Bringing in the Apple harvest

Some Apple news in the last few days gives a snapshot of the most vulnerable moment in their product cycle: nearing the end of one innovation, and before the next one has appeared.

Business Week tells the story of the iPod business's fading lustre: Wall Street is getting skittish about not seeing any more blow-out quarters in the pipeline. At the same time, a study by SG Cowen (N=1,400) indicates that the iPod is exposing Windows users to Apple, and increasing their interest in Macs.

The iPod party may well be ending, but it doesn’t follow that the Apple party is ending. Jobs is executing a very neat “niche fast follower” strategy, which is sustainable while he’s around. He takes a technology that’s proven to work, but only at a level that’s accessible to experts and early adopters. Apple then does a superb integration job, producing a product that’s a joy to use for the non-expert, though still pricey; their customer sweet spot is rich non-geeks. After a while the rest of the market catches up, and Apple has to move on to the next opportunity. It's done this for the personal computer (Mac), laptop (PowerBook), and MP3 player (iPod). This strategy will work as long as the industry keeps churning out new product ideas that have merit – the cool stuff that’s rough around the edges until Steve Jobs does his magic.

People who focus on the end-game for a particular product line will under-estimate Apple’s long-term viability. Certainly Apple will eventually be overtaken by the mass market in any given segment; but in the long run we’re all dead. For folks with a bias towards the mass market, and who look to asymptotic end-games, Apple will always be an eventual loser. It does lose eventually in any given segment - but not as a business. The the financial reality isn’t too shabby. Looking at some financial indicators, here’s how Apple and MSFT stack up:

Stock: AAPL -- MSFT
P/E: 42 -- 25
Operating margin: 9.17% -- 42.55% (Significant Market Power, gotta love it)
Return on equity: 13.8% -- 19.07%

What's the next iPod? Time and Steve Jobs will tell. Apple hasn't broken into the home entertainment market in a significant way yet, a scenario the SG Cowen data points towards. It’s likely that there will be more and more mixed-platform homes, as people who own and use Windows add Macs. Microsoft will have to start addressing this in the same way that it had to come to terms with Unix+Windows shops in enterprises. There’s an opportunity to get a head start on Windows plug-ins that will make Macs play well with MS machines - and conversely, there's an opportunity for Apple to turn Windows PCs into Mac peripherals.

Admittedly, even optimistic share projections for Apple are relatively tiny: SG Cowen believes that 6% share is achievable by 2008. However, this is the kind of tail that can wag the dog, as we’ve seen with Firefox vs. IE.

Batten down the hatches for a hard winter in the Apple orchard, but keep an eye out for the buds of new innovation.