If I were to describe a company that built a very profitable vertically integrated solution and was aggressive at preventing clones in order to protect margins, you'd think I was talking about Apple. But really, Apple only emulated IBM's original model. This was originally challenged back in 1956, two years after I was born, and the original consent decree that set the groundwork for Microsoft and the modern computer industry was created even though that industry didn't emerge for decades.
Well, this week the Computer & Communications Industry Association, which also goes back to the beginning of this thing, and has a history of pounding on other large companies like Microsoft and Intel, has called foul, alleging that IBM is once again misbehaving and the Justice Department is looking into its claims. The association ties its argument to the descendent of the original mainframe. It's creating kind of a circle that goes back to 1956 with similar arguments in what is a vastly changed world.
What is fascinating about this is that it would seem the same arguments could be applied to Apple, which was charged by Psystar using what appear to be similar arguments about restrictive practices. Psystar builds low-cost PCs that run the MacOS, something that Apple allowed for a very short time before Steve Jobs returned. It killed the practice of allowing clones in order to protect margins and save the company. It is interesting to note that Psystar still exists and still sells inexpensive PCs, starting as low as $599, that run the MacOS in tower configurations you generally can't even get from Apple. And yes, I thought Apple had put it out of business last year, as well.
This comes down to what we define as a computer. Clearly, there are competitors to mainframes in server clusters and there are clearly competitors to the Mac in Windows and Linux PCs, but the switching cost is relatively high and once you are wedded to the software, you are pretty much stuck. The cost of switching a mainframe out and trying to replace the massive amount of custom software that typically resides on one to a less-expensive platform is large in time, money and effort. And that's assuming you have the skills available to do the migration, which most of the remaining companies do not. But this was the way it was before Windows, and for much of UNIX's history, it wasn't a great deal better.
The cost of switching to and from an Apple platform product to another platform is lower, but it isn't as easy as moving from Windows machine to Windows machine. The same software generally won't migrate with you either unless you break license and create a Hackentosh or buy a Psystar PC and risk having the company go out of business, care of Apple.
When you have these relatively large switching costs, you tend to have a captive market, and margins in a captive market are what business people dream of at night. But prices are far from customer friendly and there is a sense that you simply have no choice. Years ago, I heard an IBM executive use the analogy that it was like selling air -- folks would pay whatever you charged. But there is a reason why IBM and Apple customers tend to be some of the happiest in the market, at least historically.
The Forgotten Benefit
Having one vendor that handles the entire platform generally results in a more reliable product (granted, there are exceptions), but both IBM and Apple maintain the image of companies that build high-quality products. This image does seem to be tied to their respective abilities to control their platforms. It is hard to argue there is a computer system in the world more reliable than a mainframe, and in the PC market the most reliable machines tend to be Macs.
So you do pay more, but there is a benefit tied to that extra payment that the majority of IBM and Apple customers appear to think is worth it. When it works, both the company and the customers are successful, margins are high and customers are satisfied. But, to keep it successful, the owning vendor has to keep its customers happy, even in the face of falling prices elsewhere. This is often forgotten and successful antitrust action or market collapse results.
The Recurring Problem
Apple products have been getting increasingly unreliable, with reports of products exploding. Leopard and Snow Leopard were relatively buggy at launch, and a lot of folks seem to be wondering suddenly if Apple is covering things up. IBM has had (back in the '80s) the same recurring problem, though. Currently, it doesn't seem to be enjoying the quality problems that Apple has been seeing.
The recurring problem in firms with this level of control is that they often start to take their customers for granted as they optimize margins (and sacrifice reliability and customer focus). Then, the advantage that makes the extra cost work for them evaporates. In the late '80s, we saw the result for IBM. At that time, IBM went from one of the most profitable to one of the least profitable companies very rapidly, largely because it had aggravated customers enough that the cost of switching was the least of two painful problems. A lot of folks switched or just stopped buying from IBM.
IBM is clearly at the top of its game at the moment, but Apple appears to be drifting toward making a similar mistake. And markets it owns are traditionally vastly more fickle than the large-scale computer market ever was. However, the antitrust action does point to an IBM exposure that needs to be addressed and the possibility that it needs to find ways to reduce customer costs before customers find alternatives.
This kind of thing breeds customer dissatisfaction because it puts a spotlight on costs and makes it appear that people are being overcharged. As Microsoft has recently discovered with the European Commission, these things tend to cross borders now, and once an agency gets its hooks into you, it doesn't let go easily, cheaply or quickly.
Wrapping Up: IBM Is Apple?
It is increasingly interesting to note that IBM and Apple are actually relatively similar, even though they are vastly different in terms of customers and focused markets. Both are at their best and worst when they have absolute control of their markets, both get their profits largely through a combination of this control and a tight focus on maintaining high customer satisfaction, and both lose when they lose their focus on either of these.
Going back to that original 1984 commercial, did Apple become IBM or did IBM become Apple? It may seem obvious, but if you really think about where IBM was in the '80s just prior to its collapse, it may not be.