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The Power of the Platform at Apple

Steve Lohr|The New York Times
Sunday, 30 Jan 2011 | 10:55 AM ET

SIZE is the enemy of growth. It is one of the unwritten laws of business, a matter of simple percentages. After all, when a company has $1 billion in yearly sales, an extra $1 billion doubles its size. Add $1 billion in new business to a $10 billion-a-year company, and it amounts to just 10 percent growth. The size-growth tradeoff seems inevitable, an inescapable force like gravity.

Verizon iPhone 4
Don Emmert | AFP | Getty Images
Verizon iPhone 4

Try telling that to Apple, the corporate giant that two weeks ago reported a 71 percent jump in quarterly sales. Apple generates revenue at the rate of $100 billion a year. Its chief executive, Steven P. Jobs, who went on medical leave this month, is ailing, but the company is certainly not.

Hit products like the iPod, the iPhone and the iPad are fueling Apple’s logic-defying growth. The latest entry — the iPad, introduced in April — is on track to deliver $15 billion to $20 billion in revenue in its first full year of sales, estimates A. M. Sacconaghi, an analyst at Sanford C. Bernstein. At that size, if the iPad were a stand-alone company, it would rank within the top third of the Fortune 500.

The software and services that work on Apple’s hit products are accelerating its extraordinary expansion. Apple provides the underlying technology and marketplace: iTunes software and the iTunes Store for managing, downloading and buying music and media; iPhone and iPad software for creating applications; and the App Store for sampling and buying them.

The more people buy iPhones and iPads, the more software developers and media companies want to write applications for them, as various as games and digital magazines. And consumers are more likely to buy iPhones and iPads when more entertainment and information applications are available on them. The combination of hardware, software and services is what corporate executives, economists and analysts call a platform. Successful technology platforms sustain and reinforce growth. And this self-reinforcing cycle is known as a network effect. It helps the platform owner and raises a barrier to competitors.

“Apple has hit that magical combination of gradually shifting from a product to a platform strategy,” says Michael A. Cusumano, a professor at the Sloan School of Management at M.I.T. and author of “Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World” (Oxford University Press, 2010).

Successful platforms aren’t confined to the technology industry. America’s interstate highway system, built by the government, could also be seen as platform. The more that people traveled it, the more opportunity it created for businesses and towns linked to its transportation network — and the larger the market for Detroit automakers. A Barbie doll, Mr. Cusumano notes, qualifies as a platform, too. Legions of outside suppliers make clothes, accessories and toys for the doll, while online Barbie fan clubs nurture sales.

Still, the technology business — with its interconnected hardware, software and networks — tends to be where platform strategies are most prevalent and the payoff greatest. In the corporate market, I.B.M. is pursuing a platform strategy largely focused on its Websphere Internet-based software, using I.B.M. programming tools, technology services and computers. Oracle has built a rival computing platform, surrounding its database software with business applications and hardware.

Google’s search service, combined with its in-house advertising marketplace, is the leading Internet platform strategy. In personal computers, Microsoft has been the platform-strategy master. Its Windows operating system running Microsoft’s Office productivity applications is probably the most lucrative product platform in history.

Microsoft triumphed in the PC industry, analysts say, by fostering an ecosystem of software developers and hardware makers that relied on the company. Apple, the early leader in PCs, fell behind, despite some stellar products, because it made mostly its own hardware and software, and did not nurture a large community of mutually dependent partners, analysts say.

Things look different for Apple in the market for mobile devices. There is some debate whether Apple has become a platform strategist by design or by default: When it introduced the iPhone in 2007, Apple did not have software tools for outside developers to make applications. That came in 2008.

“The iPhone was such a great product that lots of people wanted to write applications for it,” says Marco Iansiti, a professor at the Harvard Business School. “This was a case of the hit leading to the platform, and not necessarily voluntarily for Apple.”

These days, Apple is a platform player, though it is taking a hybrid approach. It has courted outside partners and suppliers but has fairly strict rules for how applications look and behave in its devices. Apple is offering users not just cool gadgets but also the software that glues together their digital lives — computing, online information gathering and entertainment. It all works better together, the company says, so a person’s second or third Apple product will make the first and second device more useful. The strategy is working so far. Even sales of MacBook notebooks were up 34 percent in the recent quarter, far faster growth than in the overall PC industry.

The company is on a roll, Apple enthusiasts say, and it still holds relatively modest shares of huge markets — less than 20 percent for smartphones, and 4 percent for PC’s globally, for example.

BUT concerns lie ahead. And the biggest may be a platform challenge from Google. The iPhone redefined the smartphone, but handsets using Google’s Android software are fast attracting users and developers. In 2009, some 25 million iPhones were shipped, compared with about 8 million phones running Android. Last year, Android shipments reached 61 million, compared with about 48 million iPhones, estimates Sanford C. Bernstein.

Like Microsoft in the PC industry, Google supplies the animating software for smartphones but not the hardware. And, also like Microsoft in PCs, it works with many hardware makers, who sell handsets to many mobile carriers.

Until this month, when it added Verizon , Apple sold to just one carrier, AT&T , limiting its distribution — and, analysts say, the size of the head start it had over Android. In smartphones, like PCs, Apple makes both the hardware and software itself.

“I don’t see any problems yet, but the long-term issue for Apple is whether it can keep it up or will its economics break down,” said David Eiswert, portfolio manager of the T. Rowe Price Global Technology fund, whose largest single holding is Apple.

In one question, Mr. Eiswert sums up the risk: “Will we eventually see the PC model all over again in this market?”

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