How Apple Uses 'Inferior' Parts to Build Superior Products

Rob Enderle

Saying Apple uses inferior parts is likely flame bait, but I started thinking about this topic after forwarding a tweet on an Inquirer article by Clive Akass on the talk by leading patent lawyer Andrew MacKenzie. In this piece, titled "How Apple cashes in on inferior hardware,'" MacKenzie is reported as pointing out that Apple makes money by selling old -- not used, just out-of-date -- hardware as new and for a premium price. This is because, also according to MacKenzie, it is the solution that is innovative (and owned by Apple), not the pieces.


The core point is that the parts might be considered inferior, but Apple ends up with a superior product the customer is willing to pay more for, regardless of the technology that goes in it. In effect, Apple is saying "Intel inside" doesn't matter as much as Apple outside, and the market in Apple's segments seems to agree. Let's chat about this because it forces us to really look at one of the reasons Apple is so successful and at one of the biggest potential coming industry changes.


Too Focused on Parts

As an industry, with Apple as the exception, the technology industry is overly parts-driven. We live and breathe parts, whether they are processors, graphics, storage, memory or chipsets. But in virtually every other industry, customers buy products and don't seem to care that much what goes into them. Do you know or care who built the engine, brakes, seats, or even radio in your car? How about who actually formulates the drugs you buy or assembles your clothing? Chances are, you generally only really care about what the product does and the brand that goes on it. It is almost as if we never really transitioned in the PC space from the early hobby days when folks built their own computers and parts were important because you bought them yourself.


Too Little Focus on Customer Experience

One thing that Apple, and particularly Steve Jobs, seemed to get was that parts weren't that important, but rather what the product actually did and whether the customer was happy with it. Cutting-edge parts are not only more expensive, they also tend to be less reliable and less well tuned. For instance, Intel issues processors on something it calls a "tick-tock release schedule." First the new higher-powered processor comes out, then later on, the chipset that makes the best use of it. While a lot of customers buy on the "tick" side, the best price/performance is likely on the later "tock" cycle because the processor is in greater supply, cheaper and the entire solution is complete. You get more for less. With Apple being the exception, most vendors focus too little on customer experience and spend too much on expensive parts that aren't as important to their customers.


Chalk that up to competitive pressure and the fact that customers looking at like products for the same price will gravitate to the components they think are the richest. Apple, because it's often shelved apart and not directly compared to its Windows counterparts, doesn't have as much of this competitive pressure.


As a result, Apple pays less for more mature parts. The Apple customer might not get the highest peak performance, but does get greater reliabiliy and values reliability more.


IBM's Potential Advantage

The technology industry, in watching Apple grow in valuation to challenge HP and capture hardware margins that are significantly higher than others, is learning how to play this game. Google and Apple appear to be in a fight to control ARM, and Microsoft has its own processor group, which designed the Xbox processor. They've all increasingly worked to own or control their solutions. Just thinking about Apple buying ARM Holdings likely has folks burning the midnight oil, but there is a remote chance it might pick up AMD as well. (It should like Fusion a lot).


Apple is hardly alone, and the result could be a return to the early days of computing. Interestingly enough, it could put IBM in an enviable position again as the only remaining general-purpose IT vendor that still has full processor design and fabrication capability.


Wrapping Up: Back to the Future

It feels like the technology industry finally is headed toward creating well-defined products, rather than collections of parts, for their customers. Apple has already figured out that you don't need the most cutting-edge parts to create the most appealing products, particularly if you want the richest margins.


Others appear to be figuring this out as well. The result will likely be fewer but larger vendors and a sense that those left standing after the music stops may no longer have a market to sell into. These trends are measured over decades so expect to look back next decade and be amazed.

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