A Long-Lens Look at Apple and Disruption

Part 1. Is Apple Disruptive?

Farshad: Horace & Dave, thanks for joining this long lens look about Apple & Disruption. I’d like to set the stage with an brief synopsis, and then ask three fundamental questions about Apple.

Apple has done an amazing job in advancing personal and mobile computing. They have brought some of the greatest products in the world to billions of happy customers. They have entered new markets methodically, taking on fierce, entrenched, and well-healed competitors. They’ve done so while growing market share, improving products and increasing margins.

Most recently Apple has introduced their own M1 SoC, based on their foundational Apple Silicon technology, leaving behind Intel, the leading supplier of PC CPUs.

Taking a long-lens look at Apple & Disruption, let us explore three questions:

1. Is Apple Disruptive?
2. Is Apple Over-serving with M1 Macs?
3. How does Apple defy Disruption?

Let’s dive right in. Is Apple Disruptive? Horace, what do you think?

Horace: Actually the reason I do Apple analysis is this. Apple is the anomaly or the exception that makes the rule of disruption. The history of Apple has been both in confirmation of and in contradiction to the theory of disruption, thus observing Apple helps us better explain disruption. This is what Clay always had as a goal: Let’s find the anomaly, so that we can improve the theory.

In looking at the graph of moving to higher margin versus a lower margin and lower performance is also present for Apple, however, the twist to that story with Apple has been that when looking at the upper end of the trajectory, they are often creating a new market.

In his classic disruption diagram, [Clay] puts a new market as a separate parallel plane, the Z dimension, which suggests there’s a parallel market that can be created. Often what Apple does is combines the two markets so that that, Apple’s move looks like an up-market move in the original market, but it’s also a down-market move in another parallel market. The iPhone is a classic case in point: it’s far too good as a phone, but it’s far, far too low-end to be a computer.

And so when do you understand that, you realize that the disruption that occurred, it’s a market creation of an alternate way of spending your time. It’s an alternate way of creating applications, which came to be known as apps. It’s a new way of communication through social media. It’s new things you can do that you wouldn’t dream of doing either with a phone or with a computer.

Architecturally, it’s a computer. Computer engineers will look at it and say, “oh yeah, I recognize within it a computer running on an operating system,” which used to run on a desktop or a workstation, or even the mini computer called Unix. And it runs on the microprocessor that eventually gets to be good enough and fast enough to be a desktop as they just did, but it’s been packaged in a container and the market that did not exist before. And as a result, it redefines the P, or the Measure of Performance.

It redefines P, which is what the goal of an entrepreneur should be. Redefining P or recalibrating P is what is really at the heart of disruption. To create products that are worse or not good enough in the original dimension of performance, but awesome on a new dimension of performance. This is what Apple does over and over again.

Dave: Jumping on the iPhone, it’s been my long-held view that the iPhone was not disruptive, but sustaining to the mobile phone market—most users look at an iPhone and say this is a better phone. Certainly iPhone helped catapult consumers’ use of mobile services. So we can safely assume that the iPhone definitely sustained mobile phones.

I believe the real disruptive force of the iPhone was not what Apple produced directly, but in their enabling a new form of software development. The iPhone, by way of the AppStore, was disruptive to software development. Before the AppStore, software development required many more people and expertise—both deep and broad—to essentially wrap their work around an operating system or to create something that interfaced with “programs” as we used to call them. But the AppStore enabled many more people with fewer resources, skills, and experience to make money creating software.

With this, the iPhone passed one of our “disruptive innovation litmus tests”: enabling a larger population of people with less expertise and fewer resources to do something that in the past could only be done by experts or was available to people and orgs that had more resources.

Horace: And now apps are constantly being refreshed and updated without developers having to box them and put them on the shelf, and without the licensing terms which used to be onerous: end-user license agreements, corporate deals and so on.

They changed distribution. And as a result of that, they changed the economics and they changed the fabric of computing, from the software side. It’s hard to get this across because software businesses are complex to explain. But the scope is vast—they enabled different layers of software to be created, for example, the whole ride-hailing industry wouldn’t exist for, well, not for the smartphone because it required your location when you summon it outdoors.

We have as, a result, not only billions and billions of dollars of income that’s being generated through the AppStores, but also we have tens of millions of new workers in that value chain whom we call developers. They used to be employed in large corporations, but now increasingly they’re self-employed or working in small companies.

Farshad: This very much reflects my personal experience as an app developer around the birth of the iPhone. The iPhone was definitely a marvel of engineering but I just didn’t see it as a business. When Apple opened the iPhone up to developers, I imagined it would be a fun hobby. I just didn’t see it in the same class as our client work. But my partner Lauren, insisted that we figure out a way to release some apps on the AppStore. She thought this was a great opportunity. By piggybacking on Apple’s brand, customer relationships and distribution network, we would have a new class of users—the consumers. When I mentioned to an indy software developer friend, he asked bluntly: “how many $1 apps do you have to sell to pay your bills?”

This was too good an opportunity to pass up. So I created a simple app called Digital Clock signed it and uploaded it to Apple’s backend—it turned out to be the first of its kind on AppStore! Apple’s developer documentation back then was even more scant than now, and Apple had put the developers under NDA so we couldn’t even use resources like StackOverflow. We were flying blind the first couple of weeks. We didn’t even know how many downloads we had. Finally we found the right person to call and they turned on app “sales” reports. By then we figured we may have a couple of hundred free downloads. When they finally sent us the report, it was not at all what we expected. We had 17,000 downloads! Not total over two weeks, 17,000 on a single day! In one day, we had served more users than all our previous work combined. This was until the next day, when our downloads more than doubled!

My point for telling this story is that, even in its early days, iPhone’s scale was staggering. Before we could blink, we had millions of downloads by customers we didn’t know in half of the countries around the world, by simply signing the App and uploading it to Apple’s servers. Apple took care of the rest of the business stuff, tally the downloads every day and deposit money into our account every month. At the end, the app sales helped us offset the loss of our corporate customers during the financial meltdown. And this was 2008. Today, Digital Clock is a genre that includes thousands of apps. There are hundreds of thousands if not millions of developers like us. The scale is unfathomable.

Horace: Yes. Like you said, Farshad, the AppStore enabled innovation in packaging, pricing, and distribution. And as the market has grown, it’s now morphing into subscriptions where developers can go from $1 per download to $1 per month. When Apple touts that they have 600 million subscriptions, it’s not their own but the subscriptions sold by third-party apps enabled by Apple devices. Imagine that: as a software developer, you’re being told that you can get customers to give you a monthly payment! Wow!

Farshad: That’s true. When I now replay my early AppStore experiences through the lens of disruption, I can see how the iPhone and AppStore met the litmus tests you guys mentioned: that iPhone was a worse computing device than computers, but it also was awesome in another dimension! It was characteristically different than working for corporations.

Horace: And it created [a whole new universe around this] but it’s so subtle and so difficult to convey. I use this notion that it’s a computer only to simplify and make it more palatable.

The fact of the matter is that the iPhone completely reshaped computing, which means it created a new ecosystem, a value network. And by this, I mean tha software distribution, oftware creation, the business model in software has completely changed.

And all of those things meant that you had to have a cellphone. And we don’t think about it now, but the imagined that that pre-smartphone we could not have had ride-hailing. We could not have had micromobility. We could not have had social media as we know it today, which itself created a niche consumption of media. Where we used to think of media as either half an hour sitcom, or a one hour drama, or a two hour movie, and now we have a six-second TikTok.

So this gives the apps the ability to slice content down to such tiny, tiny increments of time that fill up spaces that would be otherwise unoccupied. This is classic non-consumption disruption.

So the iPhone enabled all these things: it enabled new communications, that enabled new consumption, that enabled new transportation that…

So do you give credit to the iPhone and let Apple just sitse there and collect rents on all this? Or do you give credit to the whole system that was created?

Are the disruptors the engineers who wrote the apps? Or are the disruptors the Facebooks and Twitters? In their own right, they changed media, they changed the way we think about our approach to information.

The idea of the disruptive theory is that you want to use it to point to causality of the innovation—what and who caused the transformation? But what we find in reality, is that the world is multi-causal, it’s hard to pinpoint which is the real cause. And all it can do is to tell multiple causes, but it’s kind of hard to predict them. It’s fascinating.

Dave: Yes! Maybe I sound like a broken record, but the key thing Apple did that helped in the success of the iPhone was the AppStore. And to make AppStore successful, Apple had to use a different business model type. This topic probably requires its own discussion, but we have briefly introduced it here.

We’ve so far talked about two kinds of disruptive innovation in this conversation: First, low-end disruption, when an entrant sells a cheaper solution to customers who are over-served by the incumbent players (ex: Excel → Google Sheets). The second is by creating a new market—finding non-consumption and exploiting it (ex: pocket transistor radio or the Walkman, used by teenagers).

But there is yet a third type of disruptive innovation, where a firm causes fundamental changes in its business model to enable the transformation of the market. With the AppStore, Apple changed how they and their developers did business—their relationship with each other and with their respective customers. To make this happen, Apple maintained what we call a “value-added process” business model,—really, just making stuff and selling the end product—while also creating a “facilitatednetwork” business model, where people pay to participate in the network.

Horace: Yes, it’s critical to be aware of the change in the customer definition, as in mobile computing we end up with a new value chain as did the developers. This may as well be the glaring omission in the PC and particularly on the Mac because this ecosystem didn’t emerge, certainly not thriving in the same way, partly because of legacy issues, partly because of corporate customers and perhaps because the lack of an appropriate network business model. But we can see that something is fundamentally missing.

Farshad: This is a good segue to our second question which is whether Apple is over-serving with the Mac. Thank you both for this very insightful conversation! Looking forward to taking on the second question!

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