Apple is doing it wrong, Apple is living on borrowed time! Apple will Fail Again!

This idea, this meme, isn’t new. For more than 30 years we’ve heard a number of versions of the “Apple is doomed” requiem.

December 12th 1980 — the day of Apple’s IPO, coincidentally — I’m in Geneva, signing my employment agreement with Apple. My mission: start Apple France. Back in Paris I meet a chorus of naysayers: You’re deranged. Look at the respectable companies you’ve worked for: HP, Data General, Exxon Office Systems. (They don’t know that I can’t wait to leave the latter.) And now you’re going to work for these California hippies? They don’t have CP/M; the Apple ][ has a 40-column screen and lacks standard 8” floppies…and Fortune Systems is coming up with a Wang emulator that will wipe Apple off the planet’s surface!

The latest Dies Irae comes from a trio of highly skilled artists: Henry Blodget of Wall Street and Business Insider fame; Fred Wilson, co-founder of the VC firm Union Square Ventures and an eloquent and insightful blogger (AVC blog); and Dan Lyons, the sharp and eerily hilarious author of the Fake Steve Jobs parody blog (currently on hiatus), now writing for the Daily Beast and Newsweek. (See here, here and here but a few examples of their refrain. Google will oblige with more.)

I’ll start by intoning their cantus firmus.

In 1984, Apple comes out with a superior personal computer, the Macintosh. And then they lost the market to an inferior genus: the IBM PC clone.

Why?

Ignoring universal advice — including Billl Gates’ — Apple arrogantly refused to license the Mac operating system, leaving the field to Microsoft’s technically inferior product. DOS and Windows clones proliferated and almost exterminated the Mac, relegating it to a minuscule, irrelevant market share.

With the iPhone — and out of the same deeply ingrained arrogance — Apple is making the same mistake. Apple won’t license its iOS software platform. As a result, Android-powered smartphones and tablets will do to the iPhone and the iPad what Windows did to the Mac.

The story ends with Andy Rubin at the wheel of the Android steamroller. Behind him we see Henry, Fred, and Dan throwing rose petals on themselves and singing I Told You So.

(I have personal reasons to like Android. Several of my Be associates moved on to Google where they were instrumental in the creation of the platform. I admire what the engineering team accomplished in a very short time. There’s little wonder that Nokia and RIM have lost their footing. One of my two smartphones is an Android device, from Motorola; I see everyday why the platform is so successful. And as an iPhone user, I’m glad Google is fueling Apple’s competitive fires.)

That’s how the song goes. But let’s turn to some discordant facts. Yes, the Mac concept was a stroke of genius, it held out immense promise.

Going back to November ’83, I’m in the auditorium at Apple’s Sales Conference in Honolulu. First, we get the ‘1984’ commercial shock. Lights go down, a Mac descends from Heaven (sorry, from the top of the stage’s machinery). Midway through the descent, the Mac boots and we hear the soon-to-be-famous startup bong. The crowd goes wild.

Steve walks on stage and delivers a fiery speech, repeating the “1984 isn’t going to be 1984,” anti-Big Brother, anti-IBM theme. Bill Gates, Mitch Kapoor (Lotus), and Fred Gibbons (Software Publishing) promise applications for the newborn. We leave Honolulu invigorated, ready to slay the giant.

Unfortunately, the IBM PC already had a three year headstart. A faithful knock-off of the Apple ][, down to the tape cassette and game paddle interfaces, the PC benefited from a 16-bit processor vs. Apple’s 8-bit 6502. More important, it had the IBM imprimatur…and it had a “killer app”: Lotus 1–2–3. Written in assembler, running on a PC AT with a hard disk, 1–2–3 was wicked fast. The PC and its clones quickly prospered in the Enterprise market.

The Mac didn’t get an external drive until 1986, and it was yet another year before it had a color monitor — a very nice color monitor, but a full six years after the PC. As for the Mac’s killer apps, they didn’t materialize as promised at the Sales Conference. The 1–2–3 Mac equivalent, Lotus Jazz, never quite worked. Software Publishing couldn’t adapt its best-selling pfs: suite to the Mac. Ironically, only Microsoft delivered. Its first Mac spreadsheet, Excel, shipped in 1985. Word came out about the same time.

Late 1984, at another Sales Conference, we’re treated to a ‘‘demo’’ of the Mac File Server and Mac Office. These, too, never materialized. I could go on, I was there: In 1985 I became head of Product Development.

So, in effect, the “Mac lost against an inferior product” mantra is upside down. In the all-important Enterprise market, the Mac never stood a chance, with or without clones. Fortunately, the Mac’s innate graphics capabilities and its great UI won over the more creative users, thanks to Adobe, Aldus, and a few others. The Mac got “niched.”

Skip ahead to 1995. Apple execs, desperate for market penetration, finally decide to license the Mac OS to Motorola and Power Computing. This was generally well-received but eventually hurt the bottom line as licensees took hardware sales from Apple. Two years later, Steve Jobs comes back for what I’ll call Apple 2.0. He immediately cancels the Mac OS licenses and renews Apple’s relationship with Microsoft. Neither move is popular, at least initially, but they save the company — the $150M MS cash infusion was particularly welcome. (The Microsoft pact included some kind of IP settlement and a promise to port apps to the Mac.)

And, as expected, the closed-system Cassandras begin to intone…but there’s an important difference between 1984 and Apple 2.0: The team of computer scientists Steve brings with him from NeXT are disciplined and methodical. The original Mac was an incredibly clever hack, everything in 64 kilobytes of ROM, including AppleTalk and LaserWriter connectivity! The Apple 2.0 team patiently builds a new foundation while keeping the older superstructure working (at least for a while; the final ‘‘Classic’’ release is Mac OS 9).

In 2002, Mac OS X comes out. The full Unix foundation gives the Mac a strong competitive edge against Windows.

2005, Apple moves the Mac to Intel processors.

2007, Microsoft provides further help to Apple…by releasing Vista (which compels me to finally throw away the Windows machines I thought I had to use at work).

For five years, 20 consecutive quarters, the Mac outgrows the PC industry. Apple is now the fourth or fifth largest PC manufacturer by revenue or units, depending on who’s counting. More important, the Mac is now the most profitable PC line.

Smaller market share, biggest profits.

Let’s return to the notion that the iOS will suffer the Mac’s fate.

We just reviewed the first error. The Mac had great promise, but it hit two obstacles: An entrenched and superiorly equipped PC, and a Product Reality that never lived up to the PR. Jobs and his team took a good five years to rebuild the Mac’s foundation and finally make it superior to Windows. Growth and profits — and the iOS — followed.

Then we have the ‘‘history repeats itself’’ misconception. While the Mac was born naked — where are the apps? — the JesusPhone came into the world (nearly) fully formed. It had, or quickly built, a full support system: apps in the App Store (no waiting for a modern day Lotus Jazz to emerge); the iPod; the Mac; the Apple Stores; and, last but not least, the iPad. (I’ll leave the newer Apple TV running iOS under the hood aside — for the moment.)

The notion that the iOS platform will lose to Android “the way Mac OS lost to Windows” ignores history and disregards facts such as the growth of the iPhone and iPad. (Apple’s mobile share grew 115%, Q1/2010 to Q1/2011). It ignores the fact that Apple has the biggest market cap of the entire high-tech industry. In market cap terms: 1 Microsoft + 6 Adobes ≈ 1 Apple.

Still on Microsoft, Apple now has more revenue and, this last quarter, more profit than its old frenemy. And more cash, about $65B and counting.

In a NY Times piece on a somewhat related subject, Professor David P. Redlawsk writes about “Motivated Reasoning”:

People often ignore new contradictory information, argue against it or discount its source to maintain existing beliefs.

[…]

We are all somewhat impervious to new information, preferring the beliefs in which we are already invested. We often ignore new contradictory information, actively argue against it or discount its source, all in an effort to maintain existing evaluations. Reasoning away contradictions this way is psychologically easier than revising our feelings. In this sense, our emotions color how we perceive “facts.”

Does this explain the persistent “Apple will fail again” meme? Possibly. I recall thinking that the iPod couldn’t succeed, and that Apple had no business competing with its retailers by opening Apple Stores.

As for our trio of doomsayers, perhaps they’re just having fun. These are exceedingly smart and well-informed people who are at the tops of their respective professions; they understand what I just discussed and much more. So why do they insist that “Apple will fail again”?

For Henry Blodget, it must be an exercise in cryptic humor. He enjoys tweaking his audience and — this is business, after all — beaucoup pageviews in the process. I’m sure he’s having a grand time.

I doubt Fred Wilson believes a word of his doomsday scenario. He’s a world-class business model expert and isn’t confused about the difference between (almost) free licensing to support advertising and a hardcore hardware business model such as Apple’s. He, too, is pulling our leg and advancing one theory as an IQ test, as a way to separate people who believe too easily from those who take the time to gather facts and think for themselves — a breed of people we VCs are always on the lookout for.

Of the three, Dan Lyons is the most gifted at humorous misdirection (look at the best of his Fake Steve Jobs posts). My guess is he’s beating the bushes, throwing ideas left and right, looking for reactions, hoping he’ll find another opportunity for the delicious combination of sneaking into another mind and satirizing it at the same time. He must be feeling Andy Rubin. Or Larry Page. I can’t wait.

— JLG@mondaynote.com