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OMG! OMG! Today is the big day! Actually, as I write this article, it's the night before the big day, Sept. 12, 2012, when Apple (Nasdaq: AAPL) will announce its new iPhone. Not being a mind reader, I really have no idea what Apple will announce tomorrow, except for EVERYTHING. This iPhone release is the most documented, unsurprising hardware release to date for Apple, with information about the design spec, feature set, and even the packaging being leaked in the days and weeks before today's announcement.
The phone screen will be larger, it will be fully 4G LTE capable, the processor will be better, the camera will be better, Facetime won't recquire Wi-Fi anymore, Facebook and Yelp will both be integrated deeply into the operating system, Google (Nasdaq: GOOG) Maps will be gone, and the pricing will likely be a little more aggressive, especially on the low end of the portfolio, with the iPhone 4 given for free with a 2-year contract. Hmmm, maybe I AM omniscient!
Sorry, none of this matters.
Don't get me wrong, Apple makes the coolest toys out there, and we all love our cool toys. Jobs and Co. recognized a long time ago with their white ear buds and beautiful design that looks matter and usability and style go a long way. What Apple has also realized, and what CEO Tim Cook has gone out of his way to emphasize, is the fact that different people like different kinds of toys, and for wildly different reasons. People use phones differently than they use e-readers, and use tablets differently than they use laptops. Some people need a 2-ounce Nano that they can strap to their arm when they run a half-marathon and other people want an iPad to teach kids in the classroom or do inventory at their store. In the past, we have bought different products from different companies. Now we're able to buy them all, happily, from the same company.
This is why we have seen -- and will continue to see -- more variety in the product portfolio, all with the goal of appealing to the various audiences. And, the brilliance of this is that if Apple does a good job, I will buy ALL of its toys, because I have different needs. I need a phone, I want an iPad, the Nano is my next purchase because I just started running, and my 10-year old will want the iPad mini because his hands are too small still for the full iPad. Don't even get me started on the 70-inch widescreen iMac home iTheater I have been iSaving for. Yes, I want them all, because I have situational needs.
But none of this matters. Sorry. (This is where Bill Clinton comes in.)
It's the iConomy, stupid
James Carville, as campaign advisor to presidential candidate William Jefferson Clinton, famously explained to the people of the Clinton campaign that it's "the economy, stupid." And, while Tim Cook may not be running for president, he is probably saying the same thing inside the halls of Apple's headquarters in Cupertino as often as anyone will listen. But, because the shiny new toys always overshadow almost every other conversation, the real story goes somewhat undiscussed. Obviously, many writers and investment analysts have recognized what I'm saying here for a while, so I don't want to claim any sort of ownership of the idea. But I may be in slightly less crowded company in my belief that the importance of the economy being built around the shiny toys is the ultimate story here, and where Apple and its shareholders bear the greatest risk.
No iTunes?? WHAT?!
Imagine what would happen if Tim Cook announced that Apple was launching all of these great new toys, but killing its iTunes service. GAME OVER. It is simply unimaginable to consider Apple without iTunes, and increasingly, iCloud. The devices are NOT what keep you coming back for more, as cool as they are. You come back for the latest and greatest because maybe you can afford to, because you're an early adopter, because you like beautiful things, but mostly because you cannot and don't want to switch. All of your music, books, and movies are on iTunes, all of which Apple gets paid for. All of your data is synchronized seamlessly in iCloud, which Apple gets subscription revenue for. Apple has cultivated an incredible content creation economy with the App Store that builds businesses for thousands of developers, all of which Apple gets a piece of. And it all just works.
Other great economies
Apple has executed all of this brilliantly, but it's hardly the first to create an amazing, value-producing ecosystem that extends well beyond the core product or service. Google did it with paid search, eBay did it with auctions and now mobile payments, and Amazon (Nasdaq: AMZN) has done it with every retailer sitting on the long-tail fringe that needed "Prime" distribution. Amazon owns books, and it's scaling up for war on the movie and TV front.
Coming and going
But unlike these other great businesses, Apple has done the unimaginable. It has made hundreds of billions on both the razors AND the blades. Forgive the mixed metaphor, but it's fitting. All of these shiny toys we touch, feel, show off, and love to play with are simply stunning frames, all giving us a view into the content we crave. Apple is giving us many different frames of various colors, shapes, and sizes, but the real power comes in the tapestry, the content, the apps, the music, the books, etc. Amazon, which is getting hip to all of this, now has the Kindle. We'll see what else lurks.
Apple's fiscal cliff
While I'm butchering metaphors, let's recognize that Apple's biggest demon is not the beautiful frames it builds. It already won that fight. (Yes, geeks, I know Apple has to keep delivering products we love.) The real challenge is in the content, and more specifically its ability to find unique and innovative ways to deliver us what we want through our iPads, iPhones, iPad Minis, big-screen TVs, iGlasses, etc. So, how is Apple doing? Very nice work on music, but it has to keep up the licensing agreements, which don't last forever, and will become harder to maintain and more expensive over time as content producers fear this 800-pound gorilla more and more. In books, Amazon wins, though Apple is getting better and intelligently focusing on textbooks and the educational market. Newspapers and magazines? Everyone still is pretty bad at this, and I'm not even sure the modality matters anymore, but Apple is doing better than anyone else. Movies? Nope -- this is Netflix (Nasdaq: NFLX) winning, with Amazon breathing heavy. Photos? Apple, hands down.
The battle
I'll close this bit by emphasizing that the hardware rollouts are beautiful sleight of hand, with the real war being waged on the content creation and licensing fronts. How well can Apple create switching costs for the content that I produce myself -- emails, photos, videos, data files? How well can it secure content distribution rights for what others produce -- apps, movies, music, books, etc.? And how well can Apple's innovations disrupt existing markets, bringing established companies to their knees? Do we really need printers, Hewlett-Packard, when everyone in the office has an iPad and we all share documents from the cloud seamlessly? Is Sony or Nikon relevant anymore, outside of the super high-end gear, when I have a 12 megapixel camera that shoots 1080p video on my iPhone? Are TomTom, Garmin, or other stand-alone GPS makers dead with Waze now available for my iPhone? Does Netflix have a place in the world anymore once the iTV comes out and Apple figures out how to package a subscription for me to choose every show I love into one package?
While everyone else will marvel over the slightly larger screen and hopefully better battery, I will be paying very close attention to elements of the new iPhone that lend insight into how Apple's economy grows and is defended -- and how its moat gets wider. Y ou should, too.
In a few days, I'll share thoughts on the product release and give more advice to Tim Cook on how he should run the most valuable business in the history of the world. Stay tuned.
