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It's Time to Dredge Up the Old Licensing Question Again


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March 23, 2006

It's Time to Dredge Up the Old Licensing Question Again

Peter Burrows

First, the caveats: there's as much chance that Apple will license the MacOS as there is that Steve Jobs will show up to his next keynote wearing a dress instead of the usual attire. Secondly, he's probably right not to change course, because there's plenty of evidence that Apple's proprietary approach is the way to go to win the huge consumer electronics and digital media markets that are now opening up.

But humor me anyway, because it's actually an interesting time to consider the question. For thirty years now, many have bemoaned Apple's refusal to license its operating system back when it was the market leader. But on paper, at least, conditions right now may be as good as they'll ever be to make such a strategic about-face. This was the case even before Microsoft slipped its latest delivery date for Vista (Can you still call it a slip, if the delay is now going on year four from the original timetable?). With that Vista delay, the potential impact of licensing the Mac is even more fun to think about.

For starters, as has been broadly documented, the Mac is on a roll. Yes, there's concerns about the current quarter--but those are mostly related to constrained supplies, rather than a lack of demand. And while Apple is doing a remarkably quick job of converting to Intel, it has replaced only half of the product line so far. Most analysts I've spoken with think the Mac is destined for market share gains in the coming years, as it cranks up its supply chain and fills out that product line to address more price points and market segments. Citigroup's Richard Gardner thinks the Mac can gain a point of share a year just by doing what it's doing: making great-looking, easy-to-use products that have fewer malware problems than their Windows brethren.

That's without any major tweak in strategy to drive greater compatibility with Windows, which is now possible given the move to Intel. Needham & Co. analyst Charlie Wolf is convinced that by the end of the year, Mac users will be able to run their familiar Windows apps--either by making it possible to run Windows alongside the MacOS, or by enabling said applications to run from within the MacOS itself (perhaps via some new whiz-bang emulation technique, he suggests). If Wolf is right, the Mac would suddenly become a relatively risk-free alternative for millions more consumers.

Of course, these steps are by no means assured. Apple says it has no intention of supporting Windows on the Mac, even though it is now possible--though evidently not particularly fun--to get XP to run on Apple hardware. I tend to think if anything happens, it will be along the lines suggested by Robert Cringely in his predictions for 2006. He figures that Apple won't want all the hassles that come with being a Windows licensee (One reason the PC biz has been so awash in red ink for the last half-decade is that PC makers have to pay for the zillions of customer service calls that result from Windows-related problems.). But maybe it won't have to, Cringely argues:

Here's how I believe it will work. Apple won't offer versions of OS X for generic Intel hardware because the drivers and the support obligation would be too huge. But just as you can buy a shrink-wrapped copy of 10.4 for your iMac, they'll gladly sell you a shrink-wrapped Intel version intended for an Intel Mac, but of course YOU CAN PUT IT ON ANY MACHINE YOU LIKE. The key here is to offer no guarantees and only limited support, patterned on the kind you get for most Open Source packages -- a web site, forums, download section. and a wiki. Apple will help users help themselves. With two to three engineers and some outreach to hackers and hardware makers, Apple could put together an unofficial program that could easily attract two to three million Windows users per year to migrate their old machines to the new OS. Imagine the profit margins of three engineers effectively generating $300-plus million per year in sales.

But I digress. While Apple might be able to pick up market share by playing more nicely with Windows, what about trying to beat Microsoft at its own game? Now that Vista is slipping, imagine the effect if some PC bigwigs -- the dream team in this regard would be Michael Dell and HP's Mark Hurd -- stood up at the next Worldwide Developers Conference in August and announced they had inked a deal to sell MacIntels. Certainly, these PC giants are going to need something to sell this Christmas season, rather than another round of lame duck Windows XP machines.

In fact, in January Dell expressed a willingness to cut such a deal, according to Fortune's David Kirkpatrick. If true, Dell would be more motivated to do so now, given Vista's delay and Dell's own woes. Such a deal would certainly generate more buzz, and probably sales, than Dell's acquisition of Alienware is likely to bring.

What would licensing the Mac do for Apple? For starters, it would line up powerful allies to help bring the Mac to places it has yet to go--not only by hitting new price points and targetting new kinds of customers, but by expanding Apple's geographic reach. Says one PC industry exec: "Apple still offers the best user experience, but they can?? scale to meet the market opportunity. In many countries, they're not even present."

Then, there's the potential licensing payday. Longtime PC analyst Roger Kay, who runs Endpoint Technologies Associates, figures Apple could command, conservatively, $30 per OEM copy of the Mac. Just for illustration purposes, suppose Apple grabbed 10% share of the 200 million unit-a-year PC business. That's 20 million copies, or $600 million in extra annual revenues--at at syrupy-sweet 80%-plus margins, verus 25% or so for Apple's own Macs. (It sounds nuts to me, but some think 10% share would be easily surpassed. Piper Jaffrey analyst Gene Munster thinks 20% is doable.).

Then there's Apple's iLife suite. With consumers rapidly going digital with their music, photographs, and other forms of entertainment, the ease-of-use and integration of the programs that make up this offering are certanly in line with market trends. As such, PC makers would probably want to offer this software as well. If they didn't, many Mac clone buyers would buy the package themselves at the retail price, currently $80. Pretty quickly you're looking at annual software licensing revenues, and even profits, of $1 billion-plus. (Once it jumped on the Mac bandwagon, Dell might even want to distribute iPods as well, rather than continuing to hawk its DJ Ditty).

So why isn't this a slam dunk decision? Because there are just as many reasons for Jobs to stay the course. Numero Uno is that his Apple is above all else a maker of hardware systems. Sure, there's software in the products, but the code serves the purpose of making those "insanely great" products and superior "experiences". Running a licensing program would not only divert huge amounts of time and money from that higher calling, but would undoubtely result in a torrent of mediocre clones that would fall far short of Apple's quality. And remaking its software strategy while still working through the microprocessor transition may be asking for one mega-move too many.

Then there's the competition question. I think this concern may be overplayed by many. Apple has proven itself to be a very efficient operator, that could probably hold its own fairly well. Nonetheless, making a market for cloners would undoubtedly take a bite out of Apple's own PC sales.

Even on this point, though, the current conditions are interesting. That's because as of last quarter, Apple brought in nearly twice as much revenue from digital music (59% of sales) than it did from the Mac (30%). Since iPod sales are expected to stay in the stratosphere for at least another year or two, any temporary hit to Mac sales would be more easily absorbed. With sales of iPods and any as-yet-unreleased digital entertainment products keeping Wall Street happy, Apple could focus on making premium products for its most discriminating fans. ??pple could remain a hardware provider to the faithful, or gradually wander out of hardware altogether," says Endpoint's Kay.

To reiterate, neither I, nor Roger, nor any of my other sources think Apple is going to license the MacOS any time soon, if ever. Apple is doing just fine as it is, and the company has hordes of other strategic alternatives--most of which involve staying focused on creating great new products and experiences of its own. But someone had to keep the "Should Apple License?" parlor game going--especially since at this particular juncture, it might actually be a viable strategic option.

11:58 PM

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Tracked on March 26, 2006 09:56 PM

Enough with the licensing question already. I mean, it's fun mental exercise, I suppose, but it's not a legitimate question unless Steve Jobs is dead or loses interest in his company and goes off to run Disney. Okay, that's possible, I suppose, but not likely.

To license the OS, Apple (Steve) would have to set the strategic course of the company to look like this: "Become the dominant developer of operating systems worldwide on all platforms at all times." Please.

Apple is quite profitable with sub-5% of the overall PC market right now. Consider if they had 10% of the market. That's double. Double! And they wouldn't have to break a sweat or even change strategies to double their overall business. And that's just on the Mac OS X side, never mind the whole iPod/consumer electronics thing.

Licensing the OS would be a massive headache requiring an unbelievably complex shift of strategy that would literally risk the entire PC business for them. After all, they will never break the Windows monopoly by selling to consumers, and they can't break into the corporate market (and aren't really trying) due to lack of applications, lack of trained developers, and so very much more.

Ultimately this is a Steve Jobs question. What does Steve love? He loves producing products that are fun, sexy, simple and great. Sure, he wants to make money, and gobs of it -- who doesn't? But he has to remain true to his personal beliefs first. After all, he only makes $1/year right? (hee hee)

Licensing the OS or selling it for generic PCs wouldn't be fun, sexy, simple or great. It would make money for a while, but it would fundamentally change the product and change the company. That kind of strategy shift, if it is ever to be accomplished, would have to be executed by a business school grad with no soul. And it would have to be done over Steve Jobs' dead body.

Posted by: John Proffitt at March 24, 2006 03:08 AM

I argued for licensing the OS when I was at Apple, and I just don't see it happening. Even though everyone knows that the terms the last time around were just stupid, they've still got a very bad taste in their mouths about it.

If it were up to me, I'd make it available only to HP, Lenovo, and Sony. I'd leave Dell and the rest of the screwdriver-shop crowd to windows, and position Mac OS as a premium option. Charge $100 OEM price, and make it perfectly clear that support on other hardware was NOT Apple's responsibility.

-jcr

Posted by: John C. Randolph at March 24, 2006 11:14 AM

The word is "dredge" - (an apparatus for bringing up objects or mud from a river or seabed by scooping or dragging, or to clean a river or seabed using an implement. By extension, dredge means to bring up a topic from the past).

A "drudge" on the other hand is a person made to do hard, menial, or dull work. Drudge is not even a verb.

Posted by: R C at March 24, 2006 11:20 AM

Apple is having Intel design (make?) motherboards for them. The computers are designed here but built offshore. While Apple could license to only work with certain equipment, that would not go with the "whole widget" philosophy. Considering Dell spoke up, and that they tested the waters with HP with the iPod, I would say it will come sooner rather than later, but only with a BIG committment from whoever they partner with. Sort of like Intel's committment, as opposed to IBM's with the G5.

Posted by: Now at March 24, 2006 12:22 PM

Then there's that other Cringely musing that Steve could release Leopard OS X 10.5 to Mac users, and then give OS X 10.4 to the open-source community and let PC users have it for free.

Posted by: KenC at March 24, 2006 12:30 PM

Apple probably will not license its OS, but, one has to wonder what the deal is with 3,000 support people to be hired in India is about - clearly its not to support the current Apple product suite.

Posted by: Rajesh at March 24, 2006 03:49 PM

OSX is already licensed - it's called a MINI.

If you could really buy OSX & iLife not included with your Mac, let's just call it $199 for the two.

Isn't that pretty much EXACTLY the same as buying a $499 PC & the fantasy OSX-ilife package?

AND Apple would have HUGE tech support headaches with drivers for everything from graphics cards to uSB on a card to whatever is hanging off that idiotic PC - not to mention some weird PC built by druids in a swamp. So, what's Apple's margins then to make a profit on selling OSX & ilife with the hidden cost of support?

$399? $499?

How many thousands of calls will they field - What's this curly symbol? What's the COMMAND key?

Apple has already thought ahead. For the reail price of OSX & ilife plus about $399 - you get the FULL MAC experience from the beautiful box and the open me first experience that actually causes people to photo it ... to of course, EVERYTHING else that comes with a Mac & OSX including a nice Apple sticker to denote your new 'religion' :-)

You can reuse your monitor, keyboard & mouse - what could be better?

Posted by: jbelkin at March 24, 2006 09:57 PM

I LOVE THE IDEA! Sign me up now because I absolutely loathe Apple designed laptops. I will gladly give up Apple's horrible support for Dell's horrible support.

Why? Becuase Dell's cost half that of Apple's but without the promise of service.

Posted by: michael at March 24, 2006 11:10 PM

One has to wonder 'why' is Steve Jobs sold off a 'large', repeat, 'LARGE' block of his stock?:,br>

http://biz.yahoo.com/t/45/4149.html

As for April 1, expect a surprise.

Most of all, with Jobs, you can expect 'the unexpected'.

I wouldn't rule out the possibility of 'anything' happening! ;)

Posted by: Dietrich at March 26, 2006 01:07 PM

Man, I surely would love to see more OSX arond! And for all those who say that it can never happen, didn't you think the same way about Intel no so long ago? Never say never.

AEM

Posted by: Adrian Madrid at March 26, 2006 09:29 PM

Umm, Steve Jobs did not sell off a large block of stock

http://www.appleinsider.com/article.php?id=1621

This is just atrocious reporting done by the Register because Andrew Orlowski simply hates Steve Jobs and Apple to report actual facts.

The transaction was what is called a net share settlement because since 10 million shares vested, the IRS requires Jobs to pay taxes on all 10 million shares even if he sells NOTHING.

Thus, Apple is basically handing over 4.5 million shares to the IRS instead of Steve Jobs.

That's right - the IRS is getting a $295 million payment. IT DOES NOT REDUCE JOBS' STAKE IN APPLE.

That's what the "stock sale" was all about. Unfortunately, Andrew Orlowski at the Register is consumed with so much hatred for Jobs, a little thing called "facts" goes out the window in favor of sensationalistic fantasy to score cheap points.

Even Microsoft cheerleader Robert Scoble writes about Orlowski turning cheap tricks on this so-called story.

http://scobleizer.wordpress.com/2006/03/26/the-irritant-of-the-non-credible-journalists/

No less than Om Malik and several other people debunk Orlowski for the trash talker he is.

Posted by: Paul at March 27, 2006 02:36 AM

@Dietrich

Why has Steve Jobs sold off a large chunk of his stock? Because he needs a new interactive swimming pool with 18 hole golf course [or whatever].

The reality, Dietrich, is that Steve Jobs is so phenomenally rich that this chunk of change is only a fraction of his stock portfolio. He doesn't have any 'plans', he just needs to have the house painted and the light bulb in the left front light of his golf cart trolley changed.

Some time ago, there were similar questions about Bill Gates selling off one or two million shares -per week- for a while. Of course he has hundreds of millions of shares, what he sold was merely a fraction of a percentage. Operating costs, you know.

These are the people who are at the very top of the food chain. Their realities are totally different than yours and mine. To us, this is a phenomenal amount of money, and it is, but to them it's merely a transaction.

About licensing OS X... they've tried it once and did a bad job of it. Steve would do a better job of it but the question is: does he want to? I'm not looking to run Windows on my Mac. If I had wanted to run Windows I would have bought a PC. Giving OS X to the screwdriver bunch is going to put it into environments that are totally hostile, providing the user with a miserable experience.

Besides: why does Apple have to come to the rescue of the PC world all of a sudden because Microsoft can't get the cow out of the barn? You want to use OS X? Buy a Mac already. They used to be, much to my chagrin, far too expensive, but that is no longer the case [and how much are people paying for Alienware?]. And they run great software. It's designed to work together seamlessly. On screwdriver boxes they're not. Support cannot be overestimated. It will be a HUGE job.

@Michael. Ugly Macs? Yes, because Dell and HP make such great looking, slick boxes, right?

Posted by: Jorge at March 27, 2006 04:46 AM


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