Inside Steve's Brain

by Leander Kahney

  The Return of Vertical Integration

  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 and Xbox

  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.9 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.”10

  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.

  What Consumers Want

  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.”11 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.”12 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.”13 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.”14

  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.”15

  In a consumer market, design, reliability, simplicity, good marketing, and elegant packaging are key assets. It’s coming full circle—the company that does it all is the one best positioned to lead.

  “It seems to take a very unique combination of technology, talent, business and marketing and luck to make significant change in our industry,” Steve Jobs told Rolling Stone in 1994. “It hasn’t happened that often.”

  Acknowledgments

  Many thanks for help and support from everyone who gave their time for interviews, shared their expertise and stories, and provided encouragement and support. The list includes but is not limited to: Gordon Bell, Warren Berger, Robert Brunner, Vinnie Chieco, Traci Dauphin, Seth Godin, Evan Hansen, Nobuyuki Hayashi, Peter Hoddie, Guy Kawasaki, John Maeda, Geoffrey Moore, Bill Moggridge, Pete Mortensen, Don Norman, Jim Oliver, Cordell Ratzlaff, Jon Rubinstein, John Sculley, Adrienne Schultz, Dag Spicer, Patrick Whitney, and other sources who asked not to be named.

  Special thanks to Ted Weinstein for suggesting the book and providing constant encouragement.

  Notes

  Introduction 1 Alan Deutschman, The Second Coming of Steve Jobs (New York: Broad-way, 2001), pp. 59, 197, 239, 243, 254, 294-95; William L. Simon and Jeffrey S. Young, iCon: Steve Jobs, The Greatest Second Act in the History of Business (New York: John Wiley & Sons, 2005), pp. 212, 213, 254.

  2 “Steve’s Job: Restart Apple,” by Cathy Booth, Time, Aug. 18, 1997. (www.time.com/time/magazine/article/0,9171,986849,00.html)

  3 “Oh, Yeah, He Also Sells Computers,” by John Markoff, New York Times, April 25, 2004.

  4 Private e-mail from Gordon Bell, November 2007.

  5 Smithsonian Institution Oral and Video Histories: “Steve Jobs,” by David Morrow, April 20, 1995. (americanhistory.si.edu/ collections/comphist/sj1.html)

  6 “Google’s Chief Looks Ahead,” by Jeremy Caplan, Time, Oct. 2, 2006. (www.time.com/time/business/article/0,8599,1541446,00.html)

  7 “How Big Can Apple Get?” by Brent Schlender, Fortune, February 21, 2005.

  8 Stanford University commencement address by Steve Jobs, June 12, 2005. (news-service.stanford.edu/news/2005/june15/ jobs-061505.html)

  9 Guy Kawasaki, personal interview, 2006.

  10 Gil Amelio with William L. Simon, On the Firing Line: My 500 Days at Apple (New York: Harper Business, 1999), Preface, p. x.

  Chapter 1: Focus: How Saying “No” Saved Apple 1 “Steve Jobs’ Magic Kingdom. How Apple’s demanding visionary will shake up Disney and the world of entertainment,” by Peter Burrows and Ronald Grover, with Heather Green in New York. Business Week. Feb. 6, 2006. (www.businessweek.com/magazine/content/06_06/b3970001.htm)

  2 “IBM had a 10.8 percent market share; Apple 9.4 percent; and Compaq Computer 8.1 percent, according to market research firm IDC,” New York Times, Jan. 26, 1995, Vol. 144, No. 49953.

  3 “Apple’s Executive Mac Math: The Greater the Lows, the Greater the Salary,” by Denise Carreso, New York Times, July 14, 1997.

  4 Amelio with Simon, On the Firing Line, p. 192.

  5 Ibid., p. 193.

  6 Ibid., p. 199.

  7 “Steve’s Job: Restart Apple.”

  8 In the first quarter of 1996, Apple recorded a loss of $740 million.

  9 Amelio with Simon, On the Firing Line, p. 200.

  10 Ibid., p. 198.

  11 Apple’s World Wide Developers Conference, May 11, 1998.

  12 Don Norman, personal interview, October 2006.

  13 Deutschman, The Second Coming of Steve Jobs, p. 256.

  14 Jim Oliver, personal interview, October 2006.

  15 Oliver said he was later amazed that Apple’s revenues did indeed bottom out at about $5.4 billion.

  16 “Steve’s Job: Restart Apple.”

  17 Ibid.

  18 Ibid.

  19 “Steve Jobs’ Magic Kingdom.”

  20 Ibid.

  21 “The Three Faces of Steve. In this exclusive, personal conversation, Apple’s CEO reflects on the turnaround, and on how a wunderkind became an old pro,” by Brent Schlender and Steve Jobs, Fortune, Nov. 9, 1998. (money.cnn.com/magazines/fortune/fortune_archive/1998/11/09/250880/index.htm)

  22 “Steve’s Job: Restart Apple.”

  23 Jim Oliver, personal interview, October 2006.

  24 Seybold San Francisco/Publishing ’98, Web Publishing Conference, special keynote: Steve Jobs, Aug. 31, 1998.

  25 “Steve Jobs on Apple’s Resurgence: ‘Not a One-Man Show’,” by Andy Reinhart, Business Week Online, May 12, 1998. (.www.businessweek.com/bwdaily/dnflash/may1998/nf80512d.htm)

  26 “Gates Takes a Swipe at iMac,” CNET News.com staff, July 26, 1999. (www.news.com/Gates-takes-a-swipe-at-iMac/2100-1001_3-229037.html)

  27 “Thinking Too Different,” by Hiawatha Bray, Boston Globe, May 14, 1998.

  28 “Stringer: Content Drives Digitization,” by Georg Szalai, The Holly
woodReporter, Nov. 9, 2007. (www.hollywoodreporter.com/hr/content_display/business/news/e3idd293825dd51c45cff 4f1036c8398c0e)

  29 “The Music Man: Apple CEO Steve Jobs Talks About the Success of iTunes, Mac’s Future, Movie Piracy,” by Walter S. Mossberg, Wall Street Journal, June 14, 2004. (online.wsj.com/article_email/SB108716565680435835-IRjfYNolaV3nZyqaHmHcKmGm4.html)

  30 Ibid.

  31 “Steve Jobs at 44,” by Michael Krantz and Steve Jobs, Time, Oct. 10, 1999.

  32 IDC, Top 5 Vendors, United States PC Shipments, Third Quarter 2007. (www.idc.com/getdoc.jsp;jsessionid=Z53BVCY1DTP R2CQJAFICFGAKBEAUMIWD?containerId=prUS20914007)

  Chapter 2: Despotism: Apple’s One-Man Focus Group 1 Cordell Ratzlaff, personal interview, September 2006.

  2 Peter Hoddie, personal interview, September 2006.

  3 “Steve Jobs: The Rolling Stone Interview. He changed the computer industry. Now he’s after the music business,” by Jeff Goodell, posted Dec. 3, 2003. (www.rollingstone.com/news/ story/5939600/steve_jobs_the_rolling_stone_interview)

  4 “The Guts of a New Machine,” by Rob Walker, New York Times Magazine, Nov. 30, 2003. (www.nytimes.com/2003/11/30/ magazine/30IPOD.html)

  5 Ibid.

  6 John Sculley, personal interview, December 2007.

  7 Ibid.

  8 Patrick Whitney, personal interview, October 2006.

  9 “Steve Jobs on Apple’s Resurgence.”

  10 Dag Spicer, personal Interview, October 2006.

  11 Guy Kawasaki, personal interview, October 2006.

  Chapter 3: Perfectionism: Product Design and the Pursuit of Excellence 1 “Steve’s Two Jobs,” by Michael Krantz, Time, Oct. 10, 1999. (http:// www.time.com/time/magazine/article/0,9171,32209-2,00.html)

  2 Paul Kunkel and Rick English, Apple Design: The Work of the Apple Industrial Design Group (Watson-Guptill Publications, 1997), p. 22.

  3 Ibid., p. 13.