The cover story of Time ($$) this week discusses Apple and Apple CEO Steve Jobs. The basic frame of the article is that “Conventional wisdom says its strategy is wrong”, but then goes on to explain how its strategy has been working. The strategy referred to here is that Apple makes its own hardware, OS, apps and consumer-electrics devices (iPods). Here is the bit relevant to economics:
Why would anybody run a business like that? If you follow conventional wisdom, Apple is doing it all wrong. Try to do everything at once, and you won’t do anything well. Worse the way Apple operates is not how you’re supposed to foster innovation, or not in the U.S., anyway. Under the traditional, capitalist, Adam Smithian model, new and better things arise as a result of freedom and open competition, but Apple is essentially operating its own closed miniature techno-economy. What is this, Soviet Russia? Why not license Mac OS X to Dell, see what hardware it comes up with and let the market decide whose ride is flyest? Is Steve Jobs afraid of a little healthy wrasslin’ in the great American bazaar?
The article thus attempts to turn this story of free market entrepreneurship into a tribute to coercive central planning! (The article spends quite a bit of time describing Jobs’ dictatorial style… Though as far as I know he has had no one shot. See Mises on the “chocolate king“.) This is frustrating and absurd, but that is not why I’m posting this.
This excerpt seems to me an instructive example of the popular understanding of the market (and of socialism). Big companies are like socialist countries. Socialist countries, conversely, are like big companies, (one wonders why leftists tend to hate big companies and love socialist countries if they are so fundamentally similar). There are also lessons here about the damage done by neoclassical antitrust theory. The idea of “freedom and open competition” in the article sound suspiciously like the infinite price-taking firms of neoclassical theory. Please draw your own lessons in the comments.
Here is my question: If this is really how people think, how we can better communicate what really constitutes a free market? What change in thinking would make it so that no one would ever think of comparing Apple (or any other large entrepreneurial company) to the Soviet Union?
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The author, in his musings about whether Apple shouldn’t try to compete with Microsoft, conveniently forgets that Apple pursued the vertically-integrated strategy even more strongly when it became apparent that it could not compete with the WinTel duopoly. Apple’s whole customer base consists of premium customers, the kind that Gates & Co. forsook in favor of those businesses that buy computers in bulk, and consumers that buy $500 Celeron boxes. Jobs understands that Apple is virtually in a different industry than Microsoft / Intel.
There is no single right way to make profits.
The critics can put their money where their mouth is.
Vince, you are absolutely right.
All companies, in one sense, are much like socialist countries. There’s no proportional representation, it is not a democratic system, janitors aren’t voting on company policy, etc. To think that it’s anything different, in that sense, is silly. It’s essentially a dictatorship, or at the very least, an oligarchy (board of directors).
However, it has one big difference from most dictatorships. If you tried to escape from the Soviet Union and were caught, they’d shoot you. And since you had no “customers” to please, as you were a self-contained entity, it didn’t matter whether you were efficient or not. For Apple, if they abuse their workers, the workers will leave. If they don’t satisfy their customers, they’ll go out of business. If you can vertically integrate to your competitive advantage, it’s considerably different than doing so because you’re holding a big gun.
I have to agree with Vince and MLS. If Apple is profitable long-term, then what are the critics complaining about. And if, in the future, Apple’s business plan falters (which can happen to any business), then they will have the opportunity to devise a new one.
Vince, See Jon Gruber of Daring Fireball putting down the myth: “If only Apple had licensed the Macintosh, they could have been Microsoft.”
Any comparison of Apple with socialism is ludicrous, since, as Brad Warbiany points out, no one works at Apple or any other corporation at gunpoint.
In a larger sense, however, we ALL work at gunpoint, since even in this supposed Land of the Free and Home of the Brave, we cannot leave our government without leaving our country, never mind that this was the principle upon which the latter was founded.
Go figure.
Why would Dell pay to license OSX when they could just do what Apple did… use FreeBSD code and make a CDE-like window manager with eye candy?
I have nothing against Apple, but it seems to me the main “innovations” they have come up with are in the marketing, style, and form-factor department. I credit them with having good taste in OSes, but it’s not like they wrote OSX from scratch. MP3 players were around long before the iPod, they just made a cool case, set up a per-song download system and marketed the dickens out of it.
I think what I’m trying to say is that Apple is mostly about marketing existing technology to people with a lot of money to spend. I think that requires much less effort than “trying to do everything at once.” So I think in that sense the premise of the time article is wrong.
Very little of what a normal end user experiences on OS X can be linked with Unix. Yes, it’s BSD under the covers, but there is a lot of work insulating that layer from a normal user. What ultimately constitutes OS X is an Apple creation, and shouldn’t be discounted.
As an artisan, I work with hundreds of professional tools every day. I only buy the best tools that I cannot afford (!) because that I know that day-in-and-day-out they will work. This is what most of the public fails to realise about the Macintosh computer. Like my tools (bookbinding, woodworking, microscopy, etc.), Macs cost a little more up front, but the total cost of ownership is far below a knock-off tool. (Ulmia certainly didn’t invent the workbench or wood plane, but I challenge you to find a better one on this planet.) — I have five-year old Macs that will run circles around this years’ Dells and will do it everyday without fail.
Granted computing is an ever-changing environment, but if one appreciates doing a job well and consistently (without having to marry the computer as some Linux users seem to do), there is no better, more consistent platform than Macintosh.
Despite the massive amounts of shoddy goods so prevalent in today’s world, there are still a few consumers who prefer reliability over initial price. This is one fact which market watchers and business analysts cannot seem to get their head around.
I think the big picture is the notion that it is not the government that needs to be restrained but it is big business. Big business are the evil empires and it is the governments job to protect us from them. The government wears the white hats protecting us from all sorts of evils. Most Americans believe this to a lesser or greater degree. And I don’t believe this is new. This type of thinking started in the “progressive” era at the beginning of the 20th century or earlier. Previously, most Americans were weary of the government. How to change the mindset of the American people is the million dollar question. One would probably have to start by eliminating the government run school system for starters.
W Baker,
My engineer brother made sure that his non-engineer brother bought a Mac as his first computer in 1985. I’ve never wavered or regretted NOT wavering.
Tom,
Not to know that Big Government and Big Business are one and the same is so naive (think Halliburton) that I am (almost) beyond comment. The “Progressive Era” was in fact a regressive marriage of the two, and as Lew Rockwell has made clear, it can only lead to one thing — fascism:
“Why fascist? Because it is not leftist in the sense of egalitarian or redistributionist. It has no real beef with business. It doesn’t sympathize with the downtrodden, labor, or the poor. It is for all the core institutions of bourgeois life in America: family, faith, and flag. But it sees the state as the central organizing principle of society, views public institutions as the most essential means by which all these institutions are protected and advanced, and adores the head of state as a godlike figure who knows better than anyone else what the country and world’s needs, and has a special connection to the Creator that permits him to discern the best means to bring it about.” (http://www.lewrockwell.com/rockwell/red-state-fascism.html)
Or as Hegel said, “The march of God in the world, that is the state.”
Apple is not the only company to sell higher priced items to discerning customers for a profit. Apple also is not one of those trying to sell to the majority of commodity buyers. Apple is a good company, marching to their own tune. It’s too bad that they seem to want to move OSX over to Intel hardware, it makes them just that much less distinctive.
Compaq found itself faltering when it was trying to compete with Gateway and maybe Dell although I’m not sure that Dell was a force at that time. What Compaq did was raise its prices and proclaim itself being driven by quality rather than by simple price. Sure enough, although their gross customer base shrank their profit margins increased. Apple has had a solid 5% or so of the PC market for years, a loyal base built on making a distinctive complete package.
I’ve been using Linux since 1995. I understand what Apple did with OSX, poaching code from BSD, it would be VERY interesting to see Dell do the same thing. However, it won’t be with Linux for the same reason that Microsoft poaches code from BSD but not Linux: The BSD license allows reuse of the code without any restrictions. The only restriction is if the source code is released, and neither Apple nor Microsoft release their source code.
From what little Microsoft source has leaked out, I can understand why. It would cost a fortune just to clean out the vulgarity! It would also mean that their control codes would be visible, and alternative software would then be able to interoperate well. Can’t have that!
But with Linux and other software released under the GNU Public License, source must be made available if the programs are distributed. This creates a feedback mechanism by which useful changes are returned “upstream” for inclusion in the original source. Great for the evolution of the programs, but really bad for companies who want to keep those changes proprietary. Like Apple and Microsoft.
Dell uses proprietary hardware to make their products distinctive. So maybe they are in the same position of wanting to keep their secrets, which is why they do not offer Linux preinstalled on their “commodity” systems. They do, however, on some of their servers, so who knows?
I do find it interesting that while Microsoft is touted as an “illegal monopoly”, that same charge isn’t leveled at Apple even though Apple is the vertically integrated one. Oh well, no one ever lost money underestimating the intelligence of the American public.
Actually Dell does offer the Redhat Linux distribution preinstalled on workstations now.
Apple is good at what they do… making stable, stylish, user-friendly systems. You can take a BSD and/or Linux system on decent pc hardware and make it “just work” and do pretty much anything you want, day-in-day-out — assuming you know how to set it up. Apple does this for a lot of people who have no inclination to do that sort of thing, and who are perfectly content to play in the sandbox Apple has set up for them. I’m sure it’s worth the Apple price tag to them.
The point of my previous post was that they don’t develop their hardware and software from scratch (for the most part), they take existing technologies and make them more or less idiot-proof. This means there isn’t as much effort involved in “trying to do everything at once” as the article seemed to suggest… and so I don’t agree that they are going against conventional wisdom and trying to do too much.
Asking Apple to adopt some kind of ‘open’ model as many clueless geeks suggest is like asking customers to buy and assemble their car’s dashboard components separately.
That’s how it feels driving a windows machine anyway. No two apps behave the same unless they belong to a suite like Office. This extends to hardware as every gadget needs its own app or driver to load music or other kinds of data.
Then we read about these economists crunching whatever numbers they can get their hands on, but what are the relevant measures of productivity? Who takes the time to measure time lost due to driver conflicts or reading manuals because a particular statistics app needs a multiple-modifier-with-right-click gesture to do something (S-STAT, I’m looking at YOU)?
If someone does take the time to measure such things I have a feeling he would more likely work at Apple.
While everyone has contributed excellent comments here, I wanted to add a few clarifications of my own.
“The BSD license allows reuse of the code without any restrictions. The only restriction is if the source code is released, and neither Apple nor Microsoft release their source code.”
I believe Apple does indeed release their modified BSD code, called Darwin, and anyone can compile it on his/her own computer.
“The point of my previous post was that they don’t develop their hardware and software from scratch (for the most part), they take existing technologies and make them more or less idiot-proof.”
Certainly, they have a penchant for taking existing ideas and making them better. But I think they’ve done more inventing than some might realize. Tiger, for example, is the first working GPU-composited desktop (at least that I know about). The mouse, wi-fi, DVD-R, USB, Bluetooth, Firewire, and so on were all technologies Apple pushed on their computers before the PC world adopted them.
“Asking Apple to adopt some kind of ‘open’ model as many clueless geeks suggest is like asking customers to buy and assemble their car’s dashboard components separately.”
The person who finds a way to have do-it-yourselvers build their own custom car in an easy fashion will become a very rich person.
“If someone does take the time to measure such things I have a feeling he would more likely work at Apple.”
That depends on your definition of what productivity is. Is every sandbox good for every person?
Aside from focusing on Apple and Microsoft compare the amount of third-party business that each generate. There is more competition on the Microsoft realm.
Compare the productivity of a 3-tool swiss army knife to the 13-tool one.
Dave,
“Not to know that Big Government and Big Business are one and the same is so naive (think Halliburton) that I am (almost) beyond comment.”
I never paid taxes to Halliburton. Halliburton cannot arrest me and through me in jail. Halliburton cannot order me to pay my employees a minimum wage. Halliburton cannot lock me up for killing a protected toad when I use my own property as I see fit. I can opt out from dealing with Halliburton, the same cannot be said with the government. The government may buy goods and services from Halliburton, but that does not mean that they are one in the same. To think otherwise is naive. And it is a left liberal mindset that would think that they are the same.
I’m not sure I understand the need denigrate Apple with little quips about making things idiot proof and simply repackaging a bit of Unix and popping it in a sexed-up box, etc. The only folks I know who make these kinds of statements are a great many IT types (whose primary source of income comes from the security/protection racket surrounding Redmond) or the people who have never in their lives touched a Mac, but still profess to know better.
The equivalent personality is readily seen in parking lots all across the country. The pimpled teenager sitting on the roof of his souped-up jalopy eyeing a 700 series BMW (same market share as Apple) across the way and commenting to his mates, ‘what a friggin’ waste of money, I could take that car at a traffic light any day.’ The fact that the two vehicles can hardly be compared never crosses the little fellow’s mind. He’s never sat inside a BMW and certainly has never driven one. But somehow he knows. He knows that he can ‘take’ that other car, anytime, anywhere.
One can cough and sputter all day about those terribly vertically integrated folks at Apple with their yuppie industrial-designed boxes, eye candy software, Bose or Rolex-like marketing, and lack of third-party products (although this is a huge misconception, but on the other hand the world does need more mouse pads, you know). Go to an Apple store. There’s one nearby. And just spend an hour in that BMW. You probably won’t buy it. In fact, you’ll scoff at it all the more. You’ll start sputtering words that sound like “cult” and “design – real men don’t need no design”.
But that hour may be the best computational hour you’ll ever have.
Cheers!
1. for heaven’s sake, nobody is denigrating macs. OS X is nice, and user-friendly, and depending on your skill level it can be quite powerful. Denigrating macs was not the point of my previous posts at all. Apple usually does “idiot-proof” in a good way.
2. Apple is not wrong to use existing technology. This is all to the good. The point is that they do to a great extent, and thus they don’t have as much development effort as they otherwise would have if they were truly trying to “do it all.”
3. I use a powerbook that belongs to my girlfriend quite often, so rest assured I am familiar with the system. I like it, but my preferences and needs are better served by something else. OTOH, she loves it, and in fact got rid of a winXP machine to use it.
4. Not in the IT industry, nor do I have the slightest interest in being in the IT industry. I would be bored to tears.
One way to look at a corporation is as a triangle, with each point representing someone the corporation has to please: investors, customers, and employees. Go too far in any one direction, and you stand to alienate the others. Offer bonuses to your employees and lower the cost of your product, your investors lose money and steer you back on course. If you increase your production costs, your customers stop buying your product and the investors again lose money and steer you back on course. Lower the price of your product too much, you can’t afford to pay your employees and they leave, yet again affecting the invetors who steer you back on course.
Who are the investors in government, be it socialist or otherwise? Who steers the system back on course when the CEO decides to increase production cost (spending) and lower the retail price (taxes)?
That is why businesses, even ones that control a market like Apple, are nothing like a government.
HZ,
No one assumed, at least I don’t think they did, that Apple actually makes (as in actually fabricates) all of its hardware or doesn’t build on other ideas. Crack open an iPod or Powermac. No one is trying to claim that Apple reinvents the computer wheel each year at Cupertino. It’s only by comparison to other companies building either hardware or software that Apple is a one-stop shop.
There are very, very few companies which make every component from raw elements. Your point is a moot one.
The question under discussion is centralised businesses and how they do or do not reflect centralised (sic) government. Apple works because it is centralised. The same Powermac in my sons’ primary school is same computer (in cluster form) which can make a supercomputer for a university or research institution (see VA Tech, etc.) Government, on the other hand, has no choice but to centralise. This is the existing principle of any state. It must centralise its powers and goods, or its controls will be eroded or taken over by competing interests.
actually, i believe TFA _did_ assume that… “The strategy referred to here is that Apple makes its own hardware, OS, apps and consumer-electrics devices (iPods).” I disagree that making what is in effect another customized BSD distribution is the same thing as making your own OS. I doubt very much if anyone would be building clusters from macs if OS X wasn’t unix.
i don’t think the point is moot, because it says that:
1. Apple is in fact the beneficiary of much decentralized development
2. All Dell (or whoever) has to do to mimic Apple is to limit their offerings to a few high-end models, and make their own distribution of a BSD (b/c of the business-friendly license) to run on that hardware. Whether they would be successful with that strategy is a question I cannot answer.
your other points are taken.
Tom,
Agree that business per se isn’t the problem, disagree in that companies like Halliburton that have decided to let themselves become co-opted by the Feds instead of gamely following regulations and remaining a free-market company. Unfortunately, most of the firms producing products or services for the feds have become corrupted by them. Those firms then lobby for increased spending on – Surprise! – their products and services. This has been going on since the rise of the canal companies in the 1830′s. Probably the saddest example of this co-optation was the morphing of Edison General Electric, an entrepreneurial firm led by the great man himself, into General Electric, the first chairman of which Gerard Swope eagerly sought to be regulated by FDR, and indeed was a key architect of the New Deal.
On the Time article, who says thatthe hardware and the operating system and the software that comes with it and the accessories must be completely separate products? Designer coffee shops buy their own beans, brew their own coffee, and make their own food to go with it.
El Chepo coffee places use prepackaged coffee packs to make coffee, and sometimes order in various types of food to serve alongside the coffee.
And then there are chain coffee shops that do what designer coffee cafes do but in a larger economic scale. My point is that this is the free market, they ought to do whatever they want to do. Different companies serving different niches don’t need to have similar business models.
As for the suggestion that Apple ought to license OS X to Dell in order to be a free market company in the tradition of Adam Smith – I didn’t know Adam Smith advocated that private companies should be forced to do business with everyone. Consumers in a Adam Smithian economy would have choice to choose what to buy. Sellers too should have a choice who to sell their products to.
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