NQ Logic

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iCloud: Apple’s Late Mover Advantage in Cloud Computing

On June 6, 2011, Apple introduced the iCloud. This new, free service will automatically store Apple devices' content on the cloud, and synchronize all stored content and applications across one's iPhone, iPad, iPod touch, and Mac. The iCloud can synchronize up to 10 Apple devices and will be available in the US beginning this fall. It includes the App Store, iBookstore, iDrive (5GB of free cloud storage for mail, document storage and backups), Photo Stream and iTunes.

iCloud keeps your important information and content up-to-date across all your devices. All of this happens automatically and wirelessly, and because it’s integrated into our apps you don’t even need to think about it—it all just works.” — Steve Jobs, Apple CEO [June 6, 2011]

To avoid a painful and time consuming upload process, particularly regarding music files, Apple will also offer in US a new U$25/year subscription-based service called iTunes Match that scans all music on all connected devices, and match those music files with a replacement 256 kbps AAC DRM-free online version from iTunes. If a file cannot be matched to the 18 million-plus songs in the iTunes Store, then it will be uploaded to the iCloud.

Apple, who recently acquired the iCloud.com domain name for a supposed U$4.5 million, has definitively stepped into the cloud business. Its brand new U$ 1 billion and 500,000 square foot data center facility in North Carolina is another stepping stone and commitment in that market.

Source: Apple [June 06, 2011]

Up until now Apple considered the PC/Mac as the central digital hub, the ultimate customer device used to manage and store all digital music, photos, videos, and documents. Today the Cupertino, California-based company is changing its philosophy and proposing a Post-PC era solution by bypassing the PC/Mac altogether.

The iCloud and related iTunes Match services are not revolutionary in themselves. Many companies already offer such services to early adopter consumers. Even just in online music streaming, Amazon Cloud Drive, Google Music, MOG, Rdio, the recently IPO-ed Pandora, and Spotify have long been in the market.

What differentiates iCloud from the rest of the pack is its:

[1] Apps strategy, giving consumers a better experience since streaming will be local yet ubiquitous through automatic synchronization and

[2] Its landmark business agreement with the four major music companies: Warner Music Group, EMI Music Group, Universal Music Group and Sony Music Entertainment. Apple is expected to keep 18% of the iTunes Match revenue (U$25/year subscription fee, advertising) while 70% will go to the record labels, and the remaining 12% to music publishers holding the copyrights. Apple benefits from its large music market penetration in the US (26.7% of all music sold in US and almost 90% of the online music market in US), and yet knows that is a small participant of the overall digital music experience. As far back as 2007, Steve Jobs estimated that less than 3% of music files on iPods have been downloaded from iTunes.

Source: Techgadgetx [June 07, 2011]

Though many in the industry are reviewing the competitive landscape of the online music and online storage consumer markets and how the iCloud has changed their course, a more interesting angle would be to probe Apple's overall strategy shift many years back and the winning formula that we all know today, using the iCloud as a case study example.

Into the Cloud

"What the hell is cloud computing?" — Oracle CEO, Larry Ellison [Sept 25, 2008]

According to the National Institute of Standard and Technology (NIST) from the US Department of Commerce, "Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction."

Cloud computing can be defined by three key service models, five essential characteristics, and four deployment models. From the demand side, Cloud is very appealing to companies who do not want to invest in costly infrastructure, evolving platform or software needs, and who want the flexibility to outsource complexity and maintenance. It essentially moves a business' IT costs from capital expenditure to operational expenditure, from developing and managing all IT needs in-house to using a third-party Cloud service provider and paying-what-they-use only. From the supply side, a company with significant excess capacity or capabilities can offer them as services to other companies and monetize what it will not use - i.e., Amazon's first foray into Cloud services.

Source: Memset & NIST [Feb 24, 2010]

From private (Data centers) to public (“The Cloud”) and everything in between, Cloud computing has managed to package itself with different scenarios for the benefit of many. Though initially targeted to businesses, Cloud services recently entered the consumer market and it is worth noting that today, Cloud computing is with Media Tablet, 4G and 3D TV at the top of the IT hype curve. Today, it is much easier to list which IT companies are not involved in Cloud computing rather than to list the ones who are. The hype has forced everyone in the IT industry to have at least a strategy, if not a plan of execution to satisfy customers or the PR machine.

Source: Gartner IT Hype Curve[Aug 2010]

In the consumer Cloud market, the three major companies are, in order of importance: Amazon as the leader, and Google and Microsoft, neck and neck together. All other companies are distant laggards or are focusing on one specific niche of the business, or proposing a Private Cloud computing (a.k.a. data centers).

Source: NQLogic [June 2011]

Amazon is the only Cloud service provider tackling all IaaS, PaaS, and SaaS. Since 2006, Amazon, with its Elastic Compute Cloud (EC2), has delivered scalable, pay-as-you-go compute capacity in the cloud to a vast array of companies such as Foursquare, Reddit, Eli Lilly or Netflix among 365,000 other web sites. More importantly Amazon helped to nurture the Silicon Valley and its load of start-ups through its Cloud services, to the point that the VCs are giving Amazon vouchers to entrepreneurs as gift certificates. The US government is also turning to the Amazon Cloud to save money, and ironically enough the Amazon servers were used during the recent attack against Sony’s PlayStation Network and its 77 million users that took the gaming network offline for almost an entire month. Today Amazon and its Cloud offerings are certainly the most mature, scalable and cheapest in the market, although it only represents 1.5% (U$500 million) of its U$34.2 billion revenue in 2010.

Microsoft has been building its Cloud computing capabilities essentially for its business customers, but developed several services for the consumer segment in that time as well in PaaS and SaaS. It recently announced that Windows Live has been investing in the space for over a decade, serving over 500 million customers with Xbox LIVE, SkyDrive, Hotmail and Messenger. Specifically for SkyDrive that launched in 2007, its 100 million worldwide users can access documents, photos and other files from anywhere for free online, using Windows Live Mesh to sync across their devices.

Finally, Google and its "all could be accessible from a browser" philosophy has been highly active on the consumer Cloud front from the beginning. Its U$2 billion a year investment in infrastructure for all of their services - e.g., Gmail, Google Docs storage capacity - show that Cloud business requires a significant capital investment and with scale achieved, it becomes easier to launch incremental new services from it. After all, if your mission is “to organize the world's information and make it universally accessible and useful” wherever and however they are created by consumers, why not help them to do it using your own infrastructure.

Source: Forrester [Apr 22, 2011]

The U$241 billion (by 2020) Cloud computing market is not that simple. Though many IT leaders are interested in moving more and more applications to the Cloud, taking full advantage of the cost benefit and reducing the implementation time cycle, the service has some pitfalls that needs to be considered. When one outsources capacities, one outsources responsibilities as well. The recent Amazon service disruption in the US East region, the cyberattack on Google's centralized password system, or the lack of harmonized privacy laws around the world are here to make us remember that the road is still long before we end up having a just few large data centers running the entire world's data.

What is Apple doing in the 'Consumer Cloud' computing business then?

This is not the first time that Apple tried to enter the Cloud computing business. Lala.com acquisition in 2009, and the now discontinued MobileMe (formerly .Mac and iTools) service were its earlier trials. Unfortunately both services did not really fit the “All Apps” Apple strategy.

This new move iCloud move provides two solutions to address Apple customer's pain points during their life cycle.

[1] The first one simplifies the content management between Apple devices, while disconnecting consumers from physical files and letting the interface as the main and unique experience. This forced disassociation with files will help to lock the consumer into the Apple ecosystem and minimize any other disruptive forces such as piracy or device competitors. The interaction screen is now owned by Apple, and no physical access is possible.

[2] Reduce cost and avoid turn around by forcing Apple consumer to backup all OS, applications and content on the cloud. An Apple customer will now be able to easily transfer content during an upgrade or a device replacement, after a loss or theft, reducing in return the internal customer care cost for this over popular demands.

The New Apple Strategy: Late Mover Advantage

Now with an extraordinary treasure chest on its balance sheet, a strong brand known around the world, and many success stories, Apple has evolved from its early days of Disruptive Innovation strategy to a Late Mover Advantage strategy. In the last decade, Apple (Steve Jobs, in reality) has observed what is promising on the market and what could reinforce the whole ecosystem, and then implements with its own, patented “one button” design while learning a lot from early adopter mistakes.

After several companies (Eiger Labs, Samsung, Creative, Diamond Multimedia) released the first portable Mp3 player starting in 1998, Apple released the iPod with a much nicer interface, on November 2001. Since then Apple has released the iPhone in June 2006, 4 years after Palm released its touch screen PDA; then the App Store in July 2008, 1 year after Facebook Platform; later came the iPad in April 2010, 10 years after the Microsoft tablet PC; and finally iCloud in Fall 2011, 4 years after Microsoft SkyDrive. No new revolutionary devices were released by Apple in the last ten years, but all of them are consistent with each other both in term of interface and design aesthetics. Apple has done tremendous work on the representation of the consumer device as a sexy and innovative status symbol in the market mindset.

Many companies in the world try to do the same Late Mover Advantage strategy (e.g., Microsoft, Samsung), but only Apple has perfected the secret recipe so far.

What do companies need in order to implement a successful Late Mover Advantage strategy?

[1] A strong balance sheet and access to a vast network of resources, both human and infrastructure. In a world of U$500 million data centers, only a few companies can actually deploy such a network in order to move ad hoc, at lightning speed. On one end of the spectrum, technology has enabled more flexibility and creativity (i.e., Silicon Valley start-ups) but on the other end, has set an enormous barrier to entry (i.e., Telecom network, Cloud computing data center). If a company wants to play across different markets, it needs a tremendous amount of cash.

[2] Find a niche consumer market. This market doesn’t have to be large. For example Apple has decide a long time ago that it will target only a small percentage of the total addressable market and never dilute the brand by going down the food chain, preferring instead to release more device models, and provide more updates quickly.

[3] Own a consistent and differentiable product/service catalogue. Since Jonathan Ive became the Senior Vice President of Industrial Design in 1997, Apple product catalogue has turned into a reference in the world of consumer product design. From the user interface to the physical design, it is clear today that Apple has a way of creating devices that are beautiful, powerful, yet easy to use. More importantly, each new device reinforces the entire catalogue with up-to-date features and a consistent interface. An Apple fan can turn on any new device and feel at home.

[4] Lock the PR machine. Apple has managed to create a loyal and outspoken influencer-fan base, triggering a strong media attention along the way. A recent study found that 15.1% of technology media stories were about Apple, compared to 11.4% about Google, and a mere 3% about Microsoft. This media and consumer bias fuels the PR machine with over-messaging and positive feedback, further reinforcing the brand in the market mindset. This PR machine is also stimulated by the extreme secrecy that Steve Jobs has imposed at the company.

[5] Learn from predecessors. With the iPhone, Apple created a stable and simple development environment for mobile developers. With the iPad, Apple ported over all media consumption, content management and basic interaction to a portable touch screen device. With the iCloud, Apple legalized the ever-growing music storage and content management pain point across multiple devices. Each time, Apple observed and simplified the crucial bottleneck in the ecosystem and built upon it. Along the way, human and technological resources were acquired but always rebuilt from scratch to satisfy ultimately the "All Apps" Apple strategy (Lala.com, FingerWorks, or Siri). This "observe before moving" strategy has paid off over the past decade and will continue on to the next ones.

What’s Next?

In the new internet platform war and its half trillion US dollar among the 4 + 1 internet companies (Amazon, Apple, Google, Facebook + Microsoft), Apple is the only successful enterprise that has consistently implemented the Late Mover Advantage strategy. It should not come to anyone's surprise that the next round of device created by Apple (so be it iFridge, iCar, iHouse ….) will generate explosive buzz and sales, and have the same design aesthetics and ubiquitous connectivity as its previous products and services.

Simply, Apple is the best "redesign" company in the world of consumer electronics today and perhaps tomorrow.

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