Apple and the Rise of Competitive Business Platforms – What Other Companies Must Know

Last Friday, the Apple rumor mill went into overdrive. Piper Jaffray’s Gene Munster and All Things Digital’s ardent Apple follower of Boomtown fame, Kara Swisher, openly discussed the long-rumored Apple “iTablet” computer. Unceremoniously, Apple Stock moved upward. But it’s not simply innovative products and fancy form factors that drive Apple’s growth – rather it is Apple’s 21^st Century business model.

Apple understands that business platforms fundamentally change the rules of competition and accelerate cumulative business performance. Competitive business platforms drive and nurture the latest business innovations – mass collaboration, social networking, community formation, ecosystems, global cooperation, prosumerism, community branding, transparency, options portfolios and real time analytics to mention a few. And they also do the same for “old-fashioned” ones as well – things like business process management, customer intimacy, and supply chain management. We’ve studied business platforms extensively at nGenera Insight and Apple is not alone. But Apple has taken the approach and out-executed almost everyone else on the planet.

While many see Apple as enslaved to secrecy, unresponsive to external input, and obsessed with product control, the company has put many of those behaviors behind them. In fact, Apple is writing the book on 21^st Century style collaborative business models and continuous business strategy.Nokia and RIM became Apple students in the last 12 months – both have adopted a business platform approach. Ironically, RIM had the makings of a business platform long before Apple, but did not really exploit it. AT&T is being schooled again about business platforms as it copes with Apple’s latest generation iPhone 3Gs release (it seems that AT&T’s network can’t keep up with new iPhone features such as tethering and MMS messaging). Verizon is playing catch-up because it only recently saw the light – but rumors suggest it may have a deal with Apple on the “iTablet.” Meanwhile, it appears that Motorola still doesn’t get it.

But Motorola’s not alone. Almost 10 years after Apple’s launch of the iPod, iTunes and the iTunes Store, most corporations either stand in awe of Apple’s accomplishments, or see Apple’s approach as completely irrelevant to their businesses. They’re mistaken. These developments signal a new formula for business success that extends beyond the glitzy world of Hollywood or the high tech software and telecommunications industries. More importantly, leading firms in other industries have used the recession to put plans in place.

Let’s take a look at what the iPod, iTunes, the iPhone and the App Store really mean for business. A bit of history first. Apple Inc. launched iTunes, the now famous digital music application, on January 9, 2001 for the Macintosh computer. A little over 9 months later Apple launched the 1^st Generation iPod on October 23, 2001. About 2 years later Apple launched the iTunes Store on April 28, 2003. The iPhone was released 4 years later on June 29, 2007 after the runaway success of the iPod-iTunes-iTunes Store combo that revolutionized the retail music industry. The iPhone App Store was launched on July 8, 2008 with 500 applications, 125 of which were free. Today the iTunes Store is a digital media store encompassing all forms of digital media including music, games, software applications, podcasts, and a growing collection of video assets.

In the process, Apple sold in excess of 200 Million iPod units and over 40 Million iPhones. Apple sold more than 1 Million of the new 3Gs iPhones in the first weekend of its introduction in July. The iTunes store has sold 8 billion songs since inception, and is the undisputed leader in digital music sales. Moreover, Apple revealed in April of 2009 that the App Store introduced in July of 2008 had already hit the 1 Billion mark in downloaded applications. By late July of 2009, Apple reported that its extended community of iPhone developers, which split revenue with Apple on a 70/30 basis had produced over 65,000 applications that were approved by Apple and available for download on the App Store. At the end of 2001, Apple’s annual revenues were approximately $5.3 Billion USD. At the end of 2008, annual revenues had grown to approximately $32.4 Billion.

Here’s what Apple has learned and what I believe all companies should heed – the undeniable superiority of the 21^st Century business model:

1. Products must become business platforms that grow through collaboration. The iPhone, the iTouch, and iPod are not music players and multimedia phone – ergo products – so much as they are business platforms. A business platform is the totality of the physical product (e.g. iPhone), the embedded software inside the product (iPhone OS), the collaborative platform (iTunes+App Store), the economic community (the iPhone ecosystem which includes AT&T and other wireless providers, Google, Yahoo, the iPhone developers, related iPhone social networks and communities, and the iPhone global industrial complex (core manufacturers – e.g. Intel, accessory providers etc.).
2. Business platforms create superb externalities and a powerful ecosystem. Business platforms create a sort of lingua franca for all of the participants. In other words the business platform contains a common understanding for business transactions, business rules, business communication, technical specifications, interface standards and requirements. As a consequence transaction costs are minimized for all parties and efficiency results. For example, embedded in the iPhone OS, the iPhone SDK (systems development kit), the App Store and the iTunes store are the complete “rules of the road” for operating in the iPhone ecosystem. The result is a cumulative transparency that enables tens of thousands of participants to collaborate asynchronously and independently. In so doing they create economic value, a continuous wellspring of innovation and mutually extend the overall value of the economic community. They also rapidly extend the capabilities of Apple’s core product way beyond what Apple could ever do so on its own.
3. Business platforms create a learning platform that spawns communities of interest and communities of practice. A multitude of social networks and communities surrounding Apple’s iPhone business platform. Numerous Apple-sponsored and independent communities trade ideas, IP and practices daily and cajole and attempt to predict Apple’s next move.
4. Business platforms generate untold business analytics for the platform’s owner and participants. Because all elements of the business platform are networked, the platform generates a prodigious amount of valuable information about the product, the ecosystem, the participants, and the customers in realtime. Apple knows the score for each element of the platform and uses the information to fix, improve, extend and enhance the product and ultimately delight the customer.
5. Business platforms generate a superior portfolio of strategic options. The generation and management of options remains at the core of business strategy. Business growth depends upon the portfolio of business options available to the executive team. Traditional business models depend upon internal knowledge and internal innovation processes to generate new product ideas, new ventures and appropriate acquisition strategies for growth. Such traditional processes are anemic when compared to an enterprise armed with a 21^st Century collaborative business platform. Who has more options for the future, Apple or Motorola? Who has a richer options portfolio on potential products and services? Who has better information by which to value those options? For an investor looking to make an investment, which company has greater future value? The company with a business platform or a company with a 20^th Century, product-focused, internally driven innovation engine. I know my pick.

In subsequent blogs I will examine what we’ve learned about managing business platforms and dealing with negative and positional externalities, what traditional firms must do to change and embrace the rise of business platforms, the power of business platforms in Collaborative Enterprise Management, and the role that business platforms play in continuous business strategy.

To Apple I say: mega kudos, keep up the good work – it’s good for the economy and good for business. Thanks for letting the cat out of the bag.