Apple's Partner Paradox

Alliances with AT&T and Universal Music Group underscore the benefits and pitfalls of forging close ties with the maker of the iPod and iPhone

by Peter Burrows

Apple has proved time and again that it can crank out appealing, category-busting digital consumer products on a regular basis. And after the recent iPhone hysteria, it's apparent that no corporate marketing machine can come close to Apple's ability to generate the buzz to ensure those products find their way into consumers' hands.

So what, if anything, can slow the company down as it continues to evolve from PC maker to consumer electronics powerhouse? According to many experts and industry insiders, it comes down to one word: partnering. Nowhere is that more clear than in Apple's aim to conquer the vast cellular-phone business, where it relies on AT&T (T) to provide wireless calling services in the U.S. And if anything took the shine off an otherwise stellar iPhone product launch, it was early reports of sluggish network performance and customer activations.

Let's Make a Deal

For Apple (AAPL), the problem isn't finding partners, mind you. That part is easy. Everyone from electronics accessory makers to corporate software developers to airlines are knocking on Chief Executive Steven P. Jobs' door in search of deals (see BusinessWeek.com, 6/28/07, "Welcome to Planet Apple").

And Steve Jobs is almost as storied a deal maker as he is tech tastemaker. Among Jobs' epic calls were the 1997 reworked deal with Walt Disney (DIS) that gave his Pixar Animation a bigger slice of profits just as Pixar was settling into a run of eight consecutive blockbusters. Then there was his bold move in 2005 to buy up a huge swath of the world's flash memory chips—a decision that has helped Apple meet demand for products such as the iPod nano and iPod shuffle while maintaining cushy profit margins. That year, Apple inked a deal that is in many ways its most critical, and most successful, with Intel (INTC). In the two years since, the companies have pulled off a glitch-free microprocessor transplant for the Mac that has helped attract new customers to Apple and entrenched Intel with the industry's fastest-growing and most innovative player.

But is the Intel deal a harbinger of happy partnerships to come? As it is, many question whether Apple can partner in a manner that benefits both parties over the long haul. "Apple always looks out for No. 1, in the short term," says Roger Kay, founding partner of Endpoint Technologies Associates. "In the end, it comes back to bite them because they can't always maintain those partnerships."

Risky Business Partner

That's why many tech and media insiders worry that partnering with Apple is dangerous business. The common refrain is that Jobs is so competitive—and so skilled a negotiator—that he's able to woo partners into deals they'll later regret. "I don't think he appreciates this concept of a win-win," says one former partner.

Critics point to a long list of examples. Many techies say Apple shortchanged longtime partner Adobe Systems (ADBE) in the 1980s, when it developed its own TrueType font to compete with Adobe's PostScript. In 2004, Motorola (MOT) giddily signed up to create the iTunes-equipped ROKR phone, only to see the phone bomb—in part due to Apple's insistence that its music capacity be limited to only 100 songs, say sources. In 2005, one of Mark Hurd's first moves as chief executive of Hewlett-Packard (HPQ) was to kill a deal through which HP distributed millions of copies of iTunes for Apple, but failed to earn money given paltry sales of HP-branded iPods.