Fortune Article - part 3
More important than direct software sales are the growth opportunities Apple's "user experience" prowess might open up. Owning a 62% market share of the online music market, for instance, augurs serious sales growth. Even though that market is still in its infancydownloads accounted for less than 2% of U.S. music sales in 2004the iPod platform, for example, kicked in revenues of $1.4 billion in Apple's first fiscal quarter, nearly as much as it did in the previous four quarters combined. Merrill Lynch analyst Steve Milunovich predicts that the iPod business alone will hit $6.2 billion in fiscal 2006, roughly as big as all of Apple when Jobs took over. (Of course, the iPod's growth will eventually flatten as the devices lose their fad status. Yet the gadgets are so useful that it's easy to imagine them becoming as ubiquitous as the Walkmanof which Sony has sold 340 million.)
With the iPod and iTunes Music Store, Apple has changed the rules of the game for three industriesPCs, consumer electronics, and music. And as new as its influence is, Apple appears to have nothing to fear from major rivals. Its software skills have consumer electronics companies at a major disadvantage that could take years to overcome (see "Saving Face at Sony"). Says Nathan Myhrvold, former chief of Microsoft Research: "Once audio and visual experiences become a combined hardware-software-network thing, the consumer electronics guys are fish out of water."
Apple has cast a shadow over Microsoft too. Jobs likes to say that the upcoming Tiger version of OS X will have everything that Bill Gates and Microsoft are promising in Longhorn, the often delayed major upgrade of Windows, now due in mid-2006. "They copied the original Mac with Windows 95," Jobs gloats, "and now they're going to be copying us again." (Microsoft declined comment.)
We promised earlier to tell you about Tiger. The software's most notable feature is Spotlight (that's a Spotlight icon at the top of this page). It's Apple's entry in the race to deliver a hot new capability called "desktop search." The idea is to be able to automatically scan your computer's hard drive to find files, e-mail, documents, pictures, music, and the like, much as Google scours the Internet. Desktop search promises to free users from a major headache: having to remember how files and folders are organized and particular pieces of information are stashed. Google is at work on a similar product, as an add-on piece of software; Microsoft plans to integrate desktop search in Longhorn.
Tiger is also loaded with features that Apple has included just because they're cool. An icon called Dashboard unlocks a bevy of handy Internet-enabled applications called widgetswindows that pop up at the touch of a key to display movie listings, the weather outlook, stock prices, a dictionary, a currency converter, a language translator, and the like, and then melt away just as quickly so you can get back to your work.
When you look at the brief history of OS X, and hear software experts like Bill Joy call it the best operating system in the world, you begin to realize what a remarkable accomplishment it has been for Applenot only to build it but also to migrate millions of users to something so radically different with relatively little pain, and to improve it so dramatically and with such regularity that it has turned the endless nuisance of software support into a profit machine. The technology is so solid that Apple is beginning to sell Macs into markets that never before would even consider them, like the military and university supercomputer centers. Most tantalizing of all is scuttlebutt that three of the biggest PC makers are wooing Jobs to let them license OS X and adapt it to computers built around standard Intel chips. Why? They want to offer customers, many of whom are sick of the security problems that go with Windows and tired of waiting for Longhorn, an alternative. And besides, Apple has buzz now, and Microsoft does not.
Regardless of whether OS X starts showing up in PCs, it looks like Apple, a company that has had its share of ups and downs over the years, has finally mapped out a durable growth path. Sales will likely reach the $13 billion mark this year, thanks largely to the updraft from the iPod and the new $99 iPod shuffle. But there also appears to be a swelling of demand for the Mac product line, helped by the new budget-priced Mac Mini. If Apple can double its personal-computer market share in, say, the next two years (which still wouldn't put much of a dent in the sales of other PC makers), it would be well on its way to becoming a $20 billion company. And that doesn't even take into account what else Steve might have up his sleeve. Apple now has more than $6.5 billion in cash, ample to fund R&D, which last year consumed about $500 million.
Jobs is always coy about where Apple technology might pop up next, but occasionally he'll drop hints. At the recent Macworld trade show, he declared 2005 to be the year that high-definition video hits the mainstream, and touted the HD editing capabilities of a new version of iMovie. He also notes that a new generation of Wi-Fi networking gear is in the offing next year, which will offer enough bandwidth to finally make it possible to stream high-quality video from Macs to TVs. (In the short term, look for Apple to use its wireless technology to let HDTV owners display slideshows of digital photos stored on their Macs.)
Jobs also talks about alliances that will expand Apple's influence. "We're partnering with Motorola for doing things on cellphones, partnering with HP on the iPod, partnering with car companies and with the record companies. And we definitely will be partnering more and more."
There is one immense uncertainty hanging over Apple, however. Last July, Jobs was diagnosed with a rare islet-cell neuroendocrine tumor on his pancreas. In most cases, pancreatic cancer quickly turns lethal. Fortunately, this particular type can sometimes be treated with surgery, and experts say the procedure has a relatively good five-year survival rateapproaching 50%. [After presstime, FORTUNE spoke with the chief of surgical oncology at the Stanford University Medical Center, where Jobs was treated, who stated that in their experience the "cure rate" (instances in which the cancer is successfully removed, never to return) for the type of procedure Jobs had is between 80% and 90%. The "survival rate" cited in the previous sentence is for a broader set of procedures, and hence is overly pessimistic. FORTUNE regrets the error.] Jobs had part of his pancreas removed in late July, returned to work six weeks later, and has been cancer-free ever since. He says hes feeling better than ever.
That illness only serves to remind investors and fans how crucial Jobs is to Apple. Jim Collins, the management guru who wrote the bestseller Built to Last, calls him the "Beethoven of business." Jobs may not be a programmer or a designer or an engineer or an MBA, but he has matured into a shrewd business strategist. And his perfectionist's penchant for the aesthetics of the user experience is the DNA that makes Apple such a distinctive and creative enterprise. Apple has to hope this particular genie won't disappear.
More important than direct software sales are the growth opportunities Apple's "user experience" prowess might open up. Owning a 62% market share of the online music market, for instance, augurs serious sales growth. Even though that market is still in its infancydownloads accounted for less than 2% of U.S. music sales in 2004the iPod platform, for example, kicked in revenues of $1.4 billion in Apple's first fiscal quarter, nearly as much as it did in the previous four quarters combined. Merrill Lynch analyst Steve Milunovich predicts that the iPod business alone will hit $6.2 billion in fiscal 2006, roughly as big as all of Apple when Jobs took over. (Of course, the iPod's growth will eventually flatten as the devices lose their fad status. Yet the gadgets are so useful that it's easy to imagine them becoming as ubiquitous as the Walkmanof which Sony has sold 340 million.)
With the iPod and iTunes Music Store, Apple has changed the rules of the game for three industriesPCs, consumer electronics, and music. And as new as its influence is, Apple appears to have nothing to fear from major rivals. Its software skills have consumer electronics companies at a major disadvantage that could take years to overcome (see "Saving Face at Sony"). Says Nathan Myhrvold, former chief of Microsoft Research: "Once audio and visual experiences become a combined hardware-software-network thing, the consumer electronics guys are fish out of water."
Apple has cast a shadow over Microsoft too. Jobs likes to say that the upcoming Tiger version of OS X will have everything that Bill Gates and Microsoft are promising in Longhorn, the often delayed major upgrade of Windows, now due in mid-2006. "They copied the original Mac with Windows 95," Jobs gloats, "and now they're going to be copying us again." (Microsoft declined comment.)
We promised earlier to tell you about Tiger. The software's most notable feature is Spotlight (that's a Spotlight icon at the top of this page). It's Apple's entry in the race to deliver a hot new capability called "desktop search." The idea is to be able to automatically scan your computer's hard drive to find files, e-mail, documents, pictures, music, and the like, much as Google scours the Internet. Desktop search promises to free users from a major headache: having to remember how files and folders are organized and particular pieces of information are stashed. Google is at work on a similar product, as an add-on piece of software; Microsoft plans to integrate desktop search in Longhorn.
Tiger is also loaded with features that Apple has included just because they're cool. An icon called Dashboard unlocks a bevy of handy Internet-enabled applications called widgetswindows that pop up at the touch of a key to display movie listings, the weather outlook, stock prices, a dictionary, a currency converter, a language translator, and the like, and then melt away just as quickly so you can get back to your work.
When you look at the brief history of OS X, and hear software experts like Bill Joy call it the best operating system in the world, you begin to realize what a remarkable accomplishment it has been for Applenot only to build it but also to migrate millions of users to something so radically different with relatively little pain, and to improve it so dramatically and with such regularity that it has turned the endless nuisance of software support into a profit machine. The technology is so solid that Apple is beginning to sell Macs into markets that never before would even consider them, like the military and university supercomputer centers. Most tantalizing of all is scuttlebutt that three of the biggest PC makers are wooing Jobs to let them license OS X and adapt it to computers built around standard Intel chips. Why? They want to offer customers, many of whom are sick of the security problems that go with Windows and tired of waiting for Longhorn, an alternative. And besides, Apple has buzz now, and Microsoft does not.
Regardless of whether OS X starts showing up in PCs, it looks like Apple, a company that has had its share of ups and downs over the years, has finally mapped out a durable growth path. Sales will likely reach the $13 billion mark this year, thanks largely to the updraft from the iPod and the new $99 iPod shuffle. But there also appears to be a swelling of demand for the Mac product line, helped by the new budget-priced Mac Mini. If Apple can double its personal-computer market share in, say, the next two years (which still wouldn't put much of a dent in the sales of other PC makers), it would be well on its way to becoming a $20 billion company. And that doesn't even take into account what else Steve might have up his sleeve. Apple now has more than $6.5 billion in cash, ample to fund R&D, which last year consumed about $500 million.
Jobs is always coy about where Apple technology might pop up next, but occasionally he'll drop hints. At the recent Macworld trade show, he declared 2005 to be the year that high-definition video hits the mainstream, and touted the HD editing capabilities of a new version of iMovie. He also notes that a new generation of Wi-Fi networking gear is in the offing next year, which will offer enough bandwidth to finally make it possible to stream high-quality video from Macs to TVs. (In the short term, look for Apple to use its wireless technology to let HDTV owners display slideshows of digital photos stored on their Macs.)
Jobs also talks about alliances that will expand Apple's influence. "We're partnering with Motorola for doing things on cellphones, partnering with HP on the iPod, partnering with car companies and with the record companies. And we definitely will be partnering more and more."
There is one immense uncertainty hanging over Apple, however. Last July, Jobs was diagnosed with a rare islet-cell neuroendocrine tumor on his pancreas. In most cases, pancreatic cancer quickly turns lethal. Fortunately, this particular type can sometimes be treated with surgery, and experts say the procedure has a relatively good five-year survival rateapproaching 50%. [After presstime, FORTUNE spoke with the chief of surgical oncology at the Stanford University Medical Center, where Jobs was treated, who stated that in their experience the "cure rate" (instances in which the cancer is successfully removed, never to return) for the type of procedure Jobs had is between 80% and 90%. The "survival rate" cited in the previous sentence is for a broader set of procedures, and hence is overly pessimistic. FORTUNE regrets the error.] Jobs had part of his pancreas removed in late July, returned to work six weeks later, and has been cancer-free ever since. He says hes feeling better than ever.
That illness only serves to remind investors and fans how crucial Jobs is to Apple. Jim Collins, the management guru who wrote the bestseller Built to Last, calls him the "Beethoven of business." Jobs may not be a programmer or a designer or an engineer or an MBA, but he has matured into a shrewd business strategist. And his perfectionist's penchant for the aesthetics of the user experience is the DNA that makes Apple such a distinctive and creative enterprise. Apple has to hope this particular genie won't disappear.