Jim Jubak: Apple, Microsoft, Google, HP device war

Jubak's Journal5/6/2010 7:30 PM ET

Apple sets off war of tech giants

By controlling its products from OS to storefront, Apple has built a model its competitors are scrambling to replicate. Each has parts, but none has the total package yet.

By Jim Jubak

It's war. All-out war. Savage-your-former-allies war. To-the-victor-go-the-spoils war. To-the-death war.

It's Google (GOOG, news, msgs) against Hewlett-Packard (HPQ, news, msgs) against Microsoft (MSFT, news, msgs) against Dell (DELL, news, msgs) against Lenovo (LNVGY, news, msgs) against HTC against Amazon.com (AMZN, news, msgs) and, of course, everybody against Apple (AAPL, news, msgs).

Apple hasn't left competitors any choice. Its iPod, iPhone and iPad have completely disrupted the Windows-Intel model that once ruled the computer world. The disruption has been so thorough that Apple has replaced the old model with its own. Now companies must compete on Apple's terms or become irrelevant.

Need some proof? On April 28, Hewlett-Packard announced it would buy wireless phone pioneer Palm (PALM, news, msgs) for $1.2 billion -- a premium of 23% over the share price. For its money, Hewlett-Packard would get a phone-maker headed to bankruptcy with a revamped product line that no one is buying -- and what is, by all accounts, a really good operating system, webOS.

For all intents and purposes, HP, a longtime partner with Microsoft that had for years built PCs, laptops and notebooks on Microsoft's Windows operating system and that was set to roll out an iPad-killer tablet also built on Microsoft's operating system, spent that $1.2 billion to buy an operating system. (Microsoft is the publisher of MSN Money.)

That's how much Apple has changed the terms of battle. To stand any chance of surviving, let alone winning, a computer company can't just be a repackager of commodity chips and software anymore. (I'm still not a big fan of Apple's PC strategy, by the way. I think the company could be grabbing more market share in that sector than it is. For more, see my blog post "Has Apple blown it?")

A company now must own its own operating system and build its own hardware, but not to make computers easy to use. Instead, it must make innovative consumer devices that get upgraded with new models as if they rode (and created) fashion trends. The company must then own a retail channel that sends consumers back again and again to its products.

Nobody in the sector is very well-equipped to compete with Apple on these terms. Putting together hardware and software teams that would rank in the industry's top 10 at a single company isn't exactly easy. Apple has been working in this direction for a decade. Further, tech companies aren't accustomed to running retail stores of either the glass and stainless steel or virtual type.

But Hewlett-Packard's planned purchase of Palm, Google's attempt to make its own cell phones, Microsoft's perhaps mythical tablet and just about everybody's attempt to build an applications store are all testimony to the industrywide conviction that the old model had reached a dead end and that Apple's iPod and iPhone finally killed it.

In the old model, device-makers bought chips from Intel (INTC, news, msgs) or one its competitors, licensed an operating system from Microsoft and engineered them into a PC, phone or whatever. The model had its advantages: Intel's huge scale and manufacturing prowess kept driving the price of chips down and the power of chips up. Company engineers building the devices and consumers using them had a uniform operating system to learn.

From irrelevant to unstoppable

But the model has a flaw that Apple has turned into a huge vulnerability. Because engineers at device-makers were working with purchased processors and licensed operating systems from two separate and independent companies, no company ever got a processor or operating system precisely optimized for the device it was building. PCs, phones and other devices worked OK, but increasingly they worked like what they were: commodity devices built out of commodity parts.

They even looked like commodities. In a world colored gray, black was considered a style breakthrough.

Apple's PCs were different. They ran Apple's own operating system. They were in many ways easier to use. (I'm speaking from personal and observed experience. I own both Apple and Microsoft-based machines.) Apple's even came in colors and occasionally broke a rule or two (like putting the guts of the computer behind the screen instead of in a separate box).

But with Apple's market share shrinking toward 4% and threatening to go lower, nobody in the PC industry cared what it did.

And then came the iPod. Introduced in October 2001, the device had racked up unit sales of 100 million by April 2007. By September 2009, the figure was up to 225 million. And Apple dominates the portable player market. Nine years after the iPod was introduced, it held 74% of the market for MP3 players.

And it's not as if no one else has tried to take a piece of that market. Microsoft's Zune MP3 player hit the market in 2006, for example. But by September 2009, Microsoft had just a little more than 1% of the MP3 player market. Flash-memory-maker SanDisk (SNDK, news, msgs) was Apple's nearest competitor, with 7.2% of the market.

Proving that was no fluke, Apple then did the same thing with the iPhone, launched in June 2007. By September 2008, the company had sold 13 million units and, by revenue, it was the third-largest mobile-phone-maker in the world, behind only Nokia (NOK, news, msgs) and Samsung Electronics. The total is now up to 45 million iPhones sold since the product's launch. Last month, Apple beat out longtime champ Motorola (MOT, news, msgs) to become the biggest U.S. maker of mobile phones. (To keep these sales numbers in perspective, Nokia, based in Finland, shipped 127 million phones in just the fourth quarter of 2009.)

Continued: Apple's tight grip on its market share

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