Welcome to Planet Apple

How the high-tech maverick became a global trendsetter

by Peter Burrows

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Steve Jobs had plenty of problems to contend with as he sauntered onstage for his first speech after returning to the top of Apple (AAPL) in 1997. He faced a shrinking market for his Mac computers, bloated costs, and a severe shortage of cash. But on that day, Jobs chose to talk to the Mac faithful mostly about another problem: Apple's growing isolation. Despite the company's reputation for making the world's finest PCs, very little software or add-on gear worked with the Mac. "Apple lives in an ecosystem, and it needs help from other partners," said Jobs. "And it needs to help other partners."

Jobs then did the unthinkable, inviting arch-nemesis Bill Gates to join him on stage via videoconference to announce details of a deal to forget any patent claims in exchange for $150 million, and a promise by Microsoft (MSFT) to continue making a Mac-compatible version of its ubiquitous Office software.

Today, that Apple ecosystem has morphed from a sad little high-tech shtetl into a global empire. Once known for defining the digital future but never fully capitalizing on it, Apple has been transformed into tech's most influential hit-maker. More than 200,000 companies have signed on in the past year to create Apple-compatible products, a 26% increase from the year before. That includes software makers such as gamemaker Electronic Arts (ERTS) and corporate supplier VMware, drawn by Mac sales that are growing three times faster than the overall PC market.

A cottage industry of iPod accessories continues to blossom into something far more substantial. Consider that this year, some 70% of new U.S.-model cars have iPod connectors built in, and about 100,000 airline seats will have the same. And Apple's online iTunes Music Store has become the world's third-largest music retailer after Wal-Mart Stores (WMT) and Best Buy (BBY)

Joining the Jobs Club

With the June 29 debut of the iPhone, Apple seems poised to extend its reach even further. A new flock of partners, from AT&T (T) to Salesforce.com (CRM), is set to jump on the bandwagon for the slick phone/Web browser/music player/camera. Sure, the hype prior to iPhone's launch bordered on ridiculous (Comedy Central's Stephen Colbert joked that the iPhone launch is the second most important event in human history, after the birth of Christ). But phone manufacturers such as Nokia (NOK) and Motorola (MOT), and carriers like Verizon (VZ), are waiting nervously to see if Apple can remake the U.S. cellular business by determining what services consumers get and leaving the carriers out of the loop.

As long as Apple stays on its game, leading providers of everything from silicon chips to Hollywood flicks will feel pressure to strike deals to Jobs' liking. Apple can confer brand hipness on its partners. And its ascendence in markets like cell phones and who knows what else in the future may impose a new focus on more consumer-friendly parts, software, and services. But to be part of the Jobs club, you give up a certain amount of independence on everything from design to identity to pricing.

Jobs is upending two decades of conventional wisdom about the nature of competition in digital markets. Since the rise of Microsoft and Intel's (INTC) "Wintel" PC standard in the 1980s, the assumption has been that markets would be dominated by those that could set technical standards—say, Microsoft in operating systems or Intel in microprocessors—and then benefit as thousands of others competed to build products on top of these "platforms."

Consumers "Don't Buy Platforms"

But Apple's strategy is far simpler: Focus on making the best product, and rewards will follow. In fact, Apple's new partners are signing up in spite of, rather than because of, Jobs' rules of engagement. Apple makes little pretense of building a level playing field, but routinely picks favorites—such as Google (GOOG) for building mapping and video applications for the iPhone.

And rather than aim for the most partners, Apple focuses on attracting the best ones. As a result, the Mac and iPod feel more like a gated, elitist community, with Apple keeping close watch over who gets in. "The notion of a platform is a very PC-oriented way of looking at the world," says Silicon Valley financier Roger McNamee. "Consumers just want a great experience. They don't buy platforms."

Consider how Apple changed expectations about portable music devices. There were plenty of MP3 players around before the iPod arrived in 2001. Now, if the iPhone works as advertised, it could similarly redefine the mobile-phone experience. As any BlackBerry or Treo owner knows, all of the 25 million smartphones sold last year offer similar capabilities, such as Web browsing and e-mail.

But none has captured the heart of the mainstream consumer. And on paper, at least, the iPhone erases myriad frustrations faced by hundreds of millions of phone users—from maddeningly complex menus, to the inability to find a contact while on a call.