“Apple is strong”
Revolution in Cupertino
Steve Jobs didn’t let Apple rest on its laurels.
The iPod was a hot product, but it belonged to a niche market: the high-end hard-drive MP3 players. There were still zillions of little Flash players that were a lot cheaper and got sold for that. Apple went after them as well: at Macworld in January 2004, Steve unveiled the iPod mini, a smaller version of the iPod which came in colors and soon became the best selling MP3 player in the world. Exactly one year later, he introduced the iPod shuffle, a cheap, Flash version of the iPod, to go after the rest of the competition. It worked: as of early 2006, Apple’s market share in the music player space was around 70% — it still is today. The company improved its product line every year, introducing the iPod nano in September 2005, and the iPod video the following month. Every year after that, the iPod line was refreshed every September.
In the music distribution business, the iTunes Store was gradually expanded to foreign markets: a European Store was announced in June 2004, and was followed by a Japanese Store a year later. iTunes’ market share kept growing, reaching 85% of legal music downloads as of January 2006 — at the expense of other music download websites, but also the traditional distribution channels.
The exponential growth of iPod sales, the new iTunes business, the ever-expanding retail operations (Apple had more than 100 stores open in 2005 throughout the US and a couple abroad, all of which were profitable) — all contributed to Apple’s phenomenal expansion from 2004 on. This was a change in scale that was unprecedented in the company’s history. As Steve Jobs put it:
We’re in uncharted territory. We’ve never sold this many of anything before.
Steve Jobs, CNBC interview, September 2006
The company hired engineers at an incredibly fast rate, and they couldn’t even fit in the firm’s campus in Cupertino. Steve actually announced to the city council that they were planning the construction of a second campus in April 2006.
The day hell froze over
The Mac business was starting to rise — finally. The risky Trojan horse concept — iPod would seduce Windows users into switching to the Mac — seemed to be working, together with the unexpected success of the Apple Retail Stores.
The company expanded and adjusted its product line, careful to the market’s reaction. The days of the simple four-product matrix were long gone. First was the Power Mac G4 Cube, that we already talked about, halfway between the consumer and pro desktop lines. It was discontinued in 2001. Then came the eMac, a cheaper version of the iMac G4 with a CRT display, introduced especially for the education market in 2002, and discontinued in 2005. Finally, in January 2005, they released the Mac mini, a stripped-down Mac designed to appeal to switchers, the cheapest Mac ever at $499.
On the pro side, in 2002, the company entered the high-end server market with the XServe. They also fought hard to catch up with the speed performances of the Wintel platform, and in June 2003, they unveiled the G5, a new chip they had developed with IBM that they claimed was the fastest in the world.
But the biggest move was announced in June 2005, at Apple’s annual developers conference, WWDC. The company had just finished its complete transition to OS X after the release of Mac OS X 10.4 Tiger, which was adopted by a very large majority of Mac users. That day, Steve Jobs came on stage and announced to a stunned audience that Apple was going to switch away from IBM to using Intel processors in their Macs.
This was close to a cultural shock to many developers and avid Mac followers. For years, the company had been making fun of Intel, the main provider of chips used in Windows computers. Intel was always depicted as a slow, almost retard company, whose chips didn’t even compare to the ones Apple used.
But something changed in 2004. After one year of using IBM’s new chip, the G5, in their professional workstations, Apple still didn’t manage to put the chip into their pro notebooks. IBM also failed to deliver on their promise of making a 3GHz processor within a year. The situation really became embarrassing when, in September 2004, Apple unveiled iMacs that ran on G5s while its PowerBooks were still using their previous-generation processors, the G4. The problem with the G5 was its power consumption: it just required too much energy to fit inside a laptop.
That’s why Apple started talking to Intel, planning to use their much more power-efficient chips in future Macs. This change would have been impossible had Apple still been using the old Mac OS. But as you recall, Mac OS X was a different story. Its parent system, NeXTSTEP, had already been ported to Intel in 1993. The OS was platform-independent: it could run on any kind of computer. That’s why Apple developed Intel versions of its OS since version 10.0, in case they would have to use it someday — and that day came in June 2005.
Apart from the ability to make powerful notebooks, there was a strategic reason to switch to Intel. For years, Apple had suffered from unjustified critics from the PC world, claiming their computers were slower. From then on, Mac would be using the same hardware components as any Windows PC. Moreover, the Macs would now be able to run Windows natively! This was a very powerful message to potential switchers who were afraid some of their favorite software would not run on the Mac. They could turn their Mac into a Windows PC by simply rebooting, using an Apple software called Boot Camp. There simply was no compelling argument not to switch to the Mac anymore, other than price.
The move to Intel was decisive in Apple’s fight against the Windows supremacy. Given his company’s growing momentum, Steve appropriately concluded his WWDC keynote address with the words: “Apple is strong”.
Steve and the Magic Kingdom
Let’s go back a couple of years earlier and look at the changes at Steve’s other company, Pixar. The animation studios released success after success: following A Bug’s Life (1998) and Toy Story 2 (1999), their fourth movie, Monsters Inc., released in 2001, had generated more than $520 million in gross revenue worldwide. The company had expanded and was prepared to release a new movie every two years. Because it had so many more employees, it moved to a brand new, expansive campus in Emeryville, a small industrial town outside of Berkeley, in late 2000.
However, the relationship with Disney was turning bitter. The Walt Disney Company’s CEO, Michael Eisner, had never gotten along with Steve Jobs. It was obvious to any observer that there was a huge personality clash between the two of them.
The first problems emerged after the release of Toy Story 2. Eisner asked Pixar to work on yet another sequel, Toy Story 3, and even convinced Lasseter to do so. The problem was that such a sequel would not count as an “original movie” as stipulated in the five-picture deal signed by both companies in 1997. If such a sequel was released, Disney would get seven Pixar films for the price of five, so to speak. It was out of the question for Steve Jobs.
Tensions between the two bosses reached their climax when, in 2002, while Eisner was speaking about digital piracy in front of a Senate Committee, he told them that computer companies actually benefited from such illegal actions. The example he took was Apple and its advertising campaign for iTunes, whose slogan was: “Rip. Mix. Burn.” — making a confusion between “rip” and “rip off”. It was obviously a personal revenge on Steve Jobs, who was quick to react. He called up Roy Disney, Walt’s nephew, and confided to him that Pixar would not make a new deal with Disney as long as Eisner was still in charge.
In the spring of 2003, Steve Jobs came to Disney to negotiate the next deal between the two companies. His demands were so unacceptably high that it was obvious he had crafted them just so they would be refused. He asked for 100% ownership of Pixar’s films — Disney would only get a 7.5% distribution fee. Moreover, their distribution exclusivity would be limited to five years. Disney’s only privilege was the right to use Pixar’s characters in its theme parks. Of course, Eisner refused, and Steve left, officially announcing he was looking for a new distributor.
In early 2004, Steve faced Pixar’s shareholders at the company’s earnings conference call. It was the first time since the company’s IPO that its future was not tied to its contract with Disney. However, Steve was pretty confident, especially after the success of the studios’ latest release, Finding Nemo, which eventually became the highest-grossing animated movie in history and an Academy Award winner.
Steve mentioned an email that Michael Eisner sent to Disney’s board of directors before Finding Nemo was released, in which he said the new movie was “nowhere near as good as their previous movies.” “As you know, things turned out a little different”, Steve joked. Then he discussed Pixar’s concern about Disney’s right to make sequels to Pixar’s first movies:
We feel sick about Disney doing sequels, because if you look at the quality of their sequels, like The Lion King 1/2 and their Peter Pan sequels and stuff, it’s pretty embarrassing.
He ended the conference by reassuring the shareholders, saying he had had calls from four other major studios who seemed more than willing to distribute Pixar’s films in the future. The relationship with Disney was dead and buried.
However, change at the Magic Kingdom made way for quite a different future. Indeed, increasingly exasperated by Eisner’s management — including his fight with Pixar, Roy Disney had publicly announced he was resigning from the company’s board in November 2003. Shortly afterwards, he started a public campaign called “Save Disney” whose sole purpose was to oust the current CEO. He got support from prominent figures in the animation business, as well as thousands of individual Disney shareholders.
To the surprise of many, the campaign worked. At Disney’s annual shareholders meeting, in March 2004, the vote of confidence to renew Eisner’s position only garnered 57% of the votes. It was unheard of in the company’s history. The board took notice, and some six months later, the CEO announced he was going to retire the following year. His successor would be the company’s COO, Bob Iger.
The day he was informed of his promotion, Iger phoned both Steve Jobs and John Lasseter to pay his respects. He made sure they understood that the hateful days of Eisner were over.
In the summer of 2005, Steve Jobs and Bob Iger met in person in a very different context. Steve didn’t come as head of Pixar, but as Apple’s CEO. He was working on the next-generation iPod, which would be able to play video. However, there needed to be some way to acquire video content legally, or Apple would be accused of supporting piracy again. That’s why part of the announcement would be the launch of an expanded iTunes Store, where one could buy TV shows. As it happened, the two most successful TV shows in the US, Desperate Housewives and Lost, were both owned by ABC, whose parent company was no other than Disney.
Apple made a deal with Disney to sell both shows and a couple more on iTunes, and Iger went on stage during Steve’s keynote to announce it to a stunned audience of journalists and media experts. The handshake between the two CEOs was a strong signal that a new cooperation between Pixar and Disney was increasingly likely.
Yet very few people envisioned the scope of that renewed partnership. Iger proposed to Jobs no less than merging both companies. He said he understood that Pixar was the only creative force that Disney could rely on for its future in animation. After making sure that the animation studio would keep its independence — staying in Emeryville and keeping its logo — Steve signed a deal for Disney to buy Pixar for $7.4 billion. That was a lot by any standard, given the company’s revenues — but Iger was willing to pay it for John Lasseter’s leadership in animation. The merger was announced on January 24, 2006, at Pixar studios in Emeryville.
Under the terms of the deal, Steve Jobs, who still owned close to 50% of Pixar’s stock, became Disney’s single largest individual shareholder, with a share of 7%. Ed Catmull, Pixar’s former president, was named president of the combined Disney-Pixar studios, while John Lasseter was chief creative officer. Steve was now an influential board member of the Walt Disney Company, a position he still holds today. That left him with even more time to concentrate on Apple.
The company’s decade-long fight to gain market share in the PC industry, especially in the consumer market, was actually finally starting to pay off around 2006. The transition to Intel was rapid yet smooth. The entire product line was ported in less than a year: it started with the iMac and the pro notebook, re-christened the MacBook Pro, in January 2006. Then came the Mac mini in February, followed by the MacBook (replacing the venerable iBook) in May and the Mac Pro (former Power Mac) and XServe in August.
All of these new Macs sold very well, especially the MacBooks and the consumer desktop, the iMac. But, inspired by its success with the iPod, Apple was starting to expand outside the computer industry into consumer electronics. Steve Jobs finally saw his dream of making Apple the Sony of the digital age materialize. His vision was encouraged by the brand’s undeniably powerful image thanks to the iPod, as well as the incredibly hot Apple retail stores. Indeed, the stores had been designed as lifestyle boutiques demonstrating the power of Macs to run your digital life — that concept obviously worked very well with consumer electronics too.
In February 2006, Steve unveiled the iPod hi-fi, a stereo speaker system designed to work only with iPods. He claimed its quality was rivaling with high-end, $10,000 audio systems, while it cost only $349. The market thought otherwise, as the product flopped and was discontinued in September 2007. The company gave it another shot with the Apple TV, originally known as iTV, a wireless set-top box that basically linked your Mac with the widescreen TV in your living room. The Apple TV was officially released at Macworld 2007, but it has yet to prove itself as a successful product.
Since you are such well-informed readers, you probably already know that Apple’s biggest move outside its computer and music businesses was announced at Macworld in January 2007: it is the iPhone.
The iPhone project started in 2003 — although rumors about such a product had circulated even before that, with the much-hyped Apple PDA. The basic idea was to build a digital convergence product, the ultimate digital device that would combine a phone, PDA, and iPod. Actually, Apple had already moved into the phone business with the Motorola ROCKR in late 2005 — a standard chipset that was compatible with iTunes. But the product was lame, and it was just a temporary solution before Apple came up with its own phone.
One of the first thing Steve Jobs did before developing iPhone was to go to the cell phone carriers. He talked to them separately in early 2005, promising to build a device “light-years ahead of anything else”. He soon made a deal with America’s #1 carrier, Cingular. The provider knew that the only way to increase its profits was not by competing on price, but by charging users for their increasing use of data online. Since the iPhone was going to surf the Web, it fit their strategy pretty well.
By looking at Apple’s deal with AT&T, one has once again to wonder at Steve Jobs’ extraordinary negotiation skills. Before iPhone, wireless carriers treated handsets manufacturers like slaves. They used to dictate the phone’s features, pricing and marketing, in exchange for the right to use their networks. The iPhone deal completely reversed this balance of power. AT&T-Cingular begged Apple for five years of exclusivity and a 10% margin for sales in its stores, just so they could be the one carrier to support iPhone. Apple kept complete control over design, manufacturing and marketing — and they even managed to garner $10 a month from every iPhone Cingular plan. AT&T didn’t even see iPhone until a couple of weeks before it was introduced in January 2007: although such secrecy was common at Apple, it was unheard of in the cell phone industry.
Work on the iPhone really intensified by early 2006. The product was, once again, a tribute to Apple’s unique ability to innovate in the consumer electronics industry. It was a miracle of the marriage of hardware and software, and Apple was the only company that excelled in both. On the software side, it used Mac OS X, the exact same system that was used on Macs. This made iPhone potentially able to run any kind of Mac software. As for hardware, its most revolutionary feature was its touch-screen display, a technology Apple originally developed for a tablet PC... that would eventually be introduced three years later (iPad, folks!). The development of iPhone had its share of tough drawbacks, especially when it was almost restarted from scratch in fall 2006. But the prototype was eventually ready for Macworld, on January 9 2007.
That day, when Steve took the stage at Moscone Center in San Francisco, he told his audience they would making some history together. He knew iPhone would be one of the most important product in Apple’s history, one that would set its destiny for decades to come. This little box less than half an inch thick was the ultimate digital pocket device, a computer/iPod/phone that allowed its owner to make calls, take photos, handle contacts and email, browse the Web, listen to music and watch movies in a powerful yet incredibly easy fashion that was unmatched by any of its predecessors.
iPhone is five years ahead of what everybody else has got. If we didn’t do one more thing, we’d be set for five years!
Steve Jobs, Newsweek interview, January 2007
To concretize Apple’s transformation — obvious as it was at the end of his Macworld keynote, after he had introduced both iPhone and Apple TV — Steve announced that the company’s name was going to change from “Apple Computer Inc.” to just “Apple Inc.” (watch the NeXTSTEP vs. OS X video in our Movies section). It was now official: after thirty years, the fruit company had helped turn the turbulent prince of Silicon Valley into the king of the digital age.