• Jeff Matthews

When Not to Listen to Consultants

Apple Should License the Mac to Dell

That’s the headline in an email which recently hit my inbox, and I am not making it up.

The email came from a consulting firm (Gartner Invest) that provides its insights, at a price, to the outside world.

The purported logic behind this notion—that the world’s foremost consumer-empowering computer maker on the planet (to whit, Apple) should let the world’s foremost shover-of-cheap-boxes-out-the-door (to whit, Dell) slap its now-sorry name on a box filled with the former’s crown jewels—is summarized in the email as follows:

We [Gartner Invest] do not think that AAPL can significantly increase market share with the current retail distribution and product pricing strategy. However, with the right partner, we think AAPL could grow Macintosh market share to 10%, 15% or even 20%. DELL makes sense as… a distributor of technology largely created by INTC. In many ways, DELL exists to sell INTC’s ideas, and today, INTC’s best idea is AAPL’s Macintosh.

For what it’s worth, I happen to think Gartner Invest’s basic idea does—in theory—make a modest theoretical amount of theoretical sense.

The basic idea being that if Apple really wants its slick, user-friendly, digitally-fluent operating system to take its rightful place alongside the non-slick, user-defying, digitally-deficient-but-monopoly-enjoying counterpart provided by Microsoft, Apple can jump-start the market-share gains by shucking the Apple-Only manufacturing model and licensing the operating system to a third-party—in this case Dell—that could churn out low-cost “Apple Inside” boxes to the masses who otherwise can’t afford the extra bucks Apple’s tightly integrated, lower-volume, higher-cost model now requires.

In theory, what Dell brings to the table is a low-cost manufacturing and distribution system that would vastly accelerate what appears to some observers—myself included—to be an unstoppable gain in market share Apple will enjoy at Microsoft’s expense as the iPod generation matures into Mac-buying college students, engineers, artists, businesspersons, entrepreneurs, housewives, househusbands, and just general digitally-oriented human beings.

Of course, this is a “theory,” and the chief problem with “theories” is they are frequently put forth by people whose well-being does not depend on the actual real-world success of those theories.

I’m sure there’s a Warren Buffett maxim covering this topic, but what instead comes to mind is a book title once proposed by Comedian Steven Wright:

“Freud: The story of insane old man with way too much influence.” Now, the theory in this case comes not from Sigmund Freud but from a special breed of theoreticians—technology consultants—whose specialty is something called “White Papers.”

For those not familiar with “White Papers,” they are grand, future-looking, acronym-crammed, flight-of-fancy strategy pieces that excite people whose job it is to read them but otherwise cause the casual reader’s eyes to roll up into the back of the head moments before he or she swallows his or her tongue and passes out on the floor.

In fact, I have argued before (see Bill’s Hideaway at http://jeffmatthewsisnotmakingthisup.blogspot.com/2005/03/bills-hideaway.html) that the main source of Microsoft’s current problems stem from the fact that Bill Gates spends two weeks each year reading White Papers alone in a cabin by a lake thinking great thoughts about technology instead of hanging around a Starbucks watching how people actually use technology.

Since it is entrepreneurs—Gates included, at least during the early days of the PC—who actually accomplish things such as, oh, say, Google or the iPod or YouTube, as opposed to theoreticians; and since entrepreneurs are therefore by definition always—without exception—too busy actually accomplishing things to be writing “White Papers” about what other people should be doing, the value of “White Papers” has never been entirely clear to me.

Microsoft has, in the course of the last decade, accomplished (in the realm of cool new technology) the following:

1. Acquired (for $400 million) Hotmail, the pioneering free email service now dying a slow death at the hands of competing free email services that actually work well, such as Google Mail, which cost—I’m guessing—maybe a couple million bucks worth of programmers’ time to create.

2. Acquired (for $425 million) Web TV Networks, which according to a press release at the time “delivers the Net to ordinary TVs.” Unfortunately, the world almost immediately went precisely 180 degrees the opposite way—seeking delivery of ordinary TV to the Net. Which is precisely why Google bought YouTube for $1.6 billion this month.

3. Lost the paid-search market to Google and Yahoo! by letting Yahoo! buy paid-search pioneer Overture out from under its nose. Overture’s largest customer at the time was none other than…Microsoft.

4. Missed out on downloadable music—this is not a flourish or exaggeration—almost entirely.

Whether or not each of these four major failures are due strictly to White Papers alone, I think it’s fair to conclude the following: White Papers = Bad Ideas. Case closed.

Now, consultants as a class are not entirely to blame here.

First of all, the “White Papers” Gates reads are actually prepared by Microsoft people, not outside consultants.

Second, there are cases in which consultants have in fact added tremendous value to a company—and no, I am not making that up.

The example that comes most readily to mind is when Best Buy turned from a typical commission-driven electronics retailer into a Wall Street Fave some years back after bringing in some smart-alecks from McKinsey & Company (or maybe it was Bain), whose first piece of advice was to stop using music compact disks as a loss-leader, which helped boost margins overnight, and otherwise re-engineered the company into the Best Buy that dominates electronics retailing today.

In fact, consultants exist for the good and for the bad, and in this case what we are considering is a recommendation that Apple start licensing Mac hardware to other computer companies—specifically Dell. So let’s consider it.

For starters, this is not a new idea. Wall Street’s Finest have been calling on Apple to “open” the Mac system for years, particularly throughout Microsoft’s ascent to the top of the computer software pyramid thanks to its own hardware-free model.

Furthermore, Apple tried it already, and Steve Jobs—like a nervous parent who instantly regrets dropping off an only child at a child care center run by ex-cons—quickly backed out of the program.

Also, and not for nothing, Apple is the leader in bringing digital computing tools to regular consumers—just in time for the digital revolution now upending analog business models from medical radiology to movie distribution. It doesn’t, in my view, need to do anything different to achieve a much bigger share of the PC market than it had during the era of self-contained, spreadsheet-laden desktops besides keep innovating.

Another thing the consultants may have forgotten: Apple doesn’t manufacture its own gear in the first place. Order an iPod from the Apple online store and it comes straight from the Chinese contract manufacturer via Federal Express, not from a distribution center in Cupertino.

Thus, the advantage of sticking another brand name on the theoretically cheaper box isn’t entirely clear: Dell’s operating margin would become Apple’s cost of goods sold.

Finally, even assuming Apple changed its mind about licensing software and decided to partner with a hardware maker like Dell who could, theoretically, get a lower-cost version of the Mac out into the world, why would Steve Jobs want to let Dell’s own deteriorating product quality and no-longer-award-winning customer service turn off as many potential Mac users as it might add? After all, even if Toyota could sell more cars by licensing the Lexus brand to Chevy, would it ever?

Jeff Matthews I Am Not Making This Up

P.S. For some laugh-out-loud commentary on the same topic, see Eric Savitz’s excellent “Tech Trader” blog in Barron’s Online:

http://blogs.barrons.com/techtraderdaily/2006/10/20/gartner-apple-should-license-hardware-to-dell-stick-to-software/

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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