The Reinvention of Apple

Tim Bajarin / May 16th, 2014

Everyone knows Apple is one of the top three brands in the world and is known especially for their iPods, iPhones and iPad’s, as well as their Mac line of personal computers.

As a company, they have had a miraculous track record of disrupting industries and competitors particularly since Steve Jobs came back in 1997 and saved Apple from near bankruptcy and potential irrelevance. During Jobs’ second run at Apple, he pretty much reinvented the PC form factor with the candy color iMacs, the digital music player and smartphones. In 2010, even though tablets had been on the market for almost 20 years, Jobs reinvented the tablet with the iPad and has made it a highly successful new business for them. Apple has made all of these products icons within each product category and allowed them to become a $110 billion a year company with $160 billion in cash in the bank. By all measures, Apple is one of the most successful companies in history and continues to innovate in software and services along with introducing new models of their signature line of products each year.

Setting the Stage

Apple’s run of introducing disruptive products has been really amazing. With the iPod, iPhone and iPad they have changed the way people listen to music, made a cell phone into a pocket computer and delivered the next major new form factor in PCs with the iPad. Most companies are happy if they have one major hit and live on that hit for decades. But Apple’s successful track record has created what I would call unrealistic expectations from Wall Street and even consumers who want Apple to bring out the next great disruptive product that will turn the world on its ear and bring Apple the next great revenue boost to the bottom line. It is true Apple could still do something radical with the TV experience or enter the world of wearables in a big way. They are well on their way to making automobiles a new revenue stream over the years. But given the incredible innovation going on in the world of digital technology today, it would also make sense for Apple to make some highly strategic acquisitions of technology and companies that help grow their business beyond their core competency and current product lines.

Given Apple’s brand, cache with customers, retail outlets and superb customer service, it is perhaps time for all of us to be ready for Apple to leverage these major strengths beyond their current scope of products that only come from internal research and M&A activities. I think the financial world, as well as Apple customers, need to be open to the fact there are a lot of other great products out there that, under the Apple brand, could actually enhance their product portfolio and expand their reach in the marketplace around the world. In fact, I find this idea extremely intriguing since it could help Apple reinvent itself yet again. Remember, for almost 30 years Apple was a computer company. But by introducing the iPod and iPhone, Apple reinvented itself as a consumer electronics company and dropped the word computer from its corporate name — they are now only known as Apple, Inc.

Realistic Expectations

I don’t think I can emphasize enough the fact that expecting Apple to keep coming up with disruptive products that are game changing hits is not realistic. While I do have faith they still have a lot of what it takes to create innovative game changing products, trying to bring out something disruptive on a regular basis is highly improbable. It is also very difficult to do, which is why Apple disrupting three markets with the iPod, iPhone and iPad is truly amazing. They can continue to innovate on existing products and drive them to great profitability. However Apple, as well as Wall Street and consumers, have to be realistic on two key issues about Apple’s future.

First, as stated above, creating a new product category or disruptive product again and again is not only difficult to do but can no longer be the only strategy of Apple’s business plan. The amount of innovation going on in the tech world that Apple could tap into either at the tech licensing level or in forms of tech and company acquisitions is the most realistic thing for Apple to do to add to their future business model. While some might see this as a sign of weakness, it is actually the opposite. Apple as a single company can only do so much with its internal IP and talent. Admitting and accepting this is the first step towards Apple reinventing themselves again. With $160 billion to work with, Apple could pick the cream of the crop from the outside to bolster their current and future product portfolios.

The second thing to understand is Apple as a brand is huge. While Apple’s products will always be central to their strategy, bringing in other known brands or complimentary technologies that can be “Apple” products and sold through their online and physical stores and supported by their world class customer service could easily expand their product lines as well as help them gain more traction in markets around the world. I have to admit, when rumors came out Apple was considering buying Beats for $3.2 billion, I could not understand why they might even consider this. At first I really questioned the valuation amount but given Beats brought in $1.2 billion last year and a $3.2 billion price is the street average of 3 times earnings, at least this could be rationalized. When Google bought Motorola they paid 12x earnings for the acquisition so, by comparison, this is a bargain. I also questioned the fact that at the IP level Apple could have built this from existing licensable IP and created a high end headset of their own.

Now incorporate the possible acquisition of a highly successful branded headset into the idea mentioned above that would have Apple carry other Apple owned products that strategically compliment their core products and sell and support them under the Apple brand and you have the beginning of another dimension of a new Apple. A Beats headset by Apple could double the amount of Beats headsets sold in their first year as a branded product and with the streaming service it clearly would help Apple jump start their move into subscription based music — clearly the biggest trend in digital music.

There is another angle on the potential Beats deal I only discovered after talking to some cultural experts. It turns out a large segment of African Americans and Hispanics buy Android devices and most are in the mid range price segments for smart phones. However a big element of users in those markets do not scrimp on their sports shoes. This has fueled a great deal of Nike’s and other companies’ sports shoe strategies for decades. These groups also are at the heart of the high-end headphones market as apparently they expect their mid-range priced smartphones to have great audio quality but want the top line headphones to experience that music. If Apple understands these demographic issues, they could clearly use Beats to help them gain more traction in a market segment Google and Android dominate today.

Whether Apple buys Beats or not, the fact they possibly have even considered an acquisition like this reinforces my contention Apple has accepted the fact they can’t always create disruptive products from inside and as part of the reinvention of Apple, the company will be looking to license or acquire key companies and technologies that, under their brand, could get them even greater levels of profitability. In fact, on the recent earnings call, Tim Cook basically said Apple was not averse to making some significant acquisitions with their cash horde in the near future. I am sure all would be strategic and, as I have suggested, could bring into the Apple fold products and IP that become branded Apple products as part of this investment strategy.

As one thinks about the future of Apple, I believe we have to consider the fact Apple will continue to innovate from within and enhance their current line of products like the iPod, iPhone, iPad and Apple TV. They will also most likely enter the world of wearables, automobiles and maybe even the health market in some way. But it is unreasonable for Wall Street and consumers to keep pushing Apple for the next big thing that could disrupt markets. I know they have a great track record and we have come to expect this from them. But I am not sure in this day of digital innovation this alone should drive their strategy. Now add to this the idea of Apple using their cash to build the company through licensing and acquisitions and buying strategic products that could be sold through their branded franchise, stores and supported by their great customer experience and you have what I believe will be the next major version of Apple as Apple reinvents itself again.

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.
  • jfutral

    “But it is unreasonable for Wall Street and consumers to keep pushing Apple for the next big thing that could disrupt markets”

    From a tech and business perspective, I couldn’t agree more. As an artist, I vehemently disagree. Apple is steeped in Modern philosophy. Philosophically, Modernity is always at war with what came before. Even though I consider Modernity a product of the Enlightenment project, Modernity in art more strongly demonstrates and emphasizes novelty and movements. From a bit of a reductionist summary (meaning it is a bit more complex than this), from impressionism to post-impresionism, to fauvism, to surrealism, to abstract expressionism, to pop art, each movement’s artists was consumed with doing something that wasn’t done before. Why do what everyone else is already doing? What’s the point of that? I think this is what drove Jobs and Apple style innovation. Don’t just marginally improve on what was done before, rethink it, re-imagine it. Jobs even applied that philosophy to the organization. Iterate and refine after, sure, but while you are rethinking the next thing.

    If Apple really does what you propose, they will no longer be Apple. While everyone, including Apple, should be content with that, no artist who is driven is ever content with that. Even if an artist never succeeds in creating/re-creating that moment, the driven artist would rather die trying than dwell on past successes. The driven artist would rather fail at something big than wallow in the shallow end of the pool. That’s what gave artists like Picasso such longevity. That’s how Jobs operated and I am sure that is how he wants Apple to operate. If they don’t then, that will be Jobs’s biggest failure.

    What I do think is unreasonable is to believe this happens on some sort of time table or just magically occurs like some abstract puncticular moment. There is long periods of time required, much practice and not giving up until then. It is like the over-night sensation pop band who says “Over night? We played in smokey bars and clubs to 5-10 people for ten years until now”. http://vimeo.com/87448006 Steve Jobs had his “lost years”.

    Just a thought,
    Joe

    • klahanas

      Apple’s strength is design, especially industrial design. Though it is an art form, I would not speak of it in the same breath as Picasso, etc. I’m not an artist, but I can appreciate the beautiful, and I don’t think that the “art” is quite up to that level. I’m thinking McMansion instead of a Frank Lloyd Wright.

      • jfutral

        Obviously what one thinks of the quality (especially in regards to Modern art) will vary, and even to what degree an artist or group of artist (which is what is really missing to create a movement here) will actually affect things will vary. What I am more addressing is the drive. To expect that Apple should abandon the drive because it too unsustainable is like asking an artist to not be an artist. It is asking Apple to abandon the reason why they exist and how they create.

        Joe

        • klahanas

          Understood.

    • DrewBear2

      “What I do think is unreasonable is to believe this happens on some sort of time table…There is long periods of time required, much practice and not giving up until then.”

      Exactly! I personally believe Apple is doing this. They just don’t talk about it. Meanwhile…

      “Iterate and refine after, sure, but while you are rethinking the next thing.”

      I also don’t think Apple is expecting this next product to be as profitable as the iPhone. A wearable, new AppleTV or CarPlay could sell in the hundreds of millions, but none of them will match iPhone profits. They seek impact & reach, rather than just profit. I think any “next thing” will also strengthen the iOS ecosystem and support the sales growth of existing iOS devices.

      I think the potential revenue/profit growth for iPhone & iPad are so great that Apple is focused on things that integrate tightly with their existing lineup. Beats headphones would be a tiny addition and the clash of marketing & product philosophies could result in a huge internal disruption. The music curation angle seems something that Apple could achieve on their own. What would make sense is to bring Iovine on as a special advisor or negotiator, but the rest of Beats would be baggage.

    • Corvus

      Thanks for sharing this video, both parts are great.

  • RAZ

    Which are the other Top 3 Global Brands? Coca Cola? Mercedes Benz?

    You are right about unrealistic expectations with creating disruptive products. If it were easy everyone would be doing it. How many times has Apple done it? IIe? Yes to Mac, iTunes, iPhone. Apps and App store? Did Nokia have similar, but did not achieve traction with it? Not sure I would include iPad as disruptive. Others might.

    • SuperMatt

      I believe the iPad is disruptive. PC sales have declined since it launched. Netbooks died while every manufacturer tried to create their own tablet. Microsoft completely redesigned Windows to work with tablets.

      • craigpurcell

        Waiting for the folio size tablet

  • Space Gorilla

    I think you’ve missed a couple drivers of the Beats deal (if it happens of course). While I don’t know enough about the service, Beats Music appears to be a kind of curated predictive music engine. Music is culturally very important to Apple. If the Beats service is really good, that adds a lot of value. And Iovine, he brings a Jobsian quality when it comes to dealmaking in the entertainment industry (again, I don’t know enough about this to be sure, but it feels this way to me).

  • Bill Smith

    What if…Apple’s new wearable strategy is based around the headphones (for detection of blood pressure and such), and the side benefits, in composite, make Beats too good a deal to pass up?

    But honestly, I still can’t believe Apple would spend 3.2B on such a company. Even I see this as jumping the shark.

    • jfutral

      This is what I now think about the deal. Jobs had a lot of gravitas when it came to dealing with the music industry. When John Mayer’s agents says “Hey kid. Steve Jobs wants you to perform at an upcoming Apple event”, I’m pretty sure John Mayer says “What do I have to cancel to make it happen?” I doubt Tim Cook has that same kind of weight even if the artist has heard of him.

      Iovine easily carries that same kind of weight. If he calls and says he needs you to perform at an event, you pretty much clear your calendar. You might be able to find successful producers who could do something like this, but odds are most successful producers today likely learned from Iovine.

      As dealing with the music industry gets even more difficult as more music providers proliferate, few will be able to carry the weight and respect of Iovine.

      Beats just comes with the package. Iovine’s streaming service is built on his and Dre’s curatorial affinities. He wouldn’t let that go without him and likely he wouldn’t go without it.

      Joe

      • Space Gorilla

        Yes, Iovine seems to have a Jobsian feel about him. I can’t articulate it any better than that, but my gut tells me he has weight, gravitas as you put it. Good word.

  • Shameer Mulji

    ” It is also very difficult to do, which is why Apple disrupting three markets with the iPod, iPhone and iPad is truly amazing.”

    You forgot the Mac. So that makes four. Which is still pretty damn impressive over a 30-year span.

    • Jurassic

      Apple has also disrupted other markets.

      Apple disrupted the digital music market, going from zero presence to the top seller of digital music in the world.

      Apple also disrupted the retail business, going from zero retail stores to currently 424 stores around the world, with an average $4,551 in sales per square foot (more revenue per square foot than any other retail chain in the world).

      • Shameer Mulji

        Well the iPod, or more correctly, the iPod / iTunes combination definitely helped with disrupting digital music. As far as retail, I forgot that one and that’s definitely a good point. Since we’re on the topic, you can even add supply chain management / logistics to that as well and product advertising.

        No one in the tech industry, or perhaps any industry, matches Apple’s supply chain prowess, except for maybe Samsung. And Apple, for the longest time, has had some of the best ads around.

    • peteywheats

      Don’t forget the Apple II either, that was a major step forward in personal computing.

      • Shameer Mulji

        very true.

    • Apple has also disrupted photography. iPhones are the most used cameras in the world.

  • jim8151

    I think Apple also wants to leverage what Jimmy Iovine and Dr. Dre bring to the table. Apple’s music business, while still hugely successful, is maturing. What better stewards of the business are there than heavyweight music industry insiders?

  • Bruce_Mc

    I agree that it may be time for Apple to reinvent itself. I think all the disruption talk is a bit of a distraction.

    Apple has always tried to make computers that everyday people can use easily. To me the smartphone is the computer that Apple has been trying to make since the beginning, or at least since the beginning of the Mac. With the smartphone and tablet, Apple has very nearly finished the job they set out to do. Nearly everyone on the planet has or will soon have their own personal computer which is now called a smart phone, tablet, or phablet. All of the disruptions and innovations that happened along the way were amazing, but they were just part of Apple trying to keep doing what they started to do.

    In the future it seems like the personal computer will be breaking up into watches, glasses, and other wearables. The current concept of a personal computer as a physical device may cease to exist. It may be more of a presence in the cloud.

    So Apple has to think of something else to do next. Initially, part of the reason Apple wanted to make computers for everyday computers was to “Change the world.” Apple’s original “Change the world” goal seems to have gradually morphed into “make people’s lives more pleasant,” – or delightful or magical or whatever. Beats is a product that will not change the world in any meaningful way, but it does make people happy I guess.

    That’s the philosophical side of things. I don’t have anything to add about tactics and strategy.

    • Bill Smith

      Another thought: Apple realizes it’s no longer “cool.” It has become as stodgy as IBM or Microsoft, literally “a bunch of old white guys” who still listen to music from the 60s and 70s. Steve Jobs transcended that because he refused to be pigeon-holed. As much as I love Tim Cook, he’s not “cool”, he’s “establishment.”

      Ahrendts and Iovine may be able to win back some of that edginess, from the fashion and entertainment industries respectively.

      Be honest…Phil Schiller is like a smarter Steve Ballmer on lithium. And, though he may be gay by choice, something tells me Tim Cook hasn’t had too many women throwing panties at him…at least not until he became rich. Steve Jobs had style in spades (I mean seriously…the guy rocked black turtleneck sweaters and blue jeans…and years earlier, a bow tie); Tim Cook has to buy it through Ahrendts. Steve Jobs had style and musical taste which led to influence in the media industries; Tim Cook may be trying to buy that through Iovine.

      If the Beats acquisition is for real, it’s because Apple needs a “cool” infusion…

      • jfutral

        In terms of Apple as a company, I think “cool” is under control. I think it is really more behind the scenes stuff. Deals are made with people, not companies. Jobs was just a huge personality, a huge presence. Cook may have the same instincts and skills, maybe even the same demeanor, when it comes to making deals. But I doubt he has the same presence when he enters a room. The entertainment industry deal makers don’t (yet) have the same kind of relationship with Cook than with Jobs, the kind Jobs had a couple of decades to work out (including his time at Pixar).

        Joe

  • I do not believe that disruption is or has been the main business strategy for Apple. Nor do I believe acquiring companies to broaden their product portfolio will be their strategy in the future.

    Apple has clearly stated its overarching strategy in the “Intent: Designed by Apple in California” video. I think it is prudent to first revisit the meaning of this message rather then second guess Apple’s intentions.

    In this video, Apple clearly states that focus is key, and warns against confusing abundance with choice. Simply buying a company like Beats so that they can increase revenue clearly contradicts this message. If Apple indeed intends to buy Beats, there must be much more to it.

    Yes, Apple has a great track record of disruption. But were these disruptions for disruptions’ sake? No, they were products designed to enhance our lives. They became disruptions as a result, simply because previous products were no longer good enough first in Apple’s eye, and then in consumers’ eyes. I don’t believe that disruption itself was ever a strategic priority for Apple. Thus if Apple felt that they could disrupt no longer, even that would not compel them to change course.

    Does a reinvention of Apple as stated in this post contradict with Apple’s message?

    I think so. And I believe in Apple’s public message more than I do in rumors and circumstantial evidence.

    • jfutral

      I largely agree with you. But at some point the very notion of working out a new or better way of doing something has the potential to be inherently disruptive. I think Apple’s personnel understands this and is a great motivator for all innovation and invention, the notion that there must be a better way, what is everyone else missing that I can discover.

      On the other hand, yes, there are many ways one can be disruptive that does not come from trying to find the better and change the world or is otherwise totally unrelated to anything.

      Joe

  • craigpurcell

    It’s all about the Apple ecosystem at this point.

  • capnbob67

    To be a little anal… Beats would be 3x revenue, not earnings (profit). The multiple of earnings would be interesting… I assume they make “mad profit” off their cheap to make, expensively priced headphones but can’t easily find a reference.

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