What's Next for Apple
STEVE JOBS WON'T EVER TELL YOU--BUT WE WILL.HERE'S WHAT A TRAIL OF INTRIGUING EVIDENCE REVEALS ABOUT WHERE THE WORLD'S HOTTEST COMPANY IS GOING.
(Business 2.0) – Steve Jobs was rocking back and forth in his chair at the head of his conference room table--and venting. It was January 2002, and the target of his ire was the music business. The industry was reeling from Internet piracy and, as Jobs saw it, doing nothing about it. Even Jobs himself, a man accustomed to commanding people's attention, had been largely ignored by music execs. Jobs railed to his audience, a few Apple lieutenants and Paul Vidich, then a senior exec at Warner Music, about the industry's total lack of imagination. "Until now," Jobs said, "I've never had a living, breathing music executive come to Apple."
Vidich sat quietly.
"Why is it," Jobs continued, "that the people who run the music industry just don't get it?"
Vidich could have taken this the way Jobs certainly meant it--as an insult. But as Vidich listened, he couldn't help thinking that he agreed. Finally, he spoke up.
"Steve," he said, "that's why we're here. We need some help."
It's amazing to consider what has happened since that encounter at Apple's headquarters in Cupertino, Calif. In three years Apple has utterly changed the way people listen to music, and Jobs has become the hero of the very people he was lambasting. Top acts are eager to sell their music via the iTunes music store. The iPod music player has become totemic; it's selling at a rate of about 40 per minute. White buds sprout from so many ears that a sudden human evolutionary adaptation seems to have taken place.
Apple's lead in digital music is growing even as an army of corporate powerhouses--Dell, Microsoft, Samsung, and Sony among them--spends hundreds of millions of dollars to grab a slice of the business. And the financial transformation driven by Apple's storming of the music stage has been profound: On its knees when Jobs retook control in 1997, Apple is coming off a year in which revenue rose 33 percent and profits quadrupled. Its stock, not surprisingly, has been on a tear, up more than sixfold in the past two years and now hovering around $42 a share.
So, Mr. Jobs, what do you do for an encore?
It has become a parlor game in some quarters to try to divine where Apple is going and how it intends to get there--and not just at the dozens of blogs that traffic in Apple rumors. Recently, Microsoft quietly hired a former Apple design executive whose mission is to help Bill Gates's baby behave more like Steve Jobs's. Apple doesn't make the game easy; Jobs is famously secretive and detests leaks--just ask the kid from Harvard whom Apple recently sued after he posted details of the Mac Mini before the stripped-down computer was unveiled at Macworld (see "The Secrecy of Success," page 78). But there are ways to draw a bead on what's brewing in Jobs's fantasy factory. And we're here to tell you, it goes way beyond what he has discussed at Macworld.
Jobs wouldn't talk to Business 2.0, but in various public forums, he has stressed how the $499 Mac Mini, the low-cost iPod Shuffle, and an advanced operating system called Tiger, due out this spring, are meant to build on the digital-music momentum. In truth, they are but the tip of a very long spear. Discussions with past and present company officials, Apple partners, and longtime acquaintances of Jobs, as well as clues in patent applications and other evidence, point to a gargantuan effort to leverage the iPod's success by creating an entire line of breakout consumer electronics devices. Dozens of gadgets--from an iPod phone to wireless iPods that talk to one another to the ultimate all-in-one home-cum-car media hub--appear to be on the drawing board or, in some cases, already in prototype.
Most of what Apple's engineers are fiddling with won't make it out of the lab, of course. Jobs himself will determine what does. Though he has ceded some control to trusted aides as he has matured as a manager, he still makes the final call on products. And how he chooses in coming months will have an immense impact on technology, on entertainment, on the culture, and, of course, on Apple. For the first time in more than a decade, Apple has a chance to become a commercially powerful company--not just a very cool place with a superstar CEO and brilliant designers, but a leader in new markets that are exponentially bigger than the very computer industry it pioneered.
It's not a done deal by any means. Apple has a history of blowing huge leads, starting in the personal computer market, where its market share is down to 2 percent. But should Jobs pull it off, he'll add glittering new layers to an already rich legacy. "If Steve plays this right," says Mike Homer, who was a top Apple exec in the late '80s and is now a Silicon Valley entrepreneur, "this could be the greatest turnaround in corporate history."
Everybody knows that the iPod is a sensation, but it takes a close look at the numbers to fully grasp the dimensions of its success. The iPod ranks as one of the greatest consumer electronics scores of all time--and may stand as the ultimate champ before all is said and done. Apple has sold 10 million iPods; Sony's Walkman sold roughly 3 million units in its comparable first three years. There's anecdotal evidence, at least, that the iPod's momentum hasn't ebbed since its record Christmas sales; in New York, San Francisco, and other cities, demand is so intense that it's been difficult to find the iPod Shuffle, even at Apple's retail stores. And iTunes, the company's online music warehouse, is rocking: Some 300 million songs have been downloaded from it. Both iPod and the iTunes store command more than 65 percent of their respective markets.
Some of the ways in which Jobs will leverage the iPod's success are not particularly sexy, but they're potentially lucrative. For instance, Apple will continue to chase the money in fairly basic iPods--and there are big bucks still to be made in that market. The portable digital-music player is in its infancy. Charlie Wolf, an analyst with Needham & Co., projects that by 2010 there'll be 500 million portable players in circulation, about one for every 15 people on the planet. Apple's share will almost inevitably slip as competition mounts, but the vastness of the market will mean many more billions of dollars in sales for the company.
Nor should the iTunes store be counted out as a moneymaker. Jobs has said the store is mainly a way to drive sales of the far more profitable iPod. But Wolf says iTunes generated almost $200 million in sales last year, and Apple, without breaking out numbers, said the store recently turned a profit. The margins are small--but the potential for growth is huge.
iTunes is selling roughly 9.6 million songs a week, and Apple is rapidly expanding its reach. The company recently launched iTunes stores in Europe and Canada, adding 190 million potential customers. It plans to roll out iTunes in Japan this year. Wolf calculates that iTunes could bring in annual revenue of $2 billion within the next few years. "This will be a big boost to Apple," Wolf says.
The sizzle is in what Apple comes up with to turbocharge the iPod--or to create entirely new devices so irresistible that, iPod-like, they'll blast open vast new markets. Analyzing that requires some speculation, of course. But here's what a raft of evidence--both concrete and circumstantial--suggests is coming down the Apple pipeline, and how likely it is to survive Jobs's brutal product-winnowing process.
Likelihood: Virtually certain If there's anything close to a dead-bang sure bet on what Apple will do next, it's a wireless iPod. The company has been hiring wireless engineers to work on the iPod, according to job postings on its website. And an Apple patent application published in November covers a "hand-held media player" with a wide range of wireless capabilities. Tony Fadell, the original iPod team leader, is listed as one of the inventors, and a person familiar with Apple's patent process says that, in this case, the phrase "media player" mainly refers to the iPod.
A wireless iPod would offer several sweet advantages. It could use Bluetooth to sync with your computer without a docking station. With Wi-Fi, you could tap into the iTunes store from a public network--at a Starbucks, for instance, or in a hotel lobby.
"Apple still has huge opportunities to broaden the capabilities of the iPod," says Roger McNamee, a prominent Silicon Valley venture capitalist and longtime Apple watcher. "Wi-Fi is a huge secret weapon."
A wireless iPod also could provide rich new opportunities for Apple to sell music. By teaming with local radio stations, for instance, iTunes could sell you a group of songs you heard on the drive to work and wanted to hear again. The songs would be beamed directly to your iPod before you even made it to your cubicle. Bandwidth is still an issue, as is the strain that wireless capability would put on the battery. Moreover, you'd need to be able to enter a password on the iPod, and right now the only way to enter information on your iPod is through a computer.
The patent filing also suggests capabilities beyond tapping into a network. For example, it covers a method for one handheld player to send content "wirelessly to the selected remote recipients." In other words, one iPod could play music from another. Even more intriguing is that the device could extend well beyond music, even browsing and receiving content from videocameras or game players. Several Apple watchers say a wireless iPod is likely no more than a year away.
Likelihood: 75 percent Since the iPod debuted, Jobs has been fending off questions about when he'll come out with an iPod that plays video. Some iPods already can display photos, and Apple just announced one that, using a cable, retrieves pictures directly from a camera. But Jobs has repeatedly argued that video doesn't make sense on a portable device.
Still, there's powerful, almost inevitable logic to adding some sort of video capability to the iPod, or an iPod-like portable device. It wouldn't be Hollywood movies, at least not initially. Far more likely would be the ability to carry home movies--made with your iMovie software, of course--on your iPod, so you could plug it into a screen and show your flicks to friends. Commercial content is also possible, perhaps in the form of sports clips or music videos. The iTunes store now offers some music videos for free viewing on a computer, and Apple has left the video possibility open. In April 2004 it applied for a patent that covers a graphical user interface for iTunes, pointing out that it could use the system to sell "audio, video, or image data." One former Apple executive says, "This is a direction Jobs has to pursue."
Jobs has made fun of the Portable Media Center, a handheld device made by Creative Technology and other companies that runs on Microsoft software, arguing that it is cumbersome and short on content. He drew laughs in October when he projected a picture of a PMC on a San Jose movie theater screen and then superimposed a photo of the far-smaller iPod. But bulkiness was the same complaint he had with music players in the pre-iPod era. Sony's new PlayStation Portable is sleek and beautifully handles video, not to mention songs, and Apple insiders say Jobs is closely watching how that device fares. "Eventually," longtime Apple analyst Rob Enderle of Enderle Group predicts, "Apple will add video, even TiVo-like capability, to the iPod." Apple co-founder Steve Wozniak, who remains a Jobs confidant and sounding board, believes that the only reason Apple hasn't done video is "they haven't found the right product yet--and Jobs isn't willing to make a mediocre product."
Eventually, though, such a device could lead to a natural marriage with Hollywood, which is desperately trying to figure out how to cope with Internet piracy. One top movie studio executive sees Jobs's public dismissal of portable video devices as a "disinformation campaign" to buy time until Apple has a product Jobs loves. That could be years away. Still, Apple's QuickTime website is already Hollywood's favorite for putting trailers online. Movie executives also have urged Jobs to come up with encryption software for video. Most telling, the studio exec says, is that Apple headhunters have been trying to raid his employees for Apple's nascent digital-video team. And let's not forget that while Jobs had few contacts with top music execs when he started putting together the iTunes store, his other day job is as CEO of Pixar.
Likelihood: 70 percent The race is on to create the one magical device that powers all your digital home entertainment. Microsoft has been promoting its Media Center PC, which functions as a hub to a TV screen--playing and recording TV, letting users manage music and photos, and working as a regular computer controlled by either a remote or a wireless keyboard. Other companies, such as Hewlett-Packard, are pushing Microsoft-powered devices that look like large stereo-rack components. Yet, in the roughly two years these machines have been on the market, only 1.4 million have sold.
One concern among consumers is that these gadgets, in the end, are still just computers, which raises fears that endless reboots will replace constant reruns as the bane of TV watchers. Apple's angle of attack on the living room is measured but shrewd. And its aim isn't to put a computer there so people can, say, browse the Web. With its AirPort Express, a tiny device that plugs into an electrical outlet and wirelessly connects computers, Apple users can beam music from their computers to their stereos--and this appears to be the first step in an Apple campaign to make household devices seamlessly speak to one another. "What's clearly emerging from Jobs is a vision of the home network that is an entertainment network," says former Apple exec Homer, who has also worked at Netscape and his own startups. "And the next place that's going to go is into the stereo rack--a sort of stereo-rack version of an iPod."
Homer expects Apple to come out with a device (Apple certainly wouldn't call it a computer) that sits in the living room and works wirelessly not only with your music but also with your photos, movies, and TV. This product would let you tap into your music collection from anywhere in the house--not just at your computer--and play your tunes on remote speakers. The computer would still be the hub for all your entertainment, but the user would barely realize that--and it would work with Windows or Mac. Plenty of companies are trying to do this with home networks, but it's an area ripe for Apple's trademark plug-and-play simplicity. "The ideal product would be an appliance that Apple positions as a digital hub," Enderle says.
Rumors have surfaced that Apple is interested in acquiring TiVo, but analysts give them little credence. Apple is more likely to make its own device, they say, than to buy a company saddled with fierce competition and falling prices. Moreover, Jobs has complained about the TV business because cable companies have so much power. Perhaps just as important, Jobs himself has said commercial television is a wasteland. Nonetheless, Enderle believes that by 2007 Apple will unveil a digital hub. "If they execute in this area as well as they have with the iPod," he says, "they could own this segment as well."
iPod on Wheels
Likelihood: 60 percent The digital hub vision isn't restricted to the home. The car has become a key battleground for Apple to spread its digital content format, potentially locking in millions of customers. A number of automakers--Mercedes-Benz, Nissan, and Volvo among them--are rolling out models that have adapters for iPods. A driver controls the iPod using the buttons on the steering wheel, and the content is displayed on the car stereo panel. Microsoft also is working aggressively to capture the car market, but for now Apple is clearly ahead. "Every car company customer we have--Honda, Chrysler, Dodge, Ford--has asked us when we can integrate the iPod for them," says Stephen Witt, head of marketing for car stereo maker Alpine USA, an Apple partner. "The other car companies are knocking on our doors."
Some have a far grander digital vision for the car. Eventually, the thinking goes, the iPod will morph into what George Peterson, president of research firm AutoPacific, calls a super PDA, or a super iPod. It would wirelessly communicate with the car, providing an iPod-like interface on the dashboard that handles not only music but also addresses, calendar information, and even a navigational system. The device would never have to leave your shoulder bag. "This is the holy grail," Peterson says. Other companies are working on such devices, he says, but the auto industry is eager to tap into consumers' love affair with the iPod. He expects the Apple-enabled holy grail to be on the road by the middle of 2006.
Likelihood: 50 percent Apple fans--and a fair number of nonfans--lust for some sort of Apple phone. The infuriating design and general clunkiness of most mobile phones today cry out for the Apple touch. Jobs has teamed up with Motorola to make a phone that will let users play a handful of songs downloaded from iTunes. But this could be just a prelude to Apple's entrance into the phone market. With Motorola, Apple has already helped build a prototype of a combination phone/iPod that resembles the iPod in look and feel, according to someone familiar with it.
An Apple phone's functions could be accessed hassle-free with the iPod's scroll wheel, and the numbers could work with a slide-out keyboard or a simple touchpad system on the screen. It seems certain that Apple could vastly improve on current phones' finger-snarling methods of retrieving contacts, calendars, and music. "Cell phones make you jump through so many layers," says Robert Brunner, Apple's lead designer from 1989 to 1996 and now a partner at design firm Pentagram, whose team came up with the product images that accompany this story (see "Editor's Note," page 71). "The whole scroll wheel and menu system works really well on a phone."
Like iPods, cell phones have become fashion accessories, with high-end units such as Motorola's $450 Razr selling well. An Apple-designed phone/iPod would almost certainly take the high-style crown. Wozniak suspects that Apple's phone/iPod prototypes so far just aren't good enough for Jobs. "Other companies would flood the market with iPod spinoff devices," he says, "but Steve is actually very patient and cautious."
As appealing as the idea is, there's a big barrier to Apple's making a cell phone or phone/iPod combination without a partner. Jobs would need to collaborate with the wireless carriers. Carriers often place demands on phone makers, even insisting on certain functions, and Jobs, ever the control freak, would never put up with that. Yet as beefier phones hit the market--Samsung is set this year to roll out the first cell phone with an internal hard drive, making it far better than current phones for storing music--Apple could feel pressure to strike back.
No matter what bursts forth from Apple's labs, Jobs already has achieved something that many observers thought would never happen: He has freed Apple from the PC ghetto in which it had been ensnared for more than two decades. At 50, and despite a recent battle with pancreatic cancer, Jobs is at the top of his game. Throughout the life of the iPod, he has made one canny move after another.
For instance, there's the story of how Jobs managed to corner the global market on the tiny, 1.8-inch hard drives made by Toshiba that enabled the iPod to hold thousands of songs. While it's been widely noted that the deal bought Apple months of open-field running in the portable player market, the full impact on competitors still isn't well understood. Creative, an early maker of MP3 players, had been working on a hard-drive-based player for about a year and was on the verge of a deal with Toshiba for the same drives--until Jobs swooped in and struck his exclusive pact. Creative founder and CEO Sim Wong Hoo still seethes. "We had a very sexy player," he says, waving his hands in frustration, "but we couldn't ship it." Creative scrapped the model and later developed its Zen line, which debuted in November. It has sold reasonably well, and Creative is aggressively chasing the iPod with a big-bucks marketing campaign. But Zen sales remain a very distant second to the iPod's.
If Jobs can pull off similarly inspired gambits with his coming rounds of product decisions, many experts believe that Apple's influence in the new world of digital entertainment could rival Microsoft's in PCs. But above all, some argue, Jobs must avoid repeating the mistake that cost Apple its massive early lead in the computer market.
That happened largely because Jobs would not open up the Mac. He kept its operating system proprietary, and Microsoft and its ally Intel clobbered him. Jobs is also keeping the technical standards underpinning the iPod and iTunes proprietary. Skeptics argue that if he insists on keeping his digital-music system closed, sooner or later someone will do the same thing to the iPod that Microsoft did to the Mac. Microsoft itself, with its legions of partners making portable players, wants to be that someone.
Many people who know Jobs say he will never put another major format on the iPod or let rival players work with iTunes. Mark Anderson, who has been writing about Apple for 20 years as publisher of the Strategic News Service, argues half-jokingly that Jobs's zeal for control is so overwhelming that Apple should create a licensing division independent of the CEO. Jobs and his design crew could focus on creating blockbuster products. Then, when the competition begins to catch up, the licensing division would take over. Otherwise, Anderson says, "he risks blowing his lead again."
But Jobs may surprise the skeptics. One company insider has said Apple would consider opening up its system if its digital-music market share started to crumble. Wozniak also says Jobs is so determined to make Apple a huge, commercially powerful company that he'd strike partnerships if necessary. Jobs reached out to Vidich, the former Warner executive, who is now at AOL, for help breaking into the music business; today he has productive partnerships with every big-time recording label. He struck a deal allowing HP to sell iPods, and he made the shrewd decision to allow iTunes and the iPod to work with Windows machines.
This is, after all, a new era. If Microsoft can go to the once unthinkable lengths of hiring a former Apple exec for lessons on how Jobs does it, maybe it's time for Jobs himself to take a page out of Bill Gates's playbook.