WSJ _BUSINESS WORLD_ (http://online.wsj.com/public/search?article-doc-type={Business+World}&HEADER_TEXT=business+world) Updated March 6, 2012, 9:35 p.m. ET The End of Apple's Roach Motel? Apple's vast profit margins aren't built to last.
Finally we've been getting some company for the thesis that Apple, as impressive as its growth has been, will not grow to the sky by foreclosing opportunity for other mobile software makers. But it's not enough to note, as several analysts have, that another player could emerge as unexpectedly as Apple and Google did to displace incumbents Palm, BlackBerry and Windows. It's not enough to note, as many also have, that Apple's fat margins inevitably will be eroded in the competition for the next billion smartphone customers. Even as the company gets ready to introduce the latest, greatest version of its hot-selling iPad, up for question has to be the whole ecosystem meme. This is the idea that users get locked into a single ecosystem of devices, hooked to the same proprietary network of apps and content. Google might have a chance at creating a lasting alternative to Apple's Roach Motel, the scenario goes, but nobody else can catch up, no matter how much they spend to subsidize app makers and content suppliers to create their own versions of Apple's App Store and iTunes. "Every time a user downloads a native app to their smartphone or puts their data into a platform's cloud service, they are committing to a particular ecosystem and reducing the chances of switching to a new platform," explained a Gartner analyst about a year ago. This view assigns an absolute wisdom to Steve Jobs's tactical wisdom in keeping the Apple universe mostly closed. But open and closed are not synonyms for good and bad, and recent decades have seen violent swings almost overnight in response to market factors. Macintosh was closed, Windows open. AOL closed, the Web wide open. The iPhone closed, Android less closed. And good reasons exist why the next wave will be a circling back, in a sense, to the universal browser. It will matter much less what mobile operating system you run. Let's touch briefly on a few themes. Until now mobile devices have been like medical technology: spare no expense, performance is everything. That's changing as more functions get reduced to a single chip, and as price competition heats up. At the same time, capability is retreating into the cloud, which also helps the device become cheaper, even disposable. All this means that the Apple bonanza—selling $600 devices to carriers and their customers for a $300 markup—will end. Apple will be tempted to seek more of its profits from services. Apple's cloud, like anyone's, will have to pay its own way, which means opening it up to rival devices. Moreover, with any cloud service that doesn't involve a user paying to permanently "own" rights to a piece of digital content, that involves paying on a subscription or per-use basis, the stickiness is gone—poof! And in the age of Pandora and Spotify, who really wants to spend man-hours managing a music collection anymore? That's necessarily less true for email, photos and other personal documents. But it's hard to see how an Apple or anyone is going to make device imprisonment pay. Customers already get these services free on the Web. One key factor is the rise of HTML5, a Web standard that will give mobile browsers the ability to deliver app-like functions. Mozilla has announced a new project, Boot to Gecko, to make the browser central again to the mobile Web experience. Qualcomm is designing its mobile chips for faster browsing. Facebook and Twitter deliver their services today to mobile users via embedded browsers. Think Facebook and Twitter won't be using the new capabilities to deliver services that compete with apps and iTunes? Even Steve Jobs sold a lot more iPhones and iPods by making iTunes available on Windows. Now that iTunes is becoming a cloud service—guess what?— Apple still needs Windows. The cloud-version of iTunes supports both Vista and Windows 7. But notice something else: Both Apple and Microsoft are working to unify their operating systems across devices, large and small. Does that mean a Windows tablet or phone soon will be able to run a streaming iTunes? We know what Apple might say today, but tomorrow will be different. Consider the forthcoming Apple TV: To pay for Hollywood content, it will certainly have to work with non-Apple-branded television sets. Don't expect to find a stock recommendation here. Apple sold 37 million iPhones last quarter, nearly double its previous high. The urgent puzzle for analysts isn't whether its sales can keep growing. It's whether Apple can keep ringing up stupendous profits per device. If so, Apple, with a market cap today of $508 billion, could soon be worth $1 trillion, $2 trillion . . . A realistic scenario, however, is that its margins will start coming down sharply and the Roach Motel will prove less formidable than assumed. In the future, picking a device won't mean locking yourself into an ecosystem. That doesn't mean BlackBerry will get a second wind or Apple won't continue to grow rapidly. We will suggest, however, that in such a world Microsoft will be an interesting player to watch. ------------------------------------------------------------------------bi A version of this article appeared Mar. 7, 2012, on page A15 in some U.S. editions of The Wall Street Journal, with the headline: The End of Apple's Roach Motel?. -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
