Several years ago, Gill Amelio, then CEO of Apple Computer, decided
to license the Macintosh operating system (OS) to other companies. To him,
licensing made sense because Apple could not cover every market niche by
itself, but a group of computer makers could. However, the plan had one
fatal flaw, the OS was licensed to big companies that had their own agendas.
So, instead of covering the unprofitable margins of the Macintosh market,
the cloners chose to concentrate on the most profitable niches, Apple’s
core markets. By licensing the Mac OS to these firms, Apple created a group
of dangerous competitors. Naturally, the cloning program collapsed. Part
of the problem was that Apple chose the wrong partners. Big corporations
tend to be arrogant and promote a certain kind of aggressive manager. Also,
there might have been a cultural thing at work here too. How well could
Mr. Amelio relate with those outside of his society? Perhaps big corporations
were the only kinds of businesses that Mr. Amelio felt comfortable with.
However, choosing large firms as partners may not have been bad in itself.
I think the best possible brand names on a Mac would have been either Dell,
or Kenmore (think about the markets Apple is going after). But, the managers
at Apple should have expected the cloners to be competitors. The problem
was that Apple had to maintain control as manager of the Mac in order for
cloning to work. But, this was not possible under the licensing agreements,
because the cloners probably would have rejected any license agreement
allowed this (but Sears or Walmart might have accepted such a license).
Ultimately, the cloning program failed because the managers at Apple did
not understand the economic paradigms of the computer business. Cloning
seemed like a good idea to them (and it was), but they executed their strategy
according to the ideology of the business school, not the natural rules
of the marketplace. So, naturally, the market rewarded their efforts with
failure. The underlying idea was good, but the execution was lousy. If
Apple had done things differently, cloning might have worked.
Why Did Cloning Fail?
There are two economic paradigms directly at work in the computer business,
the hardware paradigm and the software paradigm. The two paradigms conflict
in essential ways. The software paradigm favors the infinitely flexible
because software can emulate anything. So, for maximum software profits
an infinite variety of machines should be available to fit every situation,
each capable of running your software. This was the fundamental argument
for cloning. On the other hand, the hardware paradigm is extremely rigid,
and favors the highly standardized. So, for maximum hardware profits, there
should only one standard computer, made by one maker, running one standard
OS, with only standard applications. This was why cloning failed. The problem
was that Apple could make money on software and lose money on hardware,
or make money on hardware and lose money on software; but could not make
money on both. And finally, the managers at Apple had to choose.
The OS Dilemmas
There are hidden choices in creating an operating system. Sometimes
you can have one option, or another option, but not both or a mixture of
the two. In creating and marketing an OS there are choices. You can have
a standard machine that works really well in only a few environments running
a proprietary OS (for example, Macintosh). Or, you can have a standard
OS that runs moderately well on a multitude of machines, made by many manufacturers,
and customized for many different work environments. But, you cannot have
both. Understand, a proprietary OS can run very well because the manufacturer
is able to design the hardware around it. A generic OS, like Windows, cannot
anticipate all the possible variations in hardware and drivers, so problems
are inevitable. Then, there are the economic realities. For a hardware
company, manufacturing dozens of different kinds of computers is unprofitable,
so the company tends to concentrate on a few models. That is why the proprietary
OS’s are limited to a few market niches. For a software company generic
OS’s are the thing because the market for proprietary OS’s is limited.
Understand, Microsoft became a monopoly because they didn’t make hardware,
and so were never limited to a few niches. Next, there is the issue of
OS niches. Different applications require different things of an OS. A
Unix machine is great for running web servers, but it requires a lot of
knowledge on the part of the user. A Macintosh is very easy to set up and
use because the machine and the OS are so integrated, but it is also more
expensive. A Windows PC runs a generic OS, so the hardware is cheaper,
but it can never be as stable as a Unix machine or as simple to use as
a Macintosh. Everything is a trade off. It all depends on what you are
doing. So, what would the Mac have become in a cloning environment? Possibly,
a hermaphrodite OS. An OS that was neither fish not fowl, but had the problems
of both. So, cloning the Mac might have created an unseen danger.
What Apple Should Have Done
If I had been advising Mr. Amelio, I would have proposed this: Sell
mother boards, daughter cards, and toolkit ROMs (what BIOS is to the PC's,
but done on much safer read only memory chips) to anyone along with the
license to build one Macintosh Computer. Price the boards according to
age, speed, and potential. So, the latest boards would have the largest
markups, while the older boards would have lower markups; and the toolkits
(what you need to build a laptop, high end workstation, or a server) would
have the largest markups. Then, let the cloners make the Cadillacs and
Porches (as well as the Yugos and Hyundais) of the Macintosh market. And
have Apple concentrate on building the inner Mac, and perhaps making a
few Buicks and Chevies; more to define a basic standard Mac than to make
money. Since most of Apple's profits would come from selling the OS and
circuit boards, letting the cloners (who have to buy the cards) have ninety
percent of the Macintosh market would be no problem. And, this would have
increased the Macintosh market share by opening up the custom computer
market (currently Macs are limited to department store shelves and internet
sales). Overall, this plan would have given Apple several advantages.
Finally
The unseen bugaboo in Apple’s cloning was the issue of choosing between
conflicting strategies. Understand, corporate managers may not be aware
of the paradoxes in their strategies because of the teachings of the business
school. There is only supposed to be one set of rules for the entire economic
system. And, one mass market for mass produced goods. So, economic paradigms
cannot exist, and paradigm conflicts cannot happen. Many firms in the computer
world are unknowingly caught up in these dilemmas. When Apple Computer
decided to license the Mac OS, no one seemed to realize that the plan had
to line up with the paradigms of the computer market. Or, that the paradigms
would dictate the outcome of their strategy. In the end, Managers should
be creative when dealing with paradigm conflicts.
I hope you enjoyed reading this.
For more on the paradigms behind the computer market see, What
About Paradigms?.
For more on the culture of behind our economics, see
An
Un-economic Interlude.
December 28, 1999 - July 10, 2000