’t take advantage of social or search well; they’re not the fastest (response time), etc.

    4. Asymco dives into this in a few articles, and it seems to me the short version is that Apple’s services are very successful. Certainly there’s work to be done, improvements to be made, but it’s magical thinking on the part of Apple detractors to say Apple is bad at services, that is more of a meme which isn’t helpful for proper analysis. It’s more accurate to say that Apple is good at services and getting better, but I think necessarily moving slowly because of the very large scale they operate at (and the relatively short time frame in which Apple expanded rapidly).

  15. I always learn a thing or two from you, John…It seems to me tho that Apple’s ability to be flexible & change with conditions might at times be underestimated…Nevertheless your insights as to how issues emerge within companies & your common sense insights as to how people function within structures is flawless…thank you

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