How Apple Could Mess Up, Again

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The trick is to manage the transition. [As standards take over], the products always become much lower in cost and much more broadly available [from more suppliers]. So if you're the incumbent, it appears you're facing a huge threat, even though you're really at the cusp of a great new opportunity. But it's usually new companies that grab that opportunity.

So it really is a fork in the road for Apple. If they don't open up the architecture and begin trying to be the iTunes inside all MP3 players, they're going to have to keep coming up with the next cool thing.

What about in the PC business today? Apple has been gaining share for the first time in years, and most people think that will continue, given the delay of Microsoft's Vista software, widespread malware problems with Windows, and Apple's move to the Intel platform. Don't you think that will enable Apple to gain some significant share in PCs?

I don't. I think it will allow them to survive for a bit longer. I think most people are satisfied with their current PCs (using Windows and based on Intel chips) and find that the performance of their systems is good enough. Sure, there are people at the bleeding edge who want to do more. But a good Dell PC can be had for $500, and it has performance that's well beyond what most of us need.

Seems to me, given your comments, that Apple has another strategic option: to focus on continuing to develop new markets with its proprietary, innovation-heavy approach, harvest them, and move on.

We have a case about this at Harvard [Business School], about when John Sculley was the CEO of Apple in the early 1990s. He actually had remarkably clear vision about where the industry was heading. He had three priorities. First, he felt the company needed to get its price down to $1,000, from $3,000 or $4,000 at the time. The second thing was to open up the architecture, by selling the OS. And the third was that handheld devices were going to be big. He was right on all three, but the culture of Apple was just so strong that Sculley just couldn't change the direction of the ship.

So I always ask the students, "What would you do if you were on Apple's board?" And they always say the same thing: "Crucify him, and bring in a good manager."

"So who would you bring in?" I ask. And they say: "Bring in someone really strong, who can make those decisions." So what did Apple do? They brought in Michael Spindler -- a strong general manager type who was known for his operations ability. Well, that didn't work out.

So I ask, "What would you do next?" And they say: "Bring in a good manager -- someone who can turn the company around." Well, they brought in Gil Amelio, who had turned around National Semiconductor. But he only lasted 18 months or so.

So then they bring Jobs back. And why did the company prosper under Jobs? The students' instinct is to say, because he's a good manager. I think the reason is that he stopped trying to change the company. He wanted them to do what they had always wanted to do: make cool products, based on proprietary architectures.

One last question. It's clear that for Apple, and for Jobs, the product comes first. Rather than try to enter many new markets to achieve the revenue growth Wall Street expects, maybe Apple should just stay true to its focused approach -- in essence, tell shareholders that it's not going to try to achieve more than it can, stock price be damned.

I've been thinking about this a lot -- about whether managers ought even to think about what Wall Street says. In the 1960s, the average investor held shares for over six years. In that world, it made sense to frame the job of the manager as maximizing shareholder value. But today, 10% of all shares are owned by hedge funds, and do you know what their average holding period is? It's just 60 days! And another 85% of the equities are owned by mutual funds and pension funds, and the average tenure there is 10 months.

Their time horizon is shorter than even that of even the shortest-term managers. So I don't think it's right to think of [these investors] as shareholders of your company. They're investors who temporarily own securities in your company at a particular point in time. They're responsible for maximizing the stock value of their investments. You as the CEO are responsible for maximizing the long-term health of your company.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley .