The halo effect

Jan 12th 2005
From The Economist Global Agenda

Using the phenomenal success of the iPod, Steve Jobs is having another go at the mass market for computers

EVERY January, Steve Jobs, the chief executive of Apple Computer, manages to look like the hippest boss in the entire computer and consumer-electronics industry. During the first week of the year, he coolly stands by as all the other industry bosses go to Las Vegas to exhaust themselves and their audiences at CES, a huge and unwieldy trade show with probably the world’s worst taxi queue. Then, in the second week, Mr Jobs, in his trademark black mock-turtleneck and jeans, mounts a stage in San Francisco at Apple’s MacWorld conference, a sort of Woodstock or Glastonbury of the gadget world. There, to oohs and aahs, he unveils Apple’s latest products, all stunning in their design elegance and user-friendliness, not least by comparison to the contraptions his rivals exhibited the week before.

This week, however, Mr Jobs went a subtle but dramatic step further than in past years. Visibly emboldened by the runaway success of the iPod, Apple’s iconic portable music player, and by profits in the most recent quarter that were up by 368% on the same quarter a year earlier, he announced what is, in effect, a new corporate strategy. Instead of remaining content as a niche outfit selling beautiful but expensive computers and related gadgets to a cultish few, the firm is returning to contest the mass market that it long ago ceded to Microsoft, Dell and others.

That this challenge (in effect, a rematch with Mr Jobs’s nemesis, Microsoft’s Bill Gates) is even conceivable is entirely thanks to the iPod, which is going from strength to strength. In December, Apple shipped the ten millionth, having sold 4.5m during this past holiday season alone. To Mr Jobs’s delight, the iPod’s market share has grown from about one-third to two-thirds in the past year, at the expense of much cheaper “flash” players (iPods use hard discs to store music, rather than flash-memory cards). This is a vindication of Mr Jobs’s decision a year ago to offer the iPod mini, a smaller and less expensive model.

Mr Jobs, however, wants to attack even that remaining third of the market. So, this week, he unveiled the iPod Shuffle, a flash player that costs $99 (with a capacity for 120 songs) or $149 (for 240 songs), is the size of a pack of chewing gum, and looks (no surprise there) much cooler than any other flash player. And a deal with Motorola, a maker of mobile phones, to include iPod-like music-player software on some handsets, starting this spring, should attract even more users. For Mr Jobs, who has never dabbled at the bottom of—nor explicitly tried to dominate—any market, all this is unprecedented.

It also makes perfect sense, says Steven Milunovich at Merrill Lynch, an investment bank, as long as one realises that “the iPod is the tail wagging the dog”, the dog being Apple’s computer business. Even though the iPod now outsells Apple’s computers by volume, most of the firm's revenues still come from the computers—the iMac desktop, the iBook laptop and the high-end Power Mac and PowerBook. So Mr Jobs still needs to fix Apple’s longstanding problem in its core business, which is that its global market share in computers seems stuck at about 3%. Using the iPod’s “halo effect” to convert mainstream (ie, Microsoft Windows) computer users, thinks Mr Milunovich, is the way to do it.

Which is why Mr Jobs, to gasps in the audience (even though the news had already leaked out), also announced his most radical product, the Mac mini. Named to remind people of the iPod mini, this is a fully-fledged but tiny computer—it almost fit into Mr Jobs’s palm. The twist, in Mr Jobs’s words, is that it is BYODKM, or “bring your own display, keyboard and mouse”: buyers are expected to plug in whatever monitors and peripherals they have already. Leaving out these bits reduces the price to $499, or $599 for a more powerful model. This is about $800 less than the flagship iMac, making the Mac mini Apple’s first truly low-cost computer, “so that people who are thinking of switching [from a Windows machine] will have no excuse,” says Mr Jobs.

Cutting the price tag of the new box by leaving out the peripherals rather than by stripping down its functionality is a shrewd way of minimising two risks. It is unlikely to cannibalise sales and profit margins of Apple’s more expensive models; and it is likely to snap many Windows users out of their inertia and into making the switch. As more of them do, Mr Jobs reckons, the converts will tell other Windows users how safe Macs are (compared to Microsoft’s buggy, virus-prone software) and how user-friendly (just try networking several Macs together, compared to several Windows machines).

Thus, Mr Jobs hopes, Apple’s growing but seamlessly integrated range of products, from entry-level stuff for kids to pricey boxes for professional designers or musicians, should make Apple the most revered brand in the digital home and in consumer electronics. This is why Mr Jobs has opened 101 retail stores around the world, their locations hand-picked by a former Gap manager. It also helps that an ecosystem of accessories—over 400 for the iPod alone—is blooming. Mr Jobs announced this week, for instance, that Mercedes, Nissan, Volvo, Scion, Alfa Romeo and Ferrari will join BMW and offer iPod controls in their steering wheels. It also may help that Mr Jobs, who is also the boss of Pixar, a studio that has made six animated-film hits, including “Finding Nemo” and “The Incredibles”, understands the world of entertainment better than probably any other boss in his industry.

Watch out behind you

One of the people who might beg to differ is, of course, Mr Gates. Fatefully, in the 1980s he chose to license Microsoft’s operating system to many hardware-makers, thus making it a standard and consigning Apple, which insisted on bundling its superior software and hardware together, to the margins. The company only revived when Mr Jobs, who was ousted from Apple in 1985, returned in 1996. It is possible to hear echoes today. Apple leads the market for online music with iTunes, its music store and jukebox software, which works only with the iPod, whereas Microsoft is pushing a rival software format, Windows Media, to several online music stores and hardware-makers in an attempt to make it the industry standard.

So Mr Gates could come from behind yet again. On the other hand, Mr Jobs has been more circumspect this time around—making iTunes work with Windows, doing marketing deals for the iPod with Hewlett-Packard and Motorola, and, with this week’s announcements, fending off competition from lower-cost rivals. It is too early to tell which of these two generals, this time, is still fighting the last war.

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