mac.column.ted: It's two...two companies in one

It's two...two companies in one

Making a variation on the tagline from an old commercial: "Apple is a hardware company. No, it's a software company. No, it's two...two companies in one."

Amidst all the buzz surrounding Apple's cool new products -- from the iPod mini to the Power Mac G5 -- what is less talked about is a central facet behind Apple's continued success: Apple's dual role as both a hardware and a software company. Apple is the only vendor that creates both the hardware that sits on your desk and the operating system that runs the hardware. For almost all the rest of the computing world, Microsoft makes the OS software while companies such as Dell and HP make the hardware.

It's hard to overstate the benefits of this arrangement. It allows Apple to optimize its software to work seamlessly with the hardware. When Apple designs an upgrade to Mac OS X, it barely needs to worry about what CPUs, sound cards, graphics cards or other hardware components are in your Mac. Apple knows exactly what components it puts in its Macs and can design the software to be optimized to match them. This is a big reason that Macs have traditionally had a huge "plug-and-play" advantage over PCs. True, the gap has narrowed substantially in recent years, but Apple continues to hold a lead.

Apple's hardware-software synergy extends beyond the relationship between Macs and Mac OS X. Apple has staked out a similar pairing between its iPod and iTunes. If you want to sync your iPod with the collection of music on your hard drive, you need iTunes. And if you are using the iTunes Music Store, you quickly become aware that the iPod is the only portable player that works with it.

The iSight camera and iChat AV software form yet another dynamic duo. Although iChat AV can create a video connection using any FireWire DV or Web camera, it's especially designed to work seamlessly with the iSight camera. Just twist the lens ring on the iSight and iChat automatically launches, detects the presence of the camera, and shows you a preview of what the camera sees. Similarly, with iMovie 4 and an iSight camera, just switch the slider on the iMovie screen from Edit to Record mode and a "Record with iSight" button appears.

Unfortunately, there is also a downside to this hardware-software one-two punch.

For one thing, it stifles what could otherwise be healthy competition from third parties. As an example, you don't see many companies offering an alternative to the iSight camera -- it's just too hard to compete with a product that emanates from the mother ship. If your product can't be better than what Apple makes, your only hope is that you can sell it for less. But Apple can also make it difficult to compete on price (which is the major reason, for example, that Adobe abandoned Premiere, leaving the market to Final Cut Pro). In some cases, Apple can afford to sell a software product for next to nothing, taking its profit from the additional hardware sales the software presumably generates. The low cost of the iLife '04 software (which until this year was entirely free!) is a prime example. In fact, if Apple had Microsoft's overall market share, it might be Apple that the DOJ was investigating for monopoly-like practices.

Another problem is that Apple's hardware-software combo can actually hurt Apple's market share, rather than boost it. Back when MS-DOS and Macs were still duking it out for dominance, so the story goes, large corporations shied away from the Mac, despite its advantages. There were several reasons for this, but one reason was the total dependence on Apple for Mac hardware. If Compaq went bankrupt, your next purchase could be a Gateway, and you would hardly miss a step -- MS-DOS (and later Windows) worked just fine on a variety of hardware components. But if Apple went belly up, your entire investment in Macs and the Mac OS would be at serious risk. The brief era of Mac clones was designed to partially address this issue. But when Steve Jobs returned to Apple, one of his first acts was terminate the clones. He decided (correctly in my view) that whatever advantage clones offered in terms of consumer choice, it was not worth Apple's lost hardware sales -- especially at a time when Apple was already bleeding red ink. Instead of clones, Steve gave us the iMac -- perhaps the ultimate example of the combination of hardware and software in an all-in-one package.

All of which leads to an intriguing, and often-asked, question: Which of the two ends of Apple's product line, hardware or software, is the dog and which is the tail? Is Apple primarily a hardware company that makes software, or a software company that makes hardware?

Historically, the answer to this question has been easy: It's a hardware company. True, Apple has sold software for the Mac almost from its inception -- the original MacDraw is an early example -- but it's bread-and-butter has always been hardware. That's why prior to System 7 the Mac OS was free. The logic was that the Mac OS was useless to anyone who did not own a Mac. And if someone owned a Mac, they had already paid a nice sum to Apple. They had also paid for the version of the Mac OS that came with their Mac, so let further updates be free. At some point, this logic became less compelling. Apple took a look north at Redmond and saw how much money could be made selling upgrades to the OS that came with your hardware. The result is that Apple now views software as playing a significantly larger role in the company's bottom line, and increasingly expects users to pay for any and all of its software. Heck, unless you upgrade to Panther, you have to pay extra to get the iChat software that's required to use the iSight camera you just purchased for $150 bucks.

Does this mean we are looking at a role reversal, with Apple now viewing itself as primarily a software company that happens to also sell hardware? Hardly. For example, the press release for Apple's January financial results clearly emphasized hardware over software:

Apple shipped 829 thousand Macintosh units during the quarter, up 12 percent from the year-ago quarter, as well as 733 thousand iPod units, up 235 percent from the year-ago quarter.

Sales of Mac OS X were mentioned, but without specific sales numbers:

We're kicking off 2004 with strong momentum, especially for Mac OS X, which is now used by almost 40 percent of our installed base.

Apple's Q1 '04 Summary Data revealed the specifics: Revenue from all of Apple's software accounted for less than 12% of Apple's total revenue ($238M/$2006M).

Even with Apple selling Panther upgrades for $129, reports indicate that Apple is barely breaking even on OS sales when the cost of developing the upgrade is figured in. Similarly, Apple admits that at 99 cents a song, the iTunes Music Store is not making much of a profit. The prime benefit of the Store remains that it helps sell iPods.

This has been and remains a delicate balancing act for Apple. For example, the iTunes-iPod link allows Apple to out-muscle Music Store competitors that cannot fall back on an MP3 player for profits. But it also means that Apple cannot risk going after the potential increase in Music Store sales that might derive from making the Store work with iPod competitors.

The one place where Apple has been willing to take some risk -- and with spectacular success thus far -- is in opening up the iPod and iTunes to Windows users. Apple has offered some Windows products before (QuickTime Player, AppleWorks), but not on this scale. The iPod and Music Store would almost certainly not have been on nearly everyone's best-of-the-year lists -- and would not have so successfully penetrated the pop culture -- if they had remained Mac-only products. Apple's recently announced "strategic alliance" to deliver an HP-branded iPod and to pre-install iTunes (and thus access to the Music Store) on HP computers further builds on this success.

Even more recently, Apple released a public beta iChat AV upgrade that "supports videoconferencing with the new AOL Instant Messenger 5.5 for Windows." This has led to speculation that Apple may eventually sell a version of its iSight camera (and perhaps iChat software) that works with Windows PCs, building on the business model that has been a success for the iPod.

I have absolutely no fear that any of this suggests Apple is thinking of abandoning the Mac in favor of a move to Windows. I expect the Mac and Mac OS X to be with us for many more years. In fact, with the introduction of the Power Mac G5 and iLife '04, I even have hope of seeing some market share increases this year for the Mac platform. But Apple has definitely been rethinking the relative balance between its software vs. hardware products, working to get more revenue from its Mac software and to expand its presence on the Windows platform without undermining its Macintosh hardware base.

The danger of a misstep is ever-present; Apple could too easily fall off its highwire. But for the past couple of years, Steve Jobs and the rest of the Apple crew have made the right step at every turn. Here's hoping that as this 20th anniversary year continues, Apple continues to wow the crowd with its daring feats on the highwire. Because one thing is certain in this very competitive field: Should Apple fall, they won't find a safety net waiting below.

Utility of the month: AppleJack

Starting up in single-user mode (by holding down Command-S at startup) is by now a well-known troubleshooting technique. For most users, it's main value is to run the fsck command (an alternative to having to boot from the Mac OS X Install CD and run Disk Utility's Repair Disk function). There is more you can do in single-user mode, but it can be risky to experiment here (especially if you are not proficient in Unix). Enter AppleJack. With AppleJack installed, you have a relatively safe and user-friendly way to run fsck, delete cache files, remove swap files, and more -- all from single-user mode.

Ted Landau is the creator of MacFixIt and author of the soon-to-be-published Mac OS X Help Desk (Peachpit, 2004). To send comments regarding this column directly to Ted, click here.

This is the latest in a series of monthly mac.column.ted articles by Ted Landau. To see a list of previous columns, click here.

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