If He's So Smart...Steve Jobs, Apple, and the Limits of Innovation

And it turns out that such value-driven business-model innovation is precisely the sort of thing that Apple is lousy at. Even back in 1989, for example, when the company still commanded a healthy 10% of the global PC market, some internal developers worried that the company couldn't stay competitive without expanding its customer base. And that, they felt, meant bringing down the cost of the Mac, which made its debut in 1984 at $2,500. That's more than $4,300 in today's dollars, which is why the Mac was first marketed to high earners and early adopters of technology. A group of those developers launched an unsanctioned project some called a "gee job," as in "Oh, gee, I'll do that in my spare time," to design a lower-cost Mac for schools.

Moonlighting for about a year, the team found ways to take costs out of the Mac, such as cheapening the floppy drive and using a less expensive, smaller power supply. In the end, they produced a fully functional Mac with a parts cost of about $340. Even with the typical 60%-plus gross margin on Macs at the time, the computer could have retailed for $1,000--far less than the standard Mac. But when the team presented the Mac LC (for low cost) to management, the marketing department nixed it.

"They said things about the computer weren't Mac-like enough, that it made the machine feel cheap," says Owen Rubin, a former Mac software developer who was on the team. Apparently, one sticking point was the floppy drive, which didn't inhale disks the way the original Mac did. Such subtle conventions cost money. Rubin and his team were sent back to the drawing board. The Mac LC hit the market in 1990, at $2,400. Adjusted for inflation, that's more than $3,300 today, meaning that the Mac LC really wasn't low cost after all.

AS BIG RIVALS SWARM, iPOD AND iTUNES MAY HAVE STARTED ONE MORE PARTY THAT APPLE WILL END UP GETTING TOSSED OUT OF.

A Digital-Music Donnybrook?

There's one last essential element to successful innovation that has often been missing at Apple: follow-through. As Howard Anderson, founder of both the consulting firm Yankee Group and the Boston-based venture capital firm Battery Ventures, puts it, "Innovation isn't the key to economic growth. Management is the key to economic growth." In practice, that means supporting product innovation with such things as a solid sales force, a strategy for collaborating with developers and makers of complementary products, and a strategy for customer ser-vice. "Companies that rely too heavily on creativity flame out," Anderson says. "In many ways, execution is more important. Apple is innovative, but Dell executes."

Apple's dismissal of such mundane pursuits is another paradoxical by-product of its restless, driven culture of creativity. Things such as sales and service are gritty, not cool; plodding, not imaginative; boring, not sexy. Standing in a darkened hallway just outside the jazz-filled salon of the Musee d'Orsay, technology consultant and Apple fan Anthony Knowles puts his finger on it. "By the time their products hit the market," he says, "they're on to the next thing."

The current focus of Apple's marketing efforts is clear to anyone walking the streets of Paris (or driving up Highway 101 in San Francisco, for that matter). Brightly colored silhouettes of hipsters dancing to their iPods are plastered on bus stops and billboards and flapping against the sides of buildings.

It makes sense that Apple would make so much fuss over the gadget. Since it was first introduced in October 2001, Apple has sold more than 1.5 million iPods, or about 300,000 per quarter today. This means that in two years, Apple has achieved roughly the run rate for the iPod that it took 25 years to achieve with its home PCs.

No one knows the cost to Apple to manufacture and market the iPod, and estimates of its operating margin range widely: 2.5% to 18%. But even at iPod's lowest list price of $299--and using a conservative margin estimate of 8%--it's clear that the iPod contributed substantially all of Apple's 2003 estimated operating income of $24.8 million, excluding onetime charges. Without the iPod, Apple is in trouble.

That's why recent releases of competing portable music players take on great significance. Selling for as little as $299, the Dell DJ is about $100 cheaper than the iPod with the same 5,000 song capacity. (A $500 iPod holds 10,000 songs). A third product, a 20-GB unit made by Samsung to work with Napster 2.0, costs $100 less than the 20-GB iPod, or about $300, and boasts a lot more features, including a built-in FM transmitter--to play songs on a car radio--and a voice recorder.