“Those who cannot remember the past are condemned to repeat it.”
Life of Reason, Reason in Common Sense, Scribner’s, 1905, page 284
— George Santayana
“The future success of Apple, Dell and Intel lies with a licensing deal between Steve Jobs’ company and the PC maker according to analyst Gartner,” Andrew Donoghue reports for ZDNet UK.
I happened to be at Apple Computer in 1996-7, and I remember quite well the launch of Mac OS licensing, and the eventual cancellation by Steve Jobs.
This idea is one that MBAs just love… regardless of the economic reality of the process.
The basic problem with OS licensing for Apple is easy. Yes, the profit margins are much higher. But the aggregate margin dollars are much lower.
Sell 10 copies of Mac OS X to Dell for $50 each. Even if the margin is 95%, that is a $450 profit.
Sell 10 iMacs for $1000. A margin of 20% gives you $2000 profit.
End result: Apple would need to expand Mac OS marketshare by 4-5x to make exactly the same profit they do today on the Mac.
It’s not impossible, but the problem is the transition. What Apple learned during licensing is that when given the option to buy a non-Apple Mac, a lot of existing Mac users took it.
These are Mac users who used to give Apple $200 profit each, and they switched to giving them 1/5 that amount.
That means Apple would have to shrink to a company with less revenue and less profit for several years, in order to hopefully someday capture sufficient marketshare to exclipse their old numbers. An uncertain bet, given the lockdown that the Windows monopoly has on the desktop.
Unfortunately, I’m not a Gartner subscriber, so I can’t read the original report. But I feel like I’ve read 100 like it in the past 20 years.
None of them ever explained how Apple would live through the process. What’s worse, is that Apple actually tried this already. They gave in to the overwhelming pressure of management consultants everywhere.
Maybe there is an answer now. Maybe the iPod business gets so large that Apple doesn’t really need the Mac profits anymore. But I doubt it.
This is a good lesson for all companies that have very profitable businesses that are lower margin. It’s wonderful to see a promised land with higher margins, but make sure you think through the transition.
In evolutionary biology, they refer to this problem as a “local maximum”. The problem is that evolution can incrementally push you towards a solution that is better than any other incremental step – but it’s still not the ideal solution overall.
It happens in business as well.
By the way, if you didn’t hear, Apple is delivering numbers that no one would have ever thought possible in 1996. Q3 earnings here.