Jobs’ Big Question: Open vs. Closed Systems

Apple is the new king of technology, and we should all hail the success of the company that just a decade ago was on the precipice of oblivion, needing a lifeline from rival Microsoft just to stay alive. Today, Apple – with a market cap of $290 billion – is the second most valuable company in the United States and third most valuable in the world. And Monday, the company announced its first $20 billion quarter, a feat that puts it on track to overtake Microsoft in annual revenue.

The success of Apple is the result of a combination of factors: attractive products, shrewd marketing, great business models and the cultivation of fanatical customers. Every day, 250,000 iPhones are activated compared to roughly 200,000 Android based phones. Apple has returned to the table as the third largest seller of PCs. And, despite missing sales targets, the iPad has sold more than 20 million units in nine months.

Perhaps the one factor that is often overlooked or taken for granted in Apple’s success is predicated on products that “just work.” Are Apple products the best? Do they have all the bells and whistles you find in Windows-based machines? Are they the most affordable products? Do they have all the applications for rich individual and business experiences? The answer to all these questions is simply “no”. However, whatever Apple lacks, it more than makes up for in integrated systems that “just work”.

CEO Steve Jobs surprised analysts during Monday’s earnings call not only by joining the discussion, but for taking unsolicited shots at competitors Research in Motion and Google. The crux of his criticism was founded in one simple hypothesis: do people want fragmented or integrated, holistic systems? 

Before getting to the answer to Jobs question, let’s revisit a little history and the birth of the PC era. In the early 1980s, Apple was fast becoming the darling of desktop computing. Its machines were reliable, easy to use and capable of basic functions. In 1984, Apple was the first to market with a commercially viable GUI-driven machine – the Macintosh. The problem with Apple was price. Its products were too expensive and didn’t have the applications to make them viable business platforms. Microsoft practically invented the software licensing model, providing operating systems and applications for virtually any X86-based machine. That drove down prices and transformed the Information Age into a Microsoft-based world.

The argument for open, distributed systems such as those advocated by Microsoft and now Google is choice. Apple remains a Henry Ford shop: You can have an iPhone anyway you want it, so long as you accept it the way Apple sells and ships it. The argument for Microsoft and Google is users can have their applications on a variety of devices that fit their individual needs. You don’t want a 5-inch iPhone? No problem, we can give you an Android phone in a variety of sizes and colors – and for less.

Ah, but here’s the rub: open systems require a lot of configuration and integration for optimal operation. In other words, they don’t “just work”. And that makes a difference. As Apple has aptly demonstrated over the last decade, users are far more forgiving of short-comings in features and design if the product matches their overall use expectations. When Apple launched the iPhone 4 last spring, users complained about dropped calls attributed to an antenna design flaw. The problem was so acute that Microsoft COO Kevin Turner gleefully exclaimed, “iPhone 4 will be Apple’s Windows Vista.” Apple treated dissenters rather shabbily before conceding it made a design mistake. Ultimately, ‘though, iPhone didn’t become the equivalent of Vista; users quickly forgave Apple and sales have propelled its mobility business past RIM.

Jobs’ question – open verses closed – is important because its strikes at the heart of what the channel is all about – providing the user with holistic, integrated systems. Apple advocates could argue it is a channel-friendly company since it does operate through third-party resellers, has grown its base of technical support companies, and is fueled by legions of application developers for its iOS platform. However, Apple controls much of the hardware and software stack. Unlike Dell and Hewlett-Packard, it owns the operating systems, primary applications and drivers of peripherals.

For Jobs, this control gives Apple an advantage over rival hardware vendors, Microsoft and Google. And he’s right. Apple controls not just the whole stack, but the user experience. Users have an expectation when they power up an Apple device, and that experience is consistent.

The implications for the channel are dramatic. “The Apple Way” isn’t lost on other hardware manufacturers. HP already has committed to launching smartphones and tables built on the Palm WebOS operating system. Overseas hardware and PC manufacturers are rumored to be building operating systems to free themselves of the Microsoft lock-in. And even Microsoft toyed with the idea of launching its own smartphone.

Is Jobs right? Will the future tech industry be one of closed, integrated systems or one of open platforms that give choice?