Thursday, January 25, 2007

The Company in the White Suit

In The Man in the White Suit, Alec Guiness plays a scientist who invents a highly durable fabric that never gets dirty. You can imagine the cascading reactions to this incredible invention... first, "This is great! We'll only have to make one suit for everyone!" and then, "This is horrible! Everyone in the clothing business will be out of a job!" Guiness' character goes from hero to villain in a heartbeat.

This is the conundrum of our modern world: with each new technological invention, significant social and economic changes are sure to follow and how you react to these changes will place you in one of two camps: the Industrial Age camp, which favors stable and steady-paying jobs, or the Information Age camp, which favors innovation and efficiency. Eventually, the Industrial Age camp will become extinct and the transition to the Information Age will be extremely painful for everyone still holding an Industrial Age mindset... people always fight nail and tooth to protect their lifestyle because change and growth hurts.

The cultural and economic differences of these two camps are stark: Industrial Age countries like France, where the unions are all powerful, have static economies and higher unemployment. It's tougher to be fired there, so inefficient workers are able to stay with a company longer. Information Age countries like America have companies not loyal to particular employees and thus can fire workers whenever they have to. Information Age companies are more dynamic and can compete better because they save more money.

America isn't totally an Information Age country, but it's getting there. American title companies outsource their online title research to the Philippines because they can get 10 queries per dollar spent vs. 1 query per dollar using America workers. More money saved = more profitable business = more wealth = better economy = more information age jobs.

When desktop computers were introduced to help design British newspapers in the 80s, the British typesetters' union went on strike for weeks... but today all British newspapers are laid out with desktop computers. And now newspapers aren't really in the publishing business—they're in the news providing business. Focus too much on how many newspapers you're selling and you'll be out on the street in a couple of years. Focus instead on how to make money from the content on your news website and you'll keep pace with the winds of change.

The other day, a friend was saying that iPods weren't the best product on the market, that he listens to music on a competing product (which I won't mention because I'm a mean and venom-spewing reptile). Here was my response:

While Apple may not have the best product, they're like McDonald's in they they don't make the best hamburgers, but they have the best system to deliver it. Well, maybe not the best, but Apple has managed to convert, and retain, people like me into cultists.

It's no secret Steve Jobs was at the center of that innovation. And when he left Apple, everything went corporate again. It lost its flair. But when Jobs came back in from the cold, he did it again: Jobs envisioned Apple as being at the center of the digital lifestyle. iPods are only one piece of his grand plan; if you snap digital photos, create graphic novels, listen to or create digital music or movies... you name it—if it's digital, Apple now has sleekly designed software and hardware to do it. Best of all, the software and hardware all talk to each other seamlessly. That's the power of the Apple brand—interoperability. Apple's cool parts make one head-shakingly cool whole.

The iPod was only Apple's first strategic lure for PC users into Apple-ness. It worked like butter, and the iPod's various incarnations have consistently tricked more PC users into using a minimalist version of Apple's snazzy OS X. This led to more and more buzz... by the time Apple's iPhone came out this month, my PC user friends were practically salivating over it. Even I, the perennial Mac user, didn't care that much for it... but they're going crazy! I knew Apple had been planning this for many years, but it's the first time I'd seen tangible results of their branding campaign. You can get a glimpse of Apple's marketing strategy by looking at this:


Actor Brian Dennehy was explaining in an interview that he wasn't more famous because he "hadn't created a need for Brian Dennehy". You can be the best actor or writer or businessman in the world, but if nobody knows about you and nobody knows why they need your product over the competition's product, you might as well hang up the spurs. As you illustrated with Apple, you need not even have the best product, either—the loudest person shouting always gets the most attention.

A musician on the street plays his guitar—if you like it, you give him money, but you're not obligated to. This is called busking and the rules of Darwinism dictate that if the musician doesn't get enough money dropped in his hat, he eventually starves and chooses a different job. At least with his hat out there, he still has a chance of making enough money to keep making music. Napster elevated busking into a highly efficient system of thievery by letting anyone hear the best musicians in the world while also throwing away the artists' hats. So if everything that musicians and movie producers produce can be copied onto a CD or DVD for free, how (and why) would they ever make more content? There's no incentive.

Then along came iTunes. Want to see the entire first season of 24 for only $35? Why not? It's easier and faster than downloading them all off eDonkey or Limewire. Want to listen to a particular recording of Gilbert & Sullivan's "A British Tar"? Download it for only 99¢. Apple had finally found a healthy business model to generate revenue from distributing digital entertainment. It was secure. It worked. The catch? You have to watch all your downloaded movies with iTunes and listen to all the music either on iTunes or with your iPod. Apple created the business model—so they set the rules. You don't like the rules? Don't use their system.

Apple's overt strategy has been to switch PC users to the Mac platform so more consumers buy Mac computers and the iPod was thought to be the best bait to accomplish that goal. Thus, Apple mandated that no iTunes purchases can be played on anything other than Apple's hardware. That's kind of harsh if you prefer other hardware, but it's all part of Apple's plan to get people hooked on Macs. France has already passed a law to break that stranglehold and today a growing number of European countries are joining that fight:
European drive against iTunes builds support
10:44 a.m. EST, January 23, 2007

OSLO, Norway (AP) -- German and French consumer groups have joined a Nordic-led drive to force Apple Inc. to make its iTunes online store compatible with digital music players made by rival companies, a Norwegian official said Monday.

Currently, songs purchased and downloaded through iTunes are designed to work with Apple's market-leading iPod players but not competitors' models, including those using Microsoft Corp.'s Windows Media system. Likewise, iPods generally can't play copy-protected music sold through non-Apple stores.

Last June, consumer agencies in Norway, Denmark and Sweden claimed that Apple was violating contract and copyright laws in their countries.

Norwegian Consumer Ombudsman Bjoern Erik Thon said French consumer lobby UFC-Que Choisir and its German counterpart, Ferbraucherzentralen, joined the effort late last year, and other European countries are considering it. Finland's Kuluttajavirasto consumer group is also part of the effort.

"This is important because Germany and France are European giants," Thon said. "Germany, in particular, is a big market for digital music."

The Nordic regulators have met Apple officials at least twice on the complaints.

"Apple is aware of the concerns we've heard from several agencies in Europe and we're looking forward to resolving these issues as quickly as possible," Apple spokesman Tom Neumayr said Monday.

"Apple hopes that European governments will encourage a competitive environment that lets innovation thrive, protects intellectual property and allows consumers to decide which products are successful."

Thon said Norway gave Apple until September to change its polices, or face possible legal action and fines in the country.

"It cannot be good for the music industry for them to lock music into one system," he said.

A French law that allows regulators to force Apple to make its iPod player and iTunes store compatible with rival offerings went into effect in August.

Apple has been working to expand its iPod sales in Europe and said during its quarterly report last week its advertising and sales efforts were paying off.

Company officials say the iPod gained market share in France, Germany, Italy, Spain, Belgium, Sweden, Austria and Denmark during the holiday period.

Governments, not shareholders, are telling businesses what to do??? Apple has created a business model that works—and now Europeans want to change it. Instead of voting with their wallet by giving their money to one of Apple's competitors, they've chosen to walk into a Rolls Royce car lot and scream until they get a hybrid. Has anyone ever wondered why there are no other significant competitors in the digital entertainment distribution market? Nobody else has found a profitable business model! It's not like all potential competitors are being discouraged from creating products that distribute digital entertainment—it's just that Apple is the only company that's created a viable format for producers and consumers.

What makes this story even more interesting is that Apple makes its bread and butter from selling hardware, which is an Industrial Age commodity... whereas iTunes is a multi-platform software that sells content—an Information Age commodity. Apple is obviously migrating its revenue stream from one camp to the other, but until that migration is complete, Apple still needs those iPod sales, which means keeping a lock (for now) on their proprietary iTunes format for as long as they can.

Who will adapt to whom—Apple or Europe? Either way, it's going to hurt. Change always does.

No comments: