TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Making the future happen also means creating a different business. But what makes the future happen is always a business’s embodiment of an idea of a different economy, a different technology, a different society. It need not be a big idea; but it must be one that differs from the norm of today.

Management, by Peter Drucker.

Before 2007, a “smartphone” was a device with a large screen and physical keyboard built into the device’s face, and their basic functionality revolved around email, contacts, calendar and the phone itself. When Apple released the iPhone, the entire concept of the smartphone was re-defined. No longer was it a device with a screen and hardware keyboard, either using a stylus or a scroll wheel and buttons for input; the iPhone was all screen and used touch as its means of input. The iPhone made everything about the software—all means of user interface were displayed on screen and interacted with via touch. After the iPhone’s release, all new smartphones began to resemble the iPhone.

Apple re-made the smartphone market in their image and thus toward their benefit. Not only was the iPhone a better device than any smartphone out at the time (because there was simply nothing like it), but it played to Apple’s advantages. Apple is, primarily, a software company (that wraps its software in exceptionally good and functional hardware), and that’s all the iPhone was: the hardware was only successful insofar as it disappeared and allowed the user to interact directly with the software. When I used an iPhone for the first time, the most striking thing about it wasn’t Safari, which made using the web on a phone as easy and enjoyable as on a computer, but how quickly I forgot I was using a touch screen at all. It felt like I was touching the software itself. Flicking through songs in the iPod application or moving around a web page felt like I was interacting with actual physical elements because it responded so precisely and naturally to touch.

The most profound change the iPhone made to the smartphone wasn’t touch input—it was the preeminence of software. Software makes and breaks phones now. If the web browser is subpar, it’s useless; if the user experience isn’t well thought out, it’s useless; and if there isn’t a strong third-party developer community, it isn’t even worth considering.1

That’s how you move into a new industry. Apple recognized that while smartphones had the potential to be an entirely new class of computer, they hadn’t yet reached their potential in functionality and form, and that Apple had the right resources to build a damn good phone. They knew how to design small, power-efficient consumer electronic devices; they had an operating system that could power it and grow; they had two platforms, the Macintosh and iTunes media store, which made the new phone even more useful; and they knew they were a software company and thus could deliver a fantastic product.

That’s been Apple’s basic strategy since the beginning: enter new markets when they have the right resources and competencies to succeed, and the potential to completely define it. With the Macintosh, they recognized that computers were capable of much more with a user interface that anyone could understand, and the Macintosh created the personal computer as we’ve known it; the iPod showed exactly how music players should be done; and the iTunes store made purchasing music online mainstream. Apple only enters new markets when (1) their resources and competencies give them a significant competitive advantage and (2) there is a chance to completely re-define the market. Apple’s competitive strategy is not just product differentiation, but defining emerging markets.

And, of course, that’s what Apple did with the iPhone in 2007. But it’s now 2011 and Apple is facing remarkable pressure from Android. ComScore reported that in the three month period ending in February 2011, Android took a larger market share than Apple’s iOS, 33 percent to 25.2 percent, growing 7 percent over the previous period, while Apple’s remained essentially stagnant. Android is quite good and consumers are purchasing a bunch of Android devices.

Based on Android’s success, and the easy parallels between the mobile device market and the personal computer market story of the 1980s and 1990s, many are questioning whether Apple’s integrated platform strategy is the correct one. Nonetheless, though, Apple is following the correct strategy.

Google is seeking a controlling position in the smartphone market and all of the benefits it entails. In Leading the Revolution, Gary Hamel wrote that what is not different is not strategic, and he’s right; pursuing the same strategy as Google is a fantastic way to fail. Apple could open iOS to chosen partners and try to compete with Google on their own terms, but that’s precisely the problem. That’s Google’s game, and one Apple will lose.

Instead, Apple should try to continually define the industry, rather than control it. This means both creating the mobile industry’s device types (pocket-sized touch screen phone, touch screen tablet) and introducing new features and technologies that set the norm for mobile devices. By doing so, Apple can control the market without needing a monopoly position.2

This strategy requires two things. First, although Apple will not be seeking a near monopoly share of the market, this still requires a significant portion of total users, and thus market share, both so their product releases can have a significant impact and so the platform has a large enough revenue potential for developers to justify investing in it.3 Second, Apple cannot just build superior devices, but must instead make their vision of “post-PC” devices their central focus. Upon this base, Apple can continue to define the industry.

Reaching Scale

This strategy, though, still requires a substantial market share to work. Apple could make the best smartphone on the market, but if Google succeeds in taking a monopoly position after the growth phase in the smartphone market cools, changing the market’s course will be much more difficult. Google will control it by sheer size, just as Microsoft has largely done in the personal computer market. As such, Apple must seek a substantial portion of the market, somewhere between twenty to thirty percent.

This seems like a trivial task; Apple’s market share currently stands at about twenty-five percent and it has achieved this while wed to a single carrier in the United States, so selling the iPhone on multiple carriers seems like a good bet to reach (or exceed) thirty percent market share. Selling the iPhone on Verizon will certainly help, but this ignores that we are only at the beginning of this growth phase and that the U.S. is just one large market.

Smartphone sales are accelerating at a stunning pace. Gartner estimates that 296 million smartphones were sold worldwide in 2010, up 72 percent over 2009. Moreover, they point out that more than 52 percent of all smartphones sold in fourth-quarter 2010 were sold in North America and Western Europe. Even so, the U.S. market is relatively unsaturated; comScore estimated in September 2010 that 22.3 percent of the U.S. mobile market was held by smartphones.

Asia has even more ground to make up. IDC reported that 84 million smartphones were sold in the Asia-Pacific region (excluding Japan) in 2010. Asia, especially China, present a huge number of people looking to adopt a middle class lifestyle, and mobile devices are an important part. Apple may be doing well now, but this is only the beginning.

To pursue this strategy, Apple needs to, in the next few years, push for as much market share as they can grab. Their main limitation in the U.S. is carriers. Picking up Verizon as a supported carrier added more than 100 million potential customers (plus any that switch from other carriers); Sprint would add nearly 50 million potential customers.

Emerging markets, though, will be even more important for the smartphone market, and this means making China—a country of more than 1.3 billion people—a top priority. A 2006 McKinsey report forecasted that in 2025, 612 million people in China will be a part of the middle class, or have incomes between 25,000 and 100,000 renminbi. That’s an incredible market, and it’s quite clear that the smartphone market is going to look very different from today in five years.

Apple’s high profit margins are the envy of the industry, but Apple should be willing to offer lower price-points for consumers across the world that can’t spend the equivalent of $700 on a phone. (A 16GB iPhone 4, for example, currently costs about $760 in China.) Luckily, Apple’s strong margins afford them an opportunity to do this, and they have; the iPad’s aggressive pricing largely reduced Apple’s gross margins in 2010 to 39.4 percent from 40.1 percent in 2009, even though the iPad accounted for only six percent of total sales. This suggests Apple is willing to aggressively price their products when there is an opportunity to significantly influence a new market.

But they should not compete on price; instead, they should seek to provide a product value that competitors cannot. The iPad, for example, costs $499, but includes a 10 inch IPS display, beautiful construction, iOS and all of its benefits, and 10 hours of battery life. It is by no means a “cheap” device, but no one else can offer an equal device for the same price. That should be Apple’s goal: to make their devices cheap enough for the mass market, while differentiating their products as much as possible from their competition.

Defining the Market

Reaching proper scale for their strategy to work requires increased distribution and aggressive pricing, but the most important element is simply having a better product. Android devices can compete on being good enough; Apple can’t.4

This isn’t as simple, though, as having superior hardware and software. Instead, Apple must make their vision for post-PC devices a reality. This is Apple’s greatest asset.

In a recent iPad ad titled “We Believe,” Apple said this: This is what we believe: technology is not enough. What they mean by this is that how we’ve thought about, and measured, computers for the last few decades—by how much storage it has, what the processor’s clock speed is, how large its cache is—those things are important, but not the point. The iPhone and iPad, Apple is saying, are not about the technology contained within them, but rather about what they can do.

The iPad guided tours make this philosophy very clear. These videos don’t show the iPad encoding a video twice as fast as its competitor, or how much lighter it is than its competition; instead, it shows non-geeks using the iPad to video chat with family members; flip through family photos; watch movies; browse the web; read books; play games; and even make music. The iPad, they’re saying, isn’t about the technology, but about what it allows people to do.

The technology is a means to an end, and it is best hidden away, so the device’s purpose becomes one-and-the-same with the device itself. Apple’s vision for post-PC devices is not to make personal computers mobile. Apple’s vision is to make the technology so seamless, so effortless to use, that people forget they are even using a computer—so invisible that all people see is the web, or their book, or their movie.

Apple is seeking to make the technology irrelevant, so we can use these devices to do—to make, to create, to be inspired from. Don’t worry about what processor or display it has. Just read. Just write. Just draw. Just do.

That vision is very different from how we currently think of computers. With the first iPad, for example, we were still quite aware that we were holding a device with a screen and very tiny computer contained behind it. But the iPad 2 is different; because it is dramatically thinner and its edges taper up, there is an illusion forming that there is only a screen, no computer at all. And since the iPad’s screen becomes whatever application it is running at the moment, the iPad 2 is approaching a point where it, as a device, becomes whatever application is running, too. We aren’t holding a mobile computer in our hands. We are holding a book, the web, a movie.

That’s where Apple is heading. It’s a grand vision, and it’s one that no other company has, and that no other company is better prepared to make reality. And that’s precisely what Apple must do.

This means addressing hardware problems holding the iPad back; this means enabling third-party developers to build the same kind of experience, and pushing them to do it; but most importantly, what it means is never forgetting that this is their purpose, this is why they’re doing what they are doing. More than price-points and margins and market share, this is Apple’s best strategy: to radically re-define what computers are.

1. The initial “iPhone killers” all failed because they were little more than dressed up feature phones. Their user experience was absolutely terrible and they did not offer compelling applications for the user. [↩]
2. Apple’s pursuit of high profit margins makes this strategy possible. While they may not capture a majority of the market, they can still capture a significant portion of the market’s profit. Product innovation and profit margins are intimately related; unique products or features justify higher margins (and reductions in cost open margins up), and those large margins justify competing on a differentiation strategy. [↩]
3. It’s more complicated than that, of course. Developers don’t develop for a platform simply because there’s a lot of money to be made there, but it is a necessary condition for a mainstream platform. [↩]
4. And neither can HP’s WebOS devices, or Microsoft’s Windows Phone 7 devices; they too must be inherently compelling for people to give them a chance. [↩]