A Case for Clones
Based on rumors, we believe that the clone licensing fracas will come to a head this week, possibly by the time you read this article. For news junkies and those who believe that clone licensing is a key issue, during the next week we will be posting updates on our Web site should solid, verifiable information become available.
Last week’s article about licensing issues between Apple and the clone manufacturers brought in more messages than any article in recent history. This week I want to share some of the responses to last week’s article, and then offer a stronger case for why Apple must continue to license clones.
Two Heads Better than One? Back in TidBITS-372, I proposed Apple should split into different companies, with each free to do whatever was best for that company. I suggested a hardware company, an operating system company, and an applications and utilities company. Although my suggestions haven’t come to pass, Apple has spun out the Newton division into Newton, Inc. (see TidBITS-381).
At that time, clone licensing wasn’t at the forefront of the Apple soap opera. But, as several readers reminded me, the fact that Apple is a systems company ensures that issues like clone licensing will always be a source of internal conflict. Mel Martinez <[email protected]> commented:
Your comment, "Cloning both solves and creates problems for Apple…" points at the crux of the matter. Apple’s current business model is fundamentally in conflict with the way the modern personal computer industry has evolved. You call Apple a "systems company" (as opposed to Microsoft being a software company). However, you cannot be a systems company and also try to be an open platform company that licenses its platform for sale by other systems vendors. Doing so creates inherent conflict within the company. Cloning is good for Apple’s software division. Cloning is bad for Apple’s hardware division. Thus Apple’s two sides are in conflict, and it is always bad business to be in conflict with yourself. As one solution, consider separating Apple’s hardware division from the software division so that their interests are independently realizable. Clones have shown that to the customer base, the hardware side of the business is replaceable. Apple’s software is the true coin of the company business, current revenue distributions aside.
In addition, Rob Gvozden <[email protected]> commented:
As I see it, you have come close to the heart of the issue in your contrast of Apple and Microsoft in terms of their respective business activities. Publishing computer software and mass producing computer hardware are very different activities in terms of market structure. Publishing an operating system, thanks to some protection from patent laws, is pretty much a monopoly business insofar as competitors should only be able to offer less-than-perfect substitutes. Building a box with a CPU in it is more like "monopolistic competition," where Compaq and Dell are identifiably different computers but both can run the same software with only minor variances in performance due to the different system designs.
The implication in terms of pricing is clear: the monopolistic competitor is forced – by the competition – to reduce prices to a level that just covers the average cost of production. The monopolist, however, can look forward to juicy margins, because as long as he gets a handle on the size of the market for his product, he will be able to sell his product above its average cost due to the lack of competition.
When Apple started, it had a monopoly in both hardware and software: you couldn’t run one without the other. Opening up the hardware side to clones means coming to terms with a shift in the company’s business model, because the hardware business by definition will see a contraction in margins due to competition.
The implication of this is that Apple would do well to split itself into separate hardware and software businesses if it wants to survive. If Apple stays a single company, the antics of its hardware business put the entire operation in jeopardy. As two separate companies, the software side could survive unmolested and profitable, regardless of who made the hardware it ran on. The hardware side would have to learn how to compete under slimmer margins or else pass the way of the dodo.
I hope Apple resolves its identity crisis, because I think that this, and not squabbles over how best to grow the market for the Mac OS platform, is what will ultimately bring down the unified Apple we know today.
Those Who Do Not Learn… Speaking of Rhapsody for Intel machines, Karen Nakamura <[email protected]> raised an interesting point that hasn’t received much attention. She noted that when NeXT ported NeXTSTEP to Intel chips, the market for NeXT’s proprietary Motorola 680×0-based hardware dried up. Although NeXT made generally well-received and innovative hardware, the fact that it was proprietary and came from a single source ensured most people purchased cheap PC clones to run NeXTSTEP. Karen wrote:
It seems Apple is heading down this road as well – but deliberately shooting itself in the foot in the process. If Apple is serious about Rhapsody, then now is not the time to shut the door on clones and revert to a not-invented-here attitude. Clones are coming, but Apple’s hardware division should be most worried about the Intel clones, not the Mac clones. I’m not optimistic about the future of Apple’s hardware division, but the only way it can survive past Rhapsody is if it has sufficient market share (as a percentage of total workstations; not versus Mac clones) to ensure that developers will still support it.
The parallels are striking, but the primary difference is that Apple has a much larger installed base of Macs than NeXT ever enjoyed, and many of those users won’t switch to the industrial-strength Rhapsody (in fact, many won’t be able to, because Rhapsody will minimally require recent PowerPC-based machines). But Karen’s point stands: will Macintosh hardware be sufficiently more attractive than lower PC clone prices to keep Rhapsody users on the Mac? And, to bring the discussion back to clone licensing, would a thriving clone market help the position of the Macintosh in the Rhapsody world?
The Real Deal — I missed a couple of facts surrounding the entire situation in my previous article – most notably that terms for continued clone licensing had been agreed upon (but not on signed contracts) between Apple and the clone manufacturers just before Gil Amelio stepped down. Amelio has commented on this in several interviews.
<http://www.macaddict.com/exclusive/ giltalks.html>
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So what’s the holdup? Most fingers are pointing at Steve Jobs, who appears to believe that the clones are significantly hurting Apple. That may be true, and it would imply that even the renegotiated terms weren’t satisfactory to the post-Amelio Apple. The question remains: does Jobs want to eliminate clone licensing or is this a power play to squeeze yet more dough from the clone manufacturers? Is the overall reason that, as Gil Amelio says in those interviews, that Apple is afraid of competition? I don’t know, but it’s hard to discount Gil’s opinions.
I said last week and I’ll say again here that the license agreements must be acceptable to both sides. (Obviously, they were a short time ago.) Apple needs Macintosh clones, and either eliminating clone licensing altogether or requiring such usurious license fees as to make clone pricing non-competitive is self-destructive.
In short, I still believe the situation is complex and in many ways incomprehensible because of the limited quantity (and quality) of information that’s been made public. However, I believe even more strongly that Apple must find a way to continue to support clone manufacturers. The elimination of clone licensing could be tantamount to corporate suicide. Consider these negatives, should Apple eliminate clone licensing altogether:
Elimination of consideration of the Mac OS from large government and corporate installations whose purchasing policies require multiple suppliers.
An exodus of development effort from the Mac OS. Even now, trying to get venture capital for a Macintosh product is next to impossible. If even venture capitalists who are major Macintosh fans aren’t willing to risk their money on the Mac, can you imagine the repercussions if Apple were to do what many believe would shrink the Mac market?
Tremendous damage to Apple’s business reputation. What sane company would choose to partner with Apple after such an action against clone manufacturers?
Potentially significant damage to Apple’s relationship with Motorola and IBM, both of which have clone licenses and produce the PowerPC chips on which Apple relies. Talk about biting the hand that feeds you.
A significant loss of loyalty from of long-time Macintosh users, particularly in business and educational settings (to judge from the comments I received from readers last week). Even worse would be the opinions of the people who have purchased clones.
A conceivably disastrous series of breach-of-contract lawsuits filed by clone manufacturers. This is the "war" referred to by ex-Power president Joel Kocher, who was pushing this option on an accelerated schedule.
A potential increase in Mac prices and slowing of hardware development efforts because of the elimination of competition. Although I think the low-price genie has been released from the bottle, without clones Apple would have even less reason to keep hardware prices low.
On the positive side, all Apple would seem to gain by eliminating clone licensing would be those sales that would have been cannibalized by clones. That’s real money, but I can’t imagine that it’s enough to solve Apple’s overall financial problems. I suppose a case could be made for Apple wanting to regain complete control over Macintosh hardware development, but that sounds utterly childish. No matter what, the negatives of eliminating clone licensing as I see them so far outweigh the positives that one wonders what Jobs or others at Apple could possibly think tips the scales in the another direction.