Apple’s un-PC habits defy our expectations

Which is the best-performing consumer technology group? The answer might seem a no-brainer. It’s Google, isn’t it? Well, no. It is true that Google posted a highly respectable 18% year-on-year increase in profits, but this was achieved on flat revenue. Google is laying people off.

A better, if surprising, answer is Apple, which has just reported some of its best-ever figures for the quarter. Nor was this a freak. Sales of its premium-priced products were good across the range. The iPhone 3GS launch did no harm at all, of course. But sales of computers – still the bulk of its business – were strong; and iPods, if down, were no disgrace either.

Apple, born on April Fool’s Day 1976, has often proved the joker in the pack. Just as everyone was about to write it off as a lost cause, something, or some combination of things has pulled it back from the brink – whether it was due to product innovation, the return of Steve Jobs to head the company, diehard loyalty to the brand, or clever market diversification. Apple really is the Houdini of marketing.
Despite the company’s serene appearance, I suspect that one of its breathtaking escapology acts is shaping up right now.

Let’s digress for a moment. The world of IT is becoming bipolar. Two standards are vying for supremacy. One is internet server-based – or to use the jargon “off-shore” or “cloud”-based – the other is dedicated to the idea of the intelligent, remote personal computer. Put more vividly, Google and Microsoft are two Sumo wrestlers who have left off posturing and are locked in a deadly embrace at the centre of the circle.

Microsoft is the reigning champion. It is heftier than its opponent, but also less fleet of foot. Google is buoyed by Microsoft’s mauling in repeated bouts over search. Even if Microsoft’s mooted deal with Yahoo! does go through, it is difficult to see it recapturing much of the market from Google’s colossal share (about 81% globally, according to Net Applications).

Now the challenger is confidently taking the fight to its enemy. Google has launched the Android open-source operating system for smart phones, whose cult following is starting to have an impact on Windows Mobile. More recently it has come up with the Chrome Browser in a market where Microsoft’s Internet Explorer has an awe-inspiring dominance. And, of greater significance strategically, it has just announced Chrome OS, an open-source operating system that challenges Microsoft’s proprietary Windows. Google makes no money out of Chrome, but the software creates a Google-friendly platform that could drive consumers to its web services and enhance its already dominant search business.

If, as a result, users cease running Windows, that would be a crippling blow for Microsoft, which derives about 45% of its operating profits from the platform. To compound matters, its second biggest earner, the Office suite of applications, is also tied to Windows.

Many commentators would argue that Microsoft, with 97% of the PC operating system market (according to Gartner), hasn’t much to worry about. It has seen off challenges before – remember Netscape and the browser wars? Besides, Google has not been notably successful outside search: it’s a one-trick pony. At best, the prospects for Google are a long, slow slog.

Such arguments, however, underestimate Microsoft’s vulnerability. Its Achilles’ heel could be the netbook – a small, cheap, lightweight laptop that has taken the market by storm. Users love them, but the big PC manufacturers, component makers and software purveyors such as Dell, Hewlett-Packard, Intel and Microsoft are less enamoured, probably because netbooks threaten to undercut their margins. With the result that Taiwanese manufacturers such as Asus and Acer have seized the initiative, using cheaper open-source software and high-speed connectivity to “cloud” technology to get rid of the need for a Windows operating system.

Reluctantly, the US PC manufacturing community has come round to netbooks. Intel, for example, produces the low-cost Atom netbook chip; even Microsoft is now offering a free web version of its Office suite.

But the economics are probably suicidal. PC manufacturing is built upon a paradox called Moore’s Law (after Gordon Moore, co-founder of Intel), which states that computing power doubles roughly every two years, while the cost is halved over the same period. To offset this deflationary effect, manufacturers have tried to defend their margins by developing ever more powerful and complex machines, not to mention overblown software such as Windows Vista.

Manufacturers have tried to defend margins by developing ever more complex machines, not to mention overblown software such as Vista

Now let’s go back to Apple. It too is wedded to the development of ever-more sophisticated desktop and laptop computers. If anything, it has proved even less prepared to compromise with the netbook phenomenon than Microsoft (which has at least let it be known that Windows 7, its latest operating system, will accommodate them). All we have had from Apple so far is talk of a touchscreen “tablet” in the product pipeline.

Apple’s reluctance to get involved with a low-cost entry product is understandable. Why cannibalise the MacBook line? After all, Apple has never been about low-cost products. People buy its products at a big premium on the basis of strong innovation, style or evangelical loyalty – in other words the strength of a “lifestyle” brand which is the envy of everyone else in the sector.

And yet, there is a balance in these things. If the trend is to “cloud” technology and simpler “slave” computers; and if a serious laptop price war, driven by Wal-Mart, is breaking out (which it is), what will Apple’s strategic response be?

The Houdini brand will, if it can, do what it has always done in an impasse. It will reinvent itself around a piece of market-disrupting technology, as it did with iTunes and the iPod in 2001 and, albeit with less permanent effect, the iPhone in 2007.