March 3 2008: 9:40 AM EST
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What makes Apple golden

The creator of the iPod and iPhone sets a dazzling new standard for innovation and mass appeal, driven by an obsessive CEO who wants his products to be practically perfect in every way.

By Betsy Morris, senior editor

NEW YORK (Fortune) -- The mass market is supposed to be dead, but you would never know it from Apple. In February the iTunes Store became the second-largest music retailer in the U.S., right behind Wal-Mart. The iPod is to music players what Kleenex is to tissue or Xerox is to copiers. Almost everything Apple makes transcends gender, geography, age, and race. An Apple Store is a demographic melting pot, with computer games for kids and a Genius Bar for their parents and so much cool stuff to touch that it's a magnet for teens and twentysomethings.

Apple scoffs at the notion of a target market. It doesn't even conduct focus groups. "You can't ask people what they want if it's around the next corner," says Steve Jobs, Apple's CEO and cofounder. At Apple (AAPL, Fortune 500), new-product development starts in the gut and gets hatched in rolling conversations that go something like this: What do we hate? (Our cellphones.) What do we have the technology to make? (A cellphone with a Mac inside.) What would we like to own? (You guessed it, an iPhone.) "One of the keys to Apple is that we build products that really turn us on," says Jobs.

With that simple formula, Apple not only has upstaged the likes of Microsoft (MSFT, Fortune 500) but has set the gold standard for corporate America with an entirely new business model: creating a brand, morphing it, and reincarnating it to thrive in a disruptive age. Now, just seven years after it unveiled the first iPod, fully half of Apple's revenues come from music and iPods. Interest in the iPod and iPhone has rubbed off on the Mac, whose sales growth outpaces the industry's. Apple has demonstrated how to create real, breathtaking growth by dreaming up products so new and ingenious that they have upended one industry after another: consumer electronics, the record industry, the movie industry, video and music production.

In the process the company that ranks as the new No. 1 among America's Most Admired Companies has become a roaring financial success. In the five years ended last September, sales tripled to $24 billion and profits surged to $3.5 billion, up from $42 million. While Apple's stock is slumping along with the market, tumbling 40% this year on worries about less-than-stratospheric sales growth, it doesn't usually stay down for long. Apple ranks No. 1 among Fortune 500 companies for total return to shareholders over both the past five years (94%) and the past ten (51%).

The decade coincides exactly with the return of Jobs as Apple's maestro, bringing his particular mix of genius and obsession, as well as a tendency to play by his own rules. His utter dedication to discovery and excellence has created a culture that has made Apple a symbol of innovation. You won't find that word on a placard or a piece of propaganda at One Infinite Loop, Apple's headquarters in Cupertino, Calif. There innovation is a way of life. But it isn't like creating new variations on Crest toothpaste. At Apple, every endeavor is a moon shot. Sometimes the company misses, but the successes are huge. Apple's goal for iPhone sales this year is ten million units, up from 3.7 million during its six months on sale in 2007.

Apple requires a special kind of workforce. The place is divided by product but also by function along what COO Tim Cook calls "very faint lines." Collaboration is key. So is a degree of perfectionism. Apple hires people who are never satisfied. A designer has to be a borderline fanatic to care about the curve of a screw on the underside of a MacBook Air or the apparent weightlessness of the tiny door that hides its connectors. You don't get a foot in the door here unless your eyes light up when you talk about your Mac. (Head designer Jonathan Ive referred to a new MacBook Air as "this guy" as he pointed out features in a recent interview.) The place is loaded with engineers, but it's not just the skills that are important, it's the ability to emote. ("Emotive" is a big word here.) The passion is what provides the push to overcome design and engineering obstacles, to bring projects in on time -- and a peer pressure so great it sometimes causes a team to eject a weak link or revolt against an underperforming boss. "Apple," says Cook, "is not for the faint of heart."

Here there is no such thing as hedging your bets. "One traditional management philosophy that's taught in many business schools is diversification. Well, that's not us," says Cook. "We are the anti-business school." Apple's philosophy goes like this: Too many companies spread themselves thin, making a profusion of products to defuse risk, so they get mired in the mediocre. Apple's approach is to put every resource it has behind just a few products and make them exceedingly well. Apple is brutal about culling past hits: The company dropped its most popular iPod, the Mini, on the day it introduced the Nano (a better product, higher margins why dilute your resources?).

Apple might look like a high-wire act. But while success is never guaranteed, it's not random either. Ownership of its operating system gives Apple an unusual degree of control over its ability to design, change, and adapt. That allows Apple to follow the product - with no preconceptions about where it will end up. The iPod has evolved from a device the size of a deck of cards to a Nano to a Shuffle and now to a Touch. The Touch, says Cook, "has another roadmap in front of it" if it becomes, as he predicts, the first mainstream Wi-Fi mobile device.

"Apple's DNA has always been to try to democratize technology," says Jobs, in the belief that if you make something "really great, then everybody will want to use it." Who would have thought that a cult brand like Apple would be resuscitating a mass market? Jobs and his true believers have proved that if you're bold enough to build it, they will come. To top of page

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