Apple’s Long Tail

17th Jun, 2012

This week Apple launched its next generation laptop, the MacBook Pro with Retina Display. A few days later, Kyle Wiens wrote a piece for Wired that examined the internals after a teardown. The article and its conclusion, widely circulated among the technocrats, has created a bit of a stir.

The Retina MacBook is the least repairable laptop we’ve ever taken apart.

Some potential customers are unhappy that these amazing new top of the line machines are virtually unserviceable and non-upgradable. Why not use standard components? Why not use commodity parts that can be upgraded and easily replaced?

Jony Ive, his team and all of Apple, are focused on building the best laptop conceivable. The questionable design choices have resulted in:

  • Long battery life (thanks to glued, bespoke cells)
  • Thin case (thanks to soldered RAM and customer flash storage)
  • Low reflective display (thanks to bonded LCD)
  • Light weight (thanks to no bulky standard slots)

In his opinion piece Wiens suggests Apple has crossed some line that was not meant to be crossed. Its a common refrain from the technocrats. In more than name Apple has transitioned from a computer company to a consumer electronics company, selling to many different types of customer. This has been a long running tension in Apple.

Steve Wozniak and Steve Jobs, co-founders of Apple, always had different views on opening a computer’s case. Wozniak, the engineer, wanted expandability and flexibility. Jobs believed expandability to be a bug, not a feature. I can’t imagine Wozniak is a fan of the new machine.

The new MacBook Pro is a clear signal that Job’s vision for Apple is doing just fine under Tim Cook. Why does Apple make these tradeoffs? Here are a couple of explanations.

A Different Target Customer

Apple’s increasing mass appeal over the last 5-10 years has changed their customer mix, even for its top-shelf products. Today, Apple’s pro-customers are people with large movie libraries, small movie studios, professional photographers, game artists. Developers and others who understand the difference between a memory bus and a universal serial bus are a much smaller percentage of sales than they used to be.

The reality is the new “prosumer” are a much larger segment than the traditional Mac developer and Apple knows this. Sometimes they misstep, like the Final Cut pro kerfuffle last year. But in general Apple will be happy to lose a few sales if it means a better long term position. The new MacBook Pro is the first step in a new long term game.

The bargain hunters who can find various computer components online, crack open a laptop and install upgrades are less important compared to other advantages Apple get from soldered RAM and bespoke flash storage.

In the short term, Apple’s target customer for the new MacBook Pro with Retina Display are the prosumer who want the fastest, best built laptop. Its a small group compared to their entire customer base. They are the “early adopters” willing to pay a premium for the latest and greatest. The bargain hunters looking to buy a shell and fill it with cheap RAM need not apply.

What about the bargain hunters? Just wait.

The Early Pay for those with Patience

When the first MacBook Air came out in 2008, I was an early adopter. For a long time, I had used a 12 inch PowerBook G4 and I loved it. But the G4 processor was struggling and when it came time to switch, I replaced it with a 15 inch Intel MacBook Pro. When the Air was announced, I’d been lugging this 15 inches around for a few years and was over it! The screen was good, but not that much bigger that it made up for the bulk and the weight.

So I pre-ordered one of the new Air’s, paid a premium, loved its small size and lived with its many faults. The current generation Air fixes virtually everything that was wrong with my machine. The 11 inch is even more portable and they’re about half the price I paid!

This style of product innovation, quantum shift, follow by incremental refinements and price reductions, is not unique to the MacBook Air, or even Apple. For another example, consider the product/price evolution of the first Sony PlayStation.

The main board of all these devices are essentially them same. As the PlayStation evolved, more of the components are merged into more complex chips. Once designed, high yield wafers with multiple chips are exceptionally cheap! The more functionality put into one chip, the cheaper the overall cost of manufacture. Ditch the CDROM and add an LCD, and a new line of portable devices defines itself with very little development cost.

This price/product evolution is repeated often, especially in the game console industry. But its not limited to electronics. Henry Ford launched the Model-T with a massive price advantage over the competition. Not content, cost savings thorough production improvements were passed on to customers.

Fifteen million Model-T’s were produced spanning almost two decades.

There are two key elements a company needs to following this product trajectory. One is sufficient control over manufacturing to allow every efficiency possible. The second is long product cycles. Apple has both.

Companies like Dell and HP, using industry standard components, are limiting the areas where they can make manufacturing improvements. RAM and SSD drives that come in standard electronic packaging must fit into industry standard slots. While these standards reduce the initial design effort, they also limit how far a production line can innovate. Innovation on a production line equates to lower costs. Standard components are a limit below which its hard to get cost savings due to production line improvements.

There is an additional benefit to soldering RAM directly. Certainly Jony Ive gets to wield his magic over the internal design, but Jeff Williams (SVP Operations) also gets a massive reward. By avoiding pre-packaged RAM modules, Apple are able to go direct to the RAM manufactures and get cheaper prices. They skip the middle man. They get larger margins. Instead of paying to have RAM chips packaged, and paying to have slots soldered onto the main board, Apple pays just for the RAM chips and solders them directly. Less space, but also less waste and more opportunity for streamlined production. The same for custom flash packaging.

A new production line that includes more component work like arranging RAM modules and SSD chips is going to be, naturally, more expensive to build. But this is an investment. With Apple’s, massive cash reserves, the new MacBook Pro is an inevitable design. Fully integrated custom build on a complicated production line that was expensive to set up, but easily justified if Apple plan to produce same device for years to come, with minor improvements.

Prices of the MacBook Pro this week reflect that setup cost. Early adopters pay a premium. But after few short years the plant has paid for itself, and been refined and optimized. Pricing can lowered to that of just component costs plus margin. With components cheaper than using industry standard parts, a long product life ends with low prices and maintains high margins.

Tick, Tock

The clock is already ticking for Apple’s competitors. Apple is paying off its expensive production line with every early adopter purchase. Soon, Apple will start passing on cost savings to customers. When this happens, the competitors scratch their head wondering how Apple can produce products of the quality they do at the price they do. Unable to move past this quarter’s earning call, unable to invest heavily in a future product line, they’ll inevitably decide to compete in a different space: cheaper, lower quality, more flexible options. All with less margin. Low margin and lower sales, hmmm.

If you need a new high-end laptop, and don’t care about price, grab the state of the art from Apple now. If you can wait 6-12 months, you can expect a modest price drop. Either way, forget about trying to fix the machine yourself. You going to have to add AppleCare to your budget. How long before this is included in the price, I wonder?