Over at TechCrunch Erick Schonfeld has a post on Apple's iPhone as an example of a company choosing the wrong business model.
In the world of high technology, plagiarism is called "using a proven business model." And it is. Every business has a model and nearly of them get at least most of their model from someone else. Which means nearly every company is building on pre-existing success. Or, sometimes failure.
Choosing an inappropriate business model can be anything from limiting to deadly, especially when a company introduces significant new technology. That means it's important to choose the right model.
Fortunately there's a simple rule to help decide when a business model is right. How closely does the model conform to Cook's Law?
Cook's Law, immodestly named after yours truly, is simply this:
Anything that doesn't add value to the person paying for it is not only dispensablle, it will be dispensed with
Someone, usually the consumer, pays for any good or service. Any feature or cost that does not add value for the consumer is surplus and will probably be eliminated.
Apple demonstrated Cook's Law brilliantly with the iPod and then violated it egregiously with the iPhone.
Pre iPod the music business consisted of selling albums at high prices. If customers wanted their own copy of the music, they either had to tape it off the radio, download a pirate MP3 or pay lot of money for a collection of songs, most of which they probably weren't interested in.
The price of albums is high because music travels through an unusually convoluted supply chain from the artist to the customer. The actual cost of production of a CD is typically only a few cents. But in addition to the artist, there are a host of others who must be paid, including the record company, the promoters, the wholesalers, the sales reps and the music stores.
Now, how much of that actually benefits the person buying the music? Well, the artist, obviously, and the cost of recording the music in purchasable form, but that's basically it. Everything else in that cost chain benefits someone other than the customer. Hence, under Cook's Law, everything else is dispensable - and going to be dispensed with as soon as someone finds a way.
The iPod represented a way. With an iPod customers could download only the songs they were interested in and pay less than a dollar each for them. Not surprisingly customers have swarmed to iPods, to the detriment of the traditional music supply chain. Suddenly a second-rank computer company found itself a giant in the music business.
Apple could have followed the conventional business model in the music industry, selling complete albums through kiosks in music stores for about the same price as CD albums. In fact there had been a couple of attempts to do just that with MP3s before the iPod. But that was the wrong way to do things and the companies sank without a trace.
So Apple comes out of the iPod looking like a genius, tries to repeat its success with the iPhone - and falls flat on its face.
As Schonfeld points out, Apple chose to model its iPhone on the cell phone business. Now cell phones have a lot in common with the traditional music industry. It is a complex business model with a lot of features that add no value whatsoever to the customer. In fact a lot of those 'features' benefit no one but the cell phone company.
Specifically what Apple chose to do was to lock in its US customers with ATT as the service provider. If you want to use an iPhone you not only have to purchase the device, you have to sign a service contract with ATT.
In fact the situation was worse with the iPhone than it was with conventional cell phones. I happen to use Cingular (ATT) for my phone service, but I was given the first phone on my account for free and only had to pay a nominal up-front cost for the other phones on my plan. The monthly fee per phone number is low enough that we switched our house phone over to my wife's cell phone. All in all, I'm not dissatisfied with the arrangement.
I say 'not too dissatisfied' because there are some things I don't like about cell phone service. You're locked into the provider and most additional services and features have to come from the provider. If there was open competition and the ability to change freely among providers, the price of service would be a lot less. Further, if I decide to change providers, I'm strongly discouraged from taking my phone with me
An iPhone has all these disadvantages and more. With an iPhone you have to pay several hundred dollars up front and you're locked in to one provider. This may be highly profitable for Apple and ATT, but it violates Cook's Law by providing nothing to the consumer. So it's hardly surprising that buyers started looking for ways around this lock-in.
Hackers being hackers, it wasn't long before a number of people had figured out how to unlock the iPhone and the hacks started appearing on the web.
Rather than recognize the mistake in its model, Apple is fighting back by making changes in the software which will deactivate cracked phones. That will work until the hackers produce the next round of cracks and the futile, expensive and ultimately pointless arms race is on.
This is a race that Apple can't win. More to the point it's a race that Apple shouldn't want to win. The only thing this accomplishes in the long term is to annoy its customers and to drive them to alternatives as the alternatives appear.
And they will appear, if the iPhone is the great idea Apple thinks it is. Heck, even the Newton, Apple's last attempt at a small-form computing device attracted competitors, and it was no great shakes in the market.
The cell phone industry took its business model from the landline phone industry, which traces its business model back to the days of the Bell monopoly. The cell phone industry is vulnerable as well and it is slowly changing.
What Apple has in the iPhone is a combination computer-phone. It would have done much better to model its iPhone business on the computer part of the combination. As Schonfeld points out:
"You don't ask Apple permission to download software off the Web for your Mac. And you would never agree to buy a laptop that only worked with only one broadband provider. Why should the iPhone be any different?"
And the iPhone device that ultimately succeeds - whether from Apple or anyone else - won't be any different. It will be sold like a computer, with all the freedom and customization you get with a computer.