Apple’s 50 Years of Integration
Listen to this post : There is a weird phenomenon as a sports fan where the athletes on the field or court are older than you…and then they’re your age…and then they’re all younger than you; for me the last athlete I could look up to, at least in terms of age, was Tom Brady. Tech companies are similar, in a way. I like to write about tech history, and the importance of origin stories for understanding company cultures, and I’m fortunate enough to have witnessed most of those origins. However, there are still some companies that pre-date me — the Tom Brady’s of the industry, if you will — and one of those is Apple, which turns 50 tomorrow. My first computer was a hand-me-down IBM-compatible 286 — I don’t even remember the brand — but I mostly cut my teeth building my own computers with overclocked Celeron chips in college, using parts procured by leveraging unsustainable dot-com era customer acquisition strategies (a unique email address meant a PayPal account with a free $25 and a single-use credit card with another free $25 used for a Value America account with a $50 off coupon). Needless to say I not only witnessed many of these companies’ births, but also their deaths! There were Apple II’s at my elementary school, where I would type out programs in BASIC, but my first serious interaction with the company’s products was at the college newspaper doing layout in QuarkXPress; after I graduated I was smitten by the iMac G4 and its adjustable arm, and the GarageBand addition to the iLife suite; I ended up buying an iBook, and here I am, a quarter of a century later, typing this Article on a MacBook Pro. In my history is much of Apple’s history. I missed the very early years, when the Apple I was a mere circuit board created by Steve Wozniak; Steve Jobs bought the parts for the initial batch on net-30 terms and paid them off by receiving cash-on-delivery from a computer shop in Mountain View; it was the Apple II, released in 1977, that made the company, and that was my first encounter with Apple. The Mac came out in 1984, and found its niche in desktop publishing; that’s how I came back to Apple in college. Apple, however, was struggling in the face of more capable modular Windows PCs, which I was happily building in the meantime. It was OS X that changed Apple’s fortunes with nerds , and Jony Ive’s stunning designs that changed the value proposition for everyone else; iLife, meanwhile, made the Mac useful from day one. It was the combination of all three that made me a customer, and as the Internet destroyed lock-in, it was the fit and finish of the operating system and Apple’s independent developer ecosystem that made my two years at Microsoft with Windows a drag; then, in 2020, Apple’s differentiation came full circle : Macs were the fastest personal computers — particularly laptops — in the world. There were, of course, other parts of the Apple story, including the iPod and, most importantly, the iPhone. Those were the products that made Apple the most valuable company in the world for years (today Apple is surpassed only by Nvidia). These products, however, might have been in a form that addressed a far larger market, but were still very much Apple, a company that, all these years later, faces no competition when it comes to integrating hardware and software. What do I mean by “no competition”? Well, consider Apple’s nominal competitors through the years: IBM: This is, perhaps, the most iconic photo from early Apple: The Apple I launched in a world where computing was primarily for the enterprise, and primarily happened on IBM’s mainframes. Increased accessibility of processors and memory, however, made hobbyist computers possible, which is exactly what the Apple I was. It was the Apple II, however, that made IBM pay attention; I explained in 2013’s The Truth About Windows Versus the Mac : In the late 1970s and very early 1980s, a new breed of personal computers were appearing on the scene, including the Commodore, MITS Altair, Apple II, and more. Some employees were bringing them into the workplace, which major corporations found unacceptable, so IT departments asked IBM for something similar. After all, “No one ever got fired…” IBM spun up a separate team in Florida to put together something they could sell IT departments. Pressed for time, the Florida team put together a minicomputer using mostly off-the-shelf components; IBM’s RISC processors and the OS they had under development were technically superior, but Intel had a CISC processor for sale immediately, and a new company called Microsoft said their OS — DOS — could be ready in six months. For the sake of expediency, IBM decided to go with Intel and Microsoft. IBM was, in the end, just a hardware maker; they couldn’t be bothered to make the software. Microsoft: Software fell to Microsoft. Continuing from that 2013 Article: The rest, as they say, is history. The demand from corporations for IBM PCs was overwhelming, and DOS — and applications written for it — became entrenched. By the time the Mac appeared in 1984, the die had long since been cast. Ultimately, it would take Microsoft a decade to approach the Mac’s ease-of-use, but Windows’ DOS underpinnings and associated application library meant the Microsoft position was secure regardless. For decades after the fact, conventional wisdom was that Microsoft’s modular approach — the one that let me build my own computers — was unquestionably superior to Apple’s integration of hardware and software. In fact, it was Apple’s integration that kept the company afloat: all of those Macs used for desktop publishing were expensive, and gave Apple enough revenue to (barely) stay in business; the company’s brief foray into licensing Macintosh OS was a major contributor to the company nearly going bankrupt. Or, to put it another way, Apple only briefly competed with Microsoft, and it nearly killed them. Consumer Electronics Companies: It’s difficult to choose a company to represent the iPod era, because Apple didn’t really face any meaningful competition. There was Sony and the Discman, and Diamond and Creative with some of the first MP3 players, but the reality is that no one had the combination of hardware and software that made the iPod special; in this case, the software was iTunes, and putting iTunes on Windows is what propelled Apple far beyond the Macintosh, and laid the groundwork for what came next. RIM, Palm, and Nokia: It was early smartphone makers who were, in the framing I am taking in this Article, the only true competition Apple has ever had. All three of these companies integrated hardware and software, which makes sense given that the smartphone category was so nascent — that’s when integration is particularly important. The iPhone, however, was different in one important regard: RIM, Palm (which also sold phones with Microsoft’s Windows Mobile), and Nokia first and foremost made phones ; the iPhone was a full-blown computer, built on a foundation of OS X. That, combined with the iPhone’s innovative multi-touch input method, resulted in a vastly more capable and compelling device that wiped out all three companies. Android: Android is, in many respects, the Windows to Apple’s iOS — which was why many commentators predicted that Apple was doomed . One critical difference, however, is in the Article I excerpted above: whereas DOS came before the Mac, the iPhone came before Android. That meant that Apple had a critical mass of users and developers first, in contrast to the 1980s. Another difference is that the iPhone sold to end users, not IT departments, who actually cared about the look and feel of the device they were spending their money on. A third difference is that Apple had (and continues to have) the performance advantage, thanks to their investment in their own silicon, a stark difference from the dead end the company found itself in with the Mac. Android is, of course, a big success, with more unit market share worldwide (although the iPhone has majority share in the U.S.). There is a place for modularity, and companies like Samsung have done well to build high-end Android-powered devices, with a host of Chinese companies in particular filling in the lower-end. And, it should be noted, that Google makes its own Pixel phones as well; that is true competition, albeit one that barely registers given Google’s commitment to the entire Android ecosystem (so few, if any Pixel-exclusive features, at least not for long), and Apple’s grip on the high-end of the market. Perhaps Apple’s most interesting new product is one that takes the company full circle. The MacBook Neo is the cheapest Mac laptop ever, and has the company poised for major gains in the low-end of the market. Notably, in defiance of the assumption that modular offerings take share by being cheaper and “good enough”, Apple, by making everything from operating system to device to chip, is selling a computer that is both higher quality and has higher performance with lower component costs than the alternatives in its class; and, now that there is no more software lock-in — the Neo runs a browser and an AI chat client just like Windows machines do — Apple is poised to make major gains in its oldest market. More generally, Apple’s market share in all of its markets, including the phone, continues to increase over time, not decrease. This is happening despite the fact that Apple is not investing at a meaningful level — at least compared to its Big Tech peers — in AI server capacity, and has yet to ship the new AI-empowered Siri it promised nearly two years ago . The reason it doesn’t matter is that no matter how powerful AI becomes, you still need to access it with a device, and Apple, thanks to its integration of hardware and software, makes the best devices. Now, according to Bloomberg , Apple is planning to leverage its position with end users to give access to multiple AI providers: Apple Inc. plans to open Siri to outside artificial intelligence assistants, a major move aimed at bolstering the iPhone as an AI platform. The company is preparing to make the change as part of a Siri overhaul in its upcoming iOS 27 operating system update, according to people with knowledge of the matter. The assistant can already tap into ChatGPT through a partnership with OpenAI, but Apple will now allow competing services to do the same… The company is developing new tools to allow AI chatbot apps installed via the App Store to integrate with the Siri assistant, said the people, who asked not to be identified because the plans haven’t been announced. The chatbots will also work with an upcoming Siri app and other features in the Apple Intelligence platform. That means, for instance, if users have Alphabet Inc.’s Google Gemini or Anthropic PBC’s Claude installed, they’d be able to send queries to those services from within the Siri voice assistant, just like they have been able to with ChatGPT since Apple Intelligence launched in 2024. The approach also should allow Apple to generate more money from third-party AI subscriptions through the App Store. This isn’t quite Safari search, wherein Apple earns a revenue share from Google for searches made through the iPhone’s built-in browser, but given that AI assistants are largely monetized through subscriptions, it’s not far off: Apple will happily sell subscriptions through the App Store and take 30% of the price for the first year, and 15% after that. Owning the device means Apple gets to aggregate AI (and the company is already making $1 billion a year from chatbot subscriptions ). This is exactly what I expected after Apple announced that initial partnership with OpenAI; from a 2024 Update Apple, probably more than any other company, deeply understands its position in the value chains in which it operates, and brings that position to bear to get other companies to serve its interests on its terms; we see it with developers, we see it with carriers, we see it with music labels, and now I think we see it with AI. Apple — assuming it delivers on what it showed with Apple Intelligence — is promising to deliver features only it can deliver, and in the process lock in its ability to compel partners to invest heavily in features it has no interest in developing but wants to make available to Apple’s users on Apple’s terms. The company that owns the point of integration in the value chain never wants to have an exclusive supplier; it wants to commoditize its complements, which means creating a modular interface for multiple companies to compete on the integrator’s terms, which is exactly what these AI extensions for App Store apps sound like. Of course there still is the matter of getting Apple Intelligence to work; this upcoming feature is separate from Apple’s deal with Gemini for foundation models for Siri. I explained the distinction in this Update , and concluded: The big problem with this vision is that it assumed that Apple Intelligence would be competent, and it simply wasn’t; just as the iPhone search deal wouldn’t be worth much if the iPhone sucked, Siri chatbot integration isn’t worth much if Siri sucks. Now, however, Google is selling the underlying model to make Siri good, and their biggest hope is that they can pay Apple all of their money back — and more! — to have a money-making Gemini sit on top. Apple will let the users decide who is on top; I’m sure the company would also be amenable to be paid to be the default! Many people are taking a victory lap about Apple’s decision to not compete in AI models, claiming that the company is winning by not trying; I previously linked to Horace Dediu’s The most brilliant move in corporate history? , but it’s a good articulation of the argument: The hyperscalers are now spending 94% of their operating cash flows on AI infrastructure. Amazon is projected to go negative free cash flow this year with as much as $28 billion in the red. Alphabet’s free cash flow is expected to collapse 90% from $73 billion to $8 billion. These companies used to be the greatest cash machines ever built. Now they’re borrowing money to keep the data center lights on… And what are they getting for that $650 billion? AI services generate roughly $35 billion in total revenue or 5% of what’s being spent on infrastructure. There are dreams of more of course, but the business models of AI have yet to resonate, especially for consumers… Apple didn’t miss the AI revolution. It just bet that the winners won’t be the ones who build the infrastructure. They’ll be the ones who own the customer and no one else on Earth owns the best customers. Apple owns the best customers because it makes the best devices, thanks to its integration of hardware and software. And, as I recounted above, it is somehow, fifty years on, the only company of its kind. There is, however, an emerging threat that Apple is seeking to head off. Again from Bloomberg : Apple Inc. awarded rare bonuses to iPhone hardware designers this week, aiming to stem a wave of departures to AI startups like OpenAI that are building their own devices. The company granted out-of-cycle bonuses worth several hundred thousand dollars to many members of its iPhone Product Design team, according to people with knowledge of the matter. Apple’s leadership has grown increasingly concerned about the number of engineers being poached by potential rivals. OpenAI, which has tapped former Apple design chief Jony Ive to help design a new generation of AI-centric products, has emerged as a particular threat…OpenAI’s hardware division is run in part by Apple veteran Tang Tan. He used to oversee the iPhone product design team that’s receiving the bonuses. Tan’s group at OpenAI has hired several dozen Apple engineers, and not just ones who worked on the iPhone. The startup has lured employees who helped develop the iPad, Apple Watch and Vision Pro. OpenAI isn’t just hiring designers; the company is also building out operations capabilities to be able to actually make the upcoming Ive-designed device at scale (presumably in China). Still, many are wondering about the status of OpenAI’s hardware device given the news about Sora; from the Wall Street Journal : OpenAI is planning to pull the plug on its Sora video platform, a product it released to great fanfare last year that has since fallen from public view. The move is one of a number of steps OpenAI is taking to refocus on business and coding functions ahead of a potential initial public offering as soon as the fourth quarter of this year. CEO Sam Altman announced the changes to staff on Tuesday, writing that the company would wind down products that use its video models. In addition to the consumer app, OpenAI is also discontinuing a version of Sora for developers and won’t support video functionality inside ChatGPT, either. OpenAI is in the middle of a strategy shift to redirect the company’s computing resources and top talent toward so-called productivity tools that can be used by both enterprises and individual users. Last week, OpenAI announced that it was combining its ChatGPT desktop app, coding tool Codex and browser into one “superapp.” The company expects the consolidated product to align its employees around a single vision. In fact, cutting Sora but keeping the hardware initiative fits this strategy shift: Sora, along with the also indefinitely delayed adult-mode , were products that drive more attention, which lends itself to the more traditional consumer business model of advertising. Productivity, on the other hand, is a much better fit for enterprise, where Anthropic is making major gains. The problem, however, is that most consumers aren’t willing to pay for software; what they are willing to pay for are devices . This was the secret of the iPhone; from 2016’s Everything as a Service : Apple has arguably perfected the manufacturing model: most of the company’s corporate employees are employed in California in the design and marketing of iconic devices that are created in Chinese factories built and run to Apple’s exacting standards (including a substantial number of employees on site), and then transported all over the world to consumers eager for best-in-class smartphones, tablets, computers, and smartwatches. What makes this model so effective — and so profitable — is that Apple has differentiated its otherwise commoditizable hardware with software. Software is a completely new type of good in that it is both infinitely differentiable yet infinitely copyable; this means that any piece of software is both completely unique yet has unlimited supply, leading to a theoretical price of $0. However, by combining the differentiable qualities of software with hardware that requires real assets and commodities to manufacture, Apple is able to charge an incredible premium for its products. OpenAI is approaching this space from the opposite direction: it has a massive consumer user base for ChatGPT, and an impressively large number of subscribers; it is also adding advertising. However, to truly monetize consumers the most attractive business model is the Apple model: integrated hardware and software. The truth is that Apple’s lack of investment in AI was always going to be a short to medium-term win: the company doesn’t have to spend on infrastructure, and everyone still needs a device. The real threat is in the long-term: what happens if AI becomes so good that it obviates traditional user interfaces? Or, to put it another way, what if the point of integration that is most compelling is not a traditional operating system and hardware device, but rather AI and a dedicated device? If this threat materializes, it won’t be with OpenAI’s initial offering; the smartphone is the ultimate form factor, and does so many jobs that depend on its flexibility and capability and 3rd-party ecosystem that no new entrant could hope to compete (indeed, Google and Android is arguably a bigger threat for this reason). However, just how capable might AI be not just next year, but in five years, or ten years? If ever a better interaction paradigm were to succeed the smartphone surely it will be rooted in AI — and Apple, by giving up now, won’t be in the game. This absolutely is not a prediction. Indeed, if I had to bet, I would bet on Apple keeping its place: It’s also worth noting that OpenAI has, in its relatively short life, managed to frame itself as a competitor to basically everyone in tech, from Google to Meta to Microsoft, only to find itself forced to pivot in the face of Anthropic and its focused approach on coding and productivity in the enterprise. The audacity of taking on everyone is impressive; the effectiveness of fighting everyone for everything may be less so. Still, there is an angle here for OpenAI, and a point of vulnerability for Apple. The company made it fifty years with no one truly competing with its integrated business model; the fate of its next fifty years may rest on the question of just how compelling AI ends up being — and if OpenAI can out-Apple the original. First, there is the likelihood that the smartphone, thanks to its screen, connectivity, and battery life, is in fact the best device for AI, and that furthermore, AI will be just one capability alongside everything a smartphone already does. Second, to the extent that AI inference moves to the edge, Apple has a big advantage thanks to its industry-leading chips. Third, Apple always has the option of opening up its devices to allow for much deeper integration with 3rd-party AI providers other than OpenAI, in order to effectively fight off a potential threat.
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