David Kellam

Kevin’s post (and the links therein) is most timely. John and I were today discussing our strategic approach for our new software (the codename keeps changing) in light of the recent Leopard announcements. Mail is broken and still will be from the looks of things. We’re going to fix it. Anyway, back to the subject of Kevin’s post – .Mac

Aside from the usual stuff about Apple “not getting it” and the silo mentality evident therein (i.e. the fact that certain apps ‘get it’ and others don’t; certain apps have acceptable UIs and others don’t, etc.), Apple could take a leaf out of Google’s book that most people don’t focus on. Google isn’t (solely) about new-fangled management techniques which only work given their cultural context (so don’t try to copy them), dictatorial benevolence and providing a bunch of free shit. Google, whilst being a ‘new media’ company (or is that ‘nu media’? I’m not hip with it), is relying on elementary economics, specifically the cross-price elasticity of demand

In Google’s case, the “good” is advertising. Its complements are many. I read it elsewhere first, but this quote puts it nicely:

Innovation in complements lies at the heart of Google’s strategy. Because Google makes its money by selling internet advertising, anything that promotes people’s use of the internet – from software applications to online auctions to telephone service – is simply a complement to its ad business. It’s in Google’s interest, therefore, to develop and give away as many of those products as possible, or at least to keep their prices low…

From The Sydney Morning Herald (Fairfax).

Apple is doing a fantastic job creating complements for their hardware; it’s what they’ve always done best. Historically, the Mac OS can be seen as a complement for Apple hardware. Sure, you could run BeOS or YellowDogLinux instead, but the value proposition reall ychanged when you threw in the Mac OS. You got a whole lot of stuff, seemingly for NOTHING. For some users, the price really was zero, but for others it was the Mac hardware premium they weren’t otherwise willing to pay. Recently, they’ve been doing it with their iApps. You used to buy a Mac with NOTHING installed on it except a shitty incompatible word processor (AppleWorks – sorry John, anything that didn’t speak .doc was useless even back then) and some trialware. Now, you buy a Mac and the ONLY thing you need to add to it is Microsoft Office (or OpenOffice if you can put up with X11 or Java) and optionally a bunch of free software from versiontracker. Now you have iEverything. Heck, thanks to Bootcamp, Windows XP is now a complement for Apple hardware!

Sadly, it seems Apple doesn’t quite get this. Perhaps they’re caught up in all their iPod success and figure “we can start charging people for everything again! The world LOVES US MUWAHAHAHAHhahha…” (runs all the way to the bank). Now they’re charging people for iLife and iWork and soon iThis and iThat (iThis goes with iThat at iSusan?). There’s nothing wrong with charging for your complements… except when people aren’t willing to pay for them, as is evident with .Mac, and where the increase in demand for your main product more than offsets the loss in revenue from making your complement free. I think .Mac and most likely iLife itself are prime contenders here.

So complements need not be free, but when you have a choice between keeping 3.5 million (at 2002 levels) iTools users or extorting US$99 subscription fees from 1 million complaining Mac users (2006 levels), perhaps it’s time for their business model to change. Think about any other organisation on the planet and what they would pay for even a statistically significant percentage of their client base to advertise their company in every single e-mail message they send. That @mac.com is significantly undervalued by Apple.

In any case, Apple could easily justify forgoing US$100M in revenues each year just based on the lock-in effects of providing @mac.com e-mail addresses for all their users. At least until our new Mac software is launched

N.B. Bootcamp also solves another of Apple’s market share problems: fear. But that’s a topic for another day.

N.B. This argument is a lot more tenuous if you accept that Apple is becoming a software company, in which case you’d argue that the Mac hardware lock-in (Intel chips haven’t changed that… yet) is simply acts as a mandatory complement for Mac OS X. The biggest problem with this approach is that it’s a juggling act between too little and too much functionality in the “included Apps”. Coupled with the evidently low conversion rates between bundled and premium (i.e. iLife, .Mac) software and the low unit price of such software anyway (i.e. in contrast to the “Pro” apps – FCP, Aperture, etc), Apple should make these products free and let the complements (sic) speak for themselves.

This entry was posted on Sunday, August 27th, 2006 at 10:42 pm and is filed under Business, Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.