Apple Computer's persistence defies the law of increasing returns.
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Scott Menchin
I have been buying Macintoshes since 1984. And except for the very first one, I thought each new Mac would be my last – that Apple Computer would soon be out of business, or at least in a clear death spiral. After all, the laws of economics have been against the company almost since its founding. For starters, the rule of network effects dictates that where standards matter, a single one tends to win out: advantage Microsoft and the Wintel camp. And the rule of increasing returns says that economies of scale lead to even greater economies of scale: Microsoft again.
Most value added by Apple comes from its operating systems. In software, as your sales volume goes up, your per-unit costs go down: Bigger sales mean not just larger profits but much, much larger profits. Apple's market share, meanwhile, has been in constant decline, even as its profit margins have risen. Today, Microsoft's operating systems are used by 92 percent of desktop computers worldwide; Apple's share is 5 percent.
With each Mac I bought, I watched as more independent programmers wrote for Microsoft first, and Apple second – if at all. I saw the latest and greatest software appear first on Microsoft machines, and six months later on Apple machines -�if at all. I saw Microsoft's ability to hire very talented programmers show itself in the improved quality of Windows software. And I expected Apple to enter a death spiral.
Yet here Apple stands, still making money, generating buzz, out-innovating its competitors, and otherwise defying economic expectation. And if news reports are to be believed, it is even contemplating buying Universal Music, the biggest label in the land. No matter if the rumored negotiations come to nothing; the fact that it's even possible is a tribute to Apple's resilience. It's still a force to be reckoned with.
And I'm still buying Macintoshes.
Somewhere, my visualization of the Cosmic All – my grasp of the Iron Laws of Dynamic Economies of Scale – was wrong, very wrong. Why?
First, and perhaps most important: Joel Klein of the Clinton Justice Department. With the DOJ attempting to break up Microsoft for antitrust violations, Redmond quickly made it a top priority to keep competitors ostensibly healthy. This meant helping Apple remain afloat with a $150 million investment in 1998. Microsoft also poured money into making sure that Macintoshes running Microsoft Office could easily interoperate with Windows machines. And it poured still more money into making sure that Internet Explorer for the Macintosh was in no way inferior to the Windows version. Without Microsoft's assistance, I think Apple would have been shuttered.
Second: Apple has managed to stay even with, or slightly ahead of, Microsoft in system software. When Microsoft largely closed the software quality gap vis-�-vis Macintosh a decade ago, I'd have bet that Windows would become a much higher-quality OS. After all, Microsoft throws at least 10 times more programming resources at operating systems. It can employ 20 times as many system-software programmers at the same per-unit cost as Apple. But Apple's vertically integrated approach offers a hidden advantage. By setting design and performance specifications of Macintosh hardware, writing system software becomes easier. There are fewer variables to contend with and less testing and debugging required. Such a controlled environment produces excellent code quickly at lower overall cost.
The company has a third powerful advantage: It's gotten its hooks into the open source movement. Mac OS X is a graphical user interface, a set of utilities and programming tools, and a few world-class user applications – iTunes, iMovie – running on top of a Unix core. This is important, because Unix is the native language of the Internet and of the world's programming culture. One of the unexpected side benefits of the Internet is that it's now possible to write and maintain first-rate software – think Linux itself, or the Apache Web server -�by using the Internet to coordinate what is essentially the spare-time contributions of thousands of programmers. Today, the latest and greatest software is as likely to be an open source project, or a for-profit effort built on top of open source code, as it is a commercial application built to run on Windows. And if its native language is Unix, the second-class implementation is now more likely to be on Windows than on Apple.
As long as the world's programmers continue to speak Unix, Apple's economic future – one perhaps greater than that of a niche player given the rumblings surrounding its apparent bid for Universal – is secure. I doubt that my current Mac will be my last.
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