Inside Steve's Brain (27 page)

After shipping iMovie, Jobs turned his attention from digital video to digital music, and he forged the biggest breakthrough of his career. The best example of Jobs’s new systems approach is the iPod, which isn’t a stand-alone music player, but a combination of gadget, computer, iTunes software, and online music store.

“I think the definition of product has changed over the decades,” said Tony Fadell, senior vice president of the iPod Division, who led the hardware development of the orignal iPod. “The product now is the iTunes Music Store and iTunes and the iPod and the software that goes on the iPod. A lot of companies don’t really have control, or they can’t really work in a collaborative way to truly make a system. We’re really about a system.”
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In the early days of the iPod, many expected Apple would soon be overtaken by competitors. The press was constantly touting the latest "iPod killer.” But until Microsoft’s Zune came along, each device was essentially a stand-alone player. Apple’s competitors were focusing on the gadget, not the software and services that supported it.

Apple’s former head of hardware, Jon Rubinstein, who oversaw development of the first several generations of the iPod, is skeptical that competitors can overtake the iPod any time soon. Some critics had likened the iPod to Sony’s Walkman, which was eventually eclipsed by cheaper knock-offs. But Rubinstein said it is unlikely the iPod would suffer the same fate. “The iPod is substantially more difficult to copy than that Walkman was,” he said. “It contains a whole ecosystem of different elements, which coordinate with each other: hardware, software, and our iTunes Music store on the Internet.”
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These days, most of Apple’s products are similar combinations of hardware, software, and online services. The AppleTV, which connects computers to TVs via WiFi, is another combo product: it’s the box that’s wired to the TV, the software that connects it to other computers around the house—both Macs and Windows PCs—and the iTunes software and store for buying and downloading TV shows and movies. The iPhone is the phone handset, the iTunes software that syncs it with a computer, and network services like Visual Voicemail, which make it easy to check messages.

Several of Apple’s iLife applications connect to the Net. Apple’s photo software, iPhoto, can share pictures over the Net via a mechanism called “photocasting,” or order prints or photo books online. iMovie has an export function for posting home movies to homepages; Apple’s backup app can save critical data online; and its iSync software uses the Net to synchronize calendar and contact information among multiple computers. None of this is unique to Apple, of course, but few companies have embraced the hardware, software, and services model so comprehensively or effectively.

Apple’s competitors are starting to wise up to the virtues of vertical integration, or a whole-systems approach. In August 2006, Nokia acquired Loudeye, a music licensing company that built several “white label” music stores for other companies. Nokia bought Loudeye to kickstart its own iTunes service for its multimedia phones and handsets.

In 2006, Real Networks teamed up with SanDisk, the number-two player manufacturer in the United States behind Apple, to pair their hardware and software offerings à la the iPod. Cutting out the middleman—Microsoft’s PlaysForSure—the companies instead opted for Real’s Helix digital rights management, which promised tighter integration.

Sony, which has decades of hardware expertise but little or none in software, has set up a software group in California to coordinate development across the giant’s disparate product groups.

The group is run by Tim Schaaf, a former Apple executive, who has been anointed Sony’s “software czar.” Schaff has been charged with developing a consistent, distinctive software platform for Sony’s many products. He will also try to foster collaboration between disparate product groups, each of which works in its own “silo.” At Sony, there’s historically been little cross pollination between isolated product groups, and there’s a lot of repeated effort but little interoperability.

Sir Howard Stringer, Sony’s first non-Japanese CEO, reorganized the company and empowered Schaaf’s software development group to address these problems. “There’s no question that the iPod was a wakeup call for Sony,” Sir Howard told CBS’s
60 Minutes
. “And the answer is that Steve Jobs [is] smarter at software than we are.”

Most significantly, Microsoft abandoned its own PlaysForSure system in favor of the Zune, a combination player, digital jukebox, and online store.

Although Microsoft pledged to continue to support PlaysForSure, its decision to go with its new vertically integrated Zune music system was a clear message that its horizontal approach had failed.

The Zune comes out of Microsoft’s Entertainment & Devices Division, a unique hardware/software shop that technology journalist Walt Mossberg characterized as a “small Apple” inside Microsoft.
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Run by Robbie Bach, a Microsoft vet who rose through the ranks, the division is responsible for the Zune music players and Xbox game consoles. Like Apple, it develops its own hardware and software, and runs the online stores and community services that its devices connect to. In spring 2007, the division unveiled a new product, an interactive, touch-screen tabletop called Surface.

The division has in its sights Sony and Nintendo, as well as Apple, and is pursuing a strategy it calls “connected entertainment”—“new and compelling, branded entertainment experiences across music, gaming, video and mobile communications,” according to Microsoft’s website.

“It’s the idea that your media, whether it’s music, video, photos, games, whatever—you should have access to that wherever you are and on whatever device you want—a PC, an Xbox, a Zune, a phone, whatever works and in whatever room it works,” Bach told the
San Francisco Chronicle
. “In order to do that, Microsoft has taken assets from across the company and consolidated them in this division.... We’re working on the specific areas of video, music, gaming and mobile, and also trying to work to make all those things come together in a coherent, logical way.”
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But to make it work in a coherent, logical way, one company has to control all the components. In technology jargon, this is known as “vertical integration.”

When the
Chronicle
asked Bach to compare Apple’s and Microsoft’s approaches to consumer devices—horizontal versus vertical integration—Bach danced about a little, before acknowledging the strengths of his competitor’s approach. “In some markets,” he said, “the benefits of choice and breadth play out successfully. On the other hand, there [are] other markets and what people are really looking for is the ease of use of a vertically integrated solution. And what Apple demonstrated with its iPod is that a vertically integrated solution could be successful in a mass way.” Bach admitted that his division is adopting Apple’s “vertically integrated” model: it is blending hardware, software, and online services. “The market showed that’s what consumers want,” he said.

These days, more and more technology companies talk not about products, but “solutions” or “customer experiences.” Microsoft’s press release announcing the Zune music player was entitled: “Microsoft to Put Zune Experience in Consumers’ Hands on Nov 14.” The release emphasized not the player, but a seamless customer experience, including connecting to other music lovers online and off, via the Zune’s WiFi sharing capabilities. It was “an end-to-end solution for connected entertainment,” Microsoft said.

The market research firm Forrester Research published a paper in December 2005: “Sell digital experiences, not products.” Forrester pointed out that consumers spend a fortune on expensive new toys, like big high-definition TVs, but then they fail to buy the services or content that bring them to life, like high-definition cable service. The firm recommended: “To close this gap, digital industries must stop selling standalone devices and services and start delivering digital experiences— products and services integrated end-to-end under the control of a single application.”
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Sound familiar?

In September 2007, at a special press event in San Francisco, Steve Jobs leapt on stage with a big grin to introduce the iPod touch: the first finger-controlled iPod. During the ninety-minute presentation, Jobs unveiled a cornucopia of Christmas goodies, including a completely revamped line of iPods and a WiFi music store coming to thousands of Starbucks coffee shops.

Industry analyst Tim Bajarin, president of Creative Strategies, who’s followed the tech industry for decades and has seen it all, is not easily bowled over. Nonetheless, after Jobs’s presentation as he stood in the aisle talking to reporters, Bajarin was shaking his head in disbelief. Ticking off the items one by one—new iPods, the WiFi music store, the Starbucks partnership—Bajarin noted that Apple had a full lineup of killer gadgets at every price point and a comprehensive media delivery system. “I don’t know how Microsoft and the Zune competes with something like that,” he said. “The industrial design, the pricing models that set new rules, the innovation, WiFi.” Now he was shaking his head more vigorously. “It’s not just Microsoft. Who out there has the ability to compete with that?”

In the thirty years since founding Apple, Jobs has remained remarkably consistent. The demand for excellence, the pursuit of great design, the instinct for marketing, the insistence on ease of use and compatibility, all have been there from the get-go. It’s just that they were the right instincts at the wrong time.

In the early days of the computer industry—the era of mainframes and centralized data processing centers—vertical integration was the name of the game. The giants of the mainframe business, IBM, Honeywell, and Burroughs, sent in armies of button-down consultants who researched, designed, and built the systems. They built IBM hardware and installed IBM software, and then ran, maintained, and repaired the systems on the customer’s behalf. For technophobic corporations of the sixties and seventies, vertical integration worked well enough, but it meant being locked into one company’s system.

But then the computer industry matured and it disaggregated. Companies started to specialize. Intel and National Semiconductor made chips, Compaq and HP made computers, and Microsoft provided the software. The industry grew, spurring competition, greater choice, and ever-falling prices. Customers could pick and choose hardware and software from different companies. They ran databases from Oracle on top of hardware from IBM.

Only Apple stuck to its whole-widget guns. Apple remained the last—and only—vertically integrated computer company. All the other vertical integrators, companies that made their own hardware and software—Commodore, Amiga, and Olivetti— are long gone.

In the early days, controlling the whole widget gave Apple an advantage in stability and ease of use, but it was soon erased by the economies of scale that came with the commoditization of the PC industry. Price and performance became more important than integration and ease of use, and Apple came close to extinction in the late nineties as Microsoft grew to dominance.

But the PC industry is changing. There’s a new era opening up that has the potential to dwarf the size and scope of the productivity era of the last thirty years. The era of digital entertainment has dawned. It’s marked by post-PC gadgets and communication devices: smartphones and video players, digital cameras, set top boxes, and Net-connected game consoles.

The pundits are obsessed with the old Apple-versus-Microsoft battle for the workplace. But Jobs conceded that to Microsoft a decade ago. “The roots of Apple were to build computers for people, not for corporations,” Jobs told
Time
. “The world doesn’t need another Dell or Compaq.”
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Jobs has got his eye on the exploding digital entertainment market—and the iPod, iPhone, and AppleTV are digital entertainment devices. In this market, consumers want devices that are well designed and easy to use, and work in harmony. Nowadays, hardware companies must get into software, and vice versa.

Owning the whole widget is why no other company has been able to build an iPod killer. Most rivals focus on the hardware—the gadget—but the secret sauce is the seamless blend of hardware, software, and services.

Now Microsoft has two whole-widget products—the Xbox and Zune—and the consumer electronics industry is getting heavily into software. Jobs has stayed the same; the world is changing around him. “My, how times have changed,” wrote Walt Mossberg. “Now, with computers, the Web and consumer electronics all merging and blurring, Apple is looking more like a role model than an object of pity.”
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The things Jobs cares about—design, ease of use, good advertising—are right in the sweet spot of the new computer industry.

“Apple’s the only company left in this industry that designs the whole widget,” Jobs told
Time
. “Hardware, software, developer relations, marketing. It turns out that that, in my opinion, is Apple’s greatest strategic advantage. We didn’t have a plan, so it looked like this was a tremendous deficit. But with a plan, it’s Apple’s core strategic advantage, if you believe that there’s still room for innovation in this industry, which I do, because Apple can innovate faster than anyone else.”
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Jobs was thirty years ahead of his time. The values he brought to the early PC market—design, marketing, ease of use—were the wrong values. The growth of the early PC market was selling to corporations, which valued price above elegance and standardization over ease of use. But the growth market is now digital entertainment and home consumers, who want digital entertainment, communication, creativity— three areas that play to Jobs’s strengths. “The great thing is that Apple’s DNA hasn’t changed,” Jobs said. “The place where Apple has been standing for the last two decades is exactly where computer technology and the consumer electronics markets are converging. So it’s not like we’re having to cross the river to go somewhere else; the other side of the river is coming to us.”
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