Innovate vs. Commoditize
Apple and Microsoft provide good examples of these two different strategies, as Thomas Fitzgerald commented in his post:
Apple identifies technologies that are in their infancy or are relatively unexploited and finds away to give them mass market appeal. Examples: iPod, iPhone, The GUI, iTunes, Multitouch
Microsoft on the other hand identifies technologies that are established and successful, then decides that it want’s part (or all) of that success and uses its size and power to chip away at the competition until it gains market share. Examples: Xbox, Bing, MSN, Windows, Windows Mobile, Zune.
The reason I am paying a premium for Apple’s products is because of the wonderful integration of the softwares and hardwares, controlled and maintained by the same company. Everything works like a charm and should a problem arises, it is taken care of directly by Apple. By the way, after more than two decades of using Macs, I have had very few incidents when I needed to contact them
To sum this up in my own words: Innovation involves huge initial investment and risk. On the other hand, successful innovation can open an untapped market which puts you ahead of the competition.
With a commoditization strategy, you let others take the risk of finding a new market, and wait until that market reaches a certain size and maturity. Then, you can penetrate the market with a communization strategy that basically gives the user the same set of product features at significantly lower cost, or even for free. You can afford to, because you didn’t carry the cost and the risk involved in the early stages of that market, and you count on volume to compensate for lower profit margins.
Profit vs. Market Share
Apple almost always seems to approach new products with the goal of making a profit from whatever that product may be, whereas Microsoft seems to approach a product line with the goal of dominating that market regardless of profitability.
If you’re going after market share, then profit becomes secondary to your strategy. Your first goal is to reach a certain adoption level, and then you can worry about ways to monetize the adoption. If you’re going after profit, you’ll first look for what brings the most value to your customers.
The Open Source Model as a Commoditization Strategy
Because of its size and existing market share, Microsoft’s commoditization strategy can only apply to Microsoft. New and small companies cannot rely on this model. This is why the open source model emerged.
A good example for this discussion is Oracle vs. MySQL –- or BEA vs. JBoss. Both Oracle and BEA were pioneers in their domain and invested years in creation of the RDBMS and App Server markets. Small companies like MySQL and JBoss needed something more disruptive to get sufficient adoption within existing markets. This is when the open source model started to take off. At the heart of it, what open source gave MySQL and JBoss is basically a “cheap marketing channel”. It enabled relatively small companies with low budgets to get significant exposure without the investment usually associated with non-open source products.
Commoditization is Not Risk-Free
Earlier in this post I commented that with a commoditization strategy, you do not share the market innovation and penetration risk and costs. As a result, you gain an advantage over existing players, enabling you to offer a lower-cost product and disrupt the market. For years, this strategy worked pretty well. However, in recent years we’ve witnessed how Microsoft has been threatened by its own commoditization weapon from companies like Red Hat, who offered a “free” operating system and competed head to head with Microsoft’s core product –- Windows.
Red Hat is now also being threaten by other open source alternatives such as CentOS, Ubuntu, and MySQL, as well as by other companies such as VMware who bought SpringSource (a direct competitor of JBoss).
There is something fairly similar between Microsoft and Redhat in this regard. Both used a commoditization strategy to get their share of the market. Both didn’t invest in any innovation for years: instead, they specialized in commoditizing and monetizing other companies’ (and individuals’ in the case of Red Hat/JBoss) innovative products.
Both Microsoft and Red Hat should serve as a reminder that commoditization is not really a risk-free business. Both Microsoft and Red Hat are now paying for years of lack of investment in innovation, and they are being forced to make much bigger investments now just to catch up with the market and defend their right to exist, costing them more than it would likely have cost them if they had continued investing in innovation.
Innovation Strategy: Attack Is the Best Defense
Most people think of innovation as technology innovation i.e. coming up with new patent or technology breakthrough. Its important to note that innovation can come in different shapes and forms. A business innovation such as the one introduced SalesForce/SaaS model could equally if not more important.
One of the unique things about Apple is that it figured out ways to couple together technology innovation with business innovation (Touch Screen with ITunes and AppleStore). It is classic case where the whole is greater than the sum of its parts.
The tricky thing about innovation is that it involves forward looking i.e. seeing what the customer needs before he even knows it.
Shaun Smith articulate that very well in his article Why Steve Jobs doesn’t listen to customers. Quoting from the article:
..seeing under the surface of what customers want now; they just don’t realize it until they see it. ..People like Jobs can see what the market is ready for before the market knows it itself.
In most cases asking your customer what they want wouldn’t lead you to the next cycle of innovation:
..customers who provide most of your profit today are those whose views you pay most attention to. Yet ask them what they want and it is likely to be the usual thing – better, faster, cheaper. They want a better version of what they’ve already got.
Henry Ford supposedly said if he had asked his customers what they wanted, before coming up with the Model T, they’d have asked for a faster horse… Tom Peters and others have long pointed out that the customers least likely to help you move on to the next innovation are the biggest customers you have.
Apple, and to a lesser degree Google, have shown that innovation is an effective tool to beat competition and disrupt the marke
t, more than just giving things for free. I would even argue that Apple’s way of innovating has contributed more to the community than if Apple had simply provided free products without a clear use case behind them (such as Google Wave). Which brings me to the difference between Apple and Google…
The Google Model — Combining Innovation and Commoditization
Google used a different plan of attack, combining commoditization and innovation strategies. Unlike many other companies, Google could afford to penetrate new markets without worrying about how to turn it into a revenue generating business, as Microsoft or Apple would have to. They rely on their existing advertising revenue channel to fund their new business and distrupt the market with an Internet-based (royalty-free) product offering. They rely on the content being generated by those services to generate indirect revenue and rely on the community to help them define the product.
At first sight the Google model seem to be a classic win-win model. You get services for free while Google gets their share as well. However, there is a small catch here: The Google model applies only to Google, and therefore represents a sort of “unfair competition”. The seeming advantage can quickly become a threat to that same community. What motive would Google have to innovate and provide high-quality products if it becomes a monopoly, working in a market with no competition… There have been several instances recently that can be very alarming. Michael Gray’s post, Is Google Stealing Your Content and Hijacking Your Traffic, taught me that we are probably already more vulnerable already than we think.
Innovation Is Not Enough
Both Apple and Google can be considered as fairly innovative companies. However, there is still a fundamental difference between Apple’s way of doing innovation and Google’s. The difference lies in the fact that Apple innovates in things are that are core to its business, and which generate direct revenue to justify the investment. While Google innovates on things that indirectly contribute to its business.
The result is that when Apple releases a product it comes out polished and well-scoped, because Apple knows that at the price they charge people will have low tolerance for defects and a clumsy user experience. Compare this to Google Buzz, Wave, Docs, AppEngine, and other Google products, where this is clearly not the case. Google releases half baked products and lets the community debug and develop them.
Sun is another good example of an extremely innovative company with tons of new open source community projects and technologies. Sun failed to turn all this innovation into profit, and at some point when the SPARC “cash cow” stopped printing money, Sun couldn’t cover all those projects and was forced to shut many of them down. We all know where that ended…
By examining the example of Apple vs. Google, it’s easy to see that from a product strategy standpoint innovation for the sake of innovation is not enough. Innovation that doesn’t contribute directly to your bottom line is probably going to be abandoned at some stage, or just go through a long maturity cycle that might do your business more harm than good.
The Jury Is Still Out
The software industry is still fairly young and tends to be very trendy. We tend to jump from one model to another fairly quickly, often without asking very many questions or even trying to learn from past experience, just because it’s cool or because someone else that we all know did it…
Apple, Microsoft, and Google represent fairly different product strategy models with varying advantages and limitations that we can learn from.
- Microsoft: “Everybody gets a say and we listen to everybody and then…we build a product that will do everything.”
- Apple: “They tell you what you need, they build it their way, it does what they say it can do and not do, they make it cool and make sure it works with all their other stuff.”
- Google: “They took a little bit of the Apple model. They went far, far away to a secret island and designed the product without letting anyone find out about it and had a big huge launch. Then they took the MS approach and asked everybody to think of what they wanted improved and what new functionality they would like to see”
The open source model, such as that used by MySQL and JBoss, is another model that applies mostly to smaller startups is another good example of a product strategy.
My main take-aways from these examples are:
- Innovation that brings immediate value to your customers and business should be the heart of any product strategy.
- Open source can be an effective commoditization and marketing tool, especially if you are a small company but cannot define your long term strategy.
- I would be cautious of using any product (innovative as it may be) that doesn’t have a clear impact on the business bottom-line of the owner, as the chances that it will be abandoned at some point is fairly high.
The jury is still out on the question of product strategy. There are fundamentally different models that are successful, such as Microsoft, Google, Apple, and Oracle…. with no clear winner.
VMware, with its recent set of acquisitions, seem to to be following Google’s path, using its virtualization stronghold to fund their new cloud strategy. Where this strategy will lead is still an open question: Will it be an attempt to create a new monopoly or an open ecosystem?
I’ll close with part of David Cook’s summation:
Perhaps incorporating the business model of MS, Apple and Google is the right road to be on…. Doing any part of that trinity half-hearted or with less enthusiasm will be to the detriment of the whole product..
Microsoft and Red Hat taught us the lesson that a commoditization strategy without innovation is not risk-free, while at the same time innovation just for the sake of innovation — as with the case of Sun and to a lesser degree Google — can be just as harmful.