Clayton Christensen has been inspirational to me. I read his books shortly after I posted my thoughts on the value chain concept and was thrilled to hear him do a better job of articulating similar ideas. Considering that I am a Mac user and a huge fan of the iPod I find his interview in Business Week discussing Apple’s future prospects very interesting. I am going to disagree with him on a few points, not because I am right and he is wrong, but because I find it interesting to examine Apple’s current success defying conventional wisdom.
Christensen bases his opinion that Apple will falter with its continued proprietary approach on the principle of industry standards. It is inevitable in his view that there is an inexorable push toward “the standardization of interfaces, which lets companies specialize on pieces of the overall system, and the product becomes modular. At that point, the competitive advantage of the early leader dissipates, and the ability to make money migrates to whoever controls the performance-defining subsystem.” The consumer electronics industry indeed follows this model of standardization and modularization driven in large part by the economics of competition and consumer desire for cheaper products. But the theory ignores an important characteristic, usability. Buyers across many disparate categories have shown a willingness to pay more for a better user experience. When the goal of providing that experience diverges from the focus on cost-cutting, an opportunity emerges for a company like Apple to provide a product that costs more and is perceived to be better. I consider the Mac and the iPod to exemplify this “better for more” category.
Any discussion about Apple inevitably leads to a comparison with Dell. And indeed Christensen goes on to state the Apple cannot innovate its way to greater market share for the Mac because “a good Dell PC can be had for $500, and it has performance that’s well beyond what most of us need.” I’d argue that Dell achieved impressive results driving cost out of the system from innovative process improvement, but now lower prices and increased performance no longer qualify as innovation. Look at what Guy Kawasaki recently said about innovating by jumping to the next curve. “Too many companies duke it out on the same curve. If they were daisy wheel printer companies, they think innovation means adding Helvetica in 24 points. Instead, they should invent laser printing. True innovation happens when a company jumps to the next curve–or better still, invents the next curve.” Could it be the case that now that computers are both powerful and cheap enough that they will be differentiated by usability?
Since we have such a love/hate relationship with computers, I’ll use the iPod to illustrate my idea. In the market for portable music players there are plenty of devices that cost less and/or have more capacity or features than the iPod. But any of them would be lucky to achieve 2% market share compared to iPod’s 75%. People are clearly paying for a better user experience. Even factoring in that some of that market share is due to marketing and trendiness. But I know people that have another player and switched to an iPod.
And what’s the user experience they are switching to? It’s that very lock-in that by all accounts should be driving them away from the iPod to the more open competitors. Look at it from the point of view of a less technical user. Where is my music? It’s in iTunes. Where is the music store? It’s in iTunes. How do I rip music from my CDs? In iTunes. Where does my iPod appear on my computer when I connect it? Again, in iTunes.
Any Apple competitor could offer this experience, but they don’t. And they won’t because they rely on the modular approach of hardware vendors supplying the hardware, software vendors supplying the software, and Microsoft providing the standards. This makes it all interoperable, but prevents building and offering a unified user experience. This is the market model Christensen predicts will succeed based on commoditization pressures at each layer in the value chain. A user can swap out one player for a cheaper or more feature-rich model and continue to use the same software and online music stores. Or switch software or stores. It’s all interoperable.
The way to add value and thrive in such a competitive market is to integrate value from another layer. (This is my view and not necessarily Christensen’s.) Thus when the iTunes software tightly integrates with the iTunes Music Store it sacrifices market interoperability but adds usability value. Same with the iPod and iTunes. We are witnessing a market where the customer is valuing the improvements in user experience over the economic value of openness and interoperability.
But the economic advantages are not absent in the iPod and the Mac. The component layers are still commoditizing. Hard drives, processors, displays, and other components are industry standard in the Apple product line. Apple thus benefits from the same component pricing economics as its hardware competitors. It is only the operating system layer that is proprietary and tied to the hardware. And again, from the user perspective that is the layer of interaction. You only buy the product one time, but you use it continuously. Is it hard to believe then that users would make a value judgement and choose to pay more for a better user experience?
None of this is to say that Apple can continue to stay ahead of the market with an approach that defies the conventional economic forces of the industry. But I think the economic argument is overlooking the impact usability has on value.