'Apple can't afford failures': Steve Milunovich on the future of Apple and the post-Jony Ive era

"We don’t know if Apple has figured out what the next 'jobs to be done' are."

Jim: Reading your note, you gave me the impression that you were worrying that Apple right now has not identified a new "job to be done".

Steve: Yes, my concern is with what Alex Danco talks about with alignment on the supply and demand side. So my concern is actually a little less on the "job to be done" side. We don’t know if Apple has figured out what the next jobs to be done are. But my sense in talking to them is they've at least identified the places they want to innovate — home automation; healthcare; and they don’t talk about it but I guess automotive; AR and VR which they do talk about, particularly augmented reality.

So I think they've identified the places they can make a difference and disrupt. It's also dependent on the technology. I don't think the technology today has evolved to fully satisfy these demands. So, for example, you and I would probably like to have a much more capable internet assistant, where we can just talk into the phone or Amazon and say "buy me two tickets to this play tonight." We’re getting closer to that and starting to see that show up in message services, but we're not there yet. So AI is certainly going to be a part of this and over the next few years we're going to see big improvements here. But I don’t think we’re there yet.

Same as virtual reality, people in the industry still think it's years away from being generally usable. There's a lot of similar thoughts about driverless driving. It's making headway but it will still be many years before it is implemented. I think Apple and others in the industry are in a bit of a period where the technologies are not yet mature enough to align with the jobs to be done. So I'm not sure whether Apple has identified the jobs to be done but the technology might not allow them. Another example is the Apple Watch.

Apple Watch: "Some of the applications turned out to be not early but just wrong in terms of expectations of use."

Jim: Now, when Apple introduced the watch, they strongly suggested that there was some problem that consumers had with carrying around a phone, taking it out of their pocket and unlocking it to use it, and to then have to get into an app to pull the information they want from it. That was identified as a cumbersome process with lots of steps, and somehow the watch would solve this. Talk about that.

Steve: Yeah sure, Apple Pay also has some similarities in terms of, I'm not sure the friction with it is sufficient, with Apple Pay in terms of "is it really that much easier to pull out the phone than pull out your credit card?" It’s certainly debatable. With the Apple Watch I think Horace Dediu [of Asymco] has pointed out that Apple Watch is unusual for Apple because they tend to wait for a market to be 10-15% penetrated before they enter. They didn't have the first MP3 player, they just had a much better solution to that. And yet they were the first-in with a product like the watch. So they must think of it as a really important platform.

And yet, when they introduce it, they introduced a number of jobs to be done, including some that you alluded to in terms of not needing to pull out the phone just to get notifications. They talked a lot about notifications, sending cards to friends and so forth. And it took a year or two to see there didn't seem to be a whole lot of demand for that job. Some of the applications turned out to be not early but just wrong in terms of expectations of use.

Now they're kind of focused on health and fitness, that seems to be the job they're most focused on. I still think the job is going to be a combination of health, as the technology advances and you're able to read more of your body signals — things like temperature and glucose level and so forth. But also I think, not just replicating what the phone does, the advantage of the watch is it is external at all times. So as we live in a world of an internet of things, it's just all around you, there may be an advantage to having something like a watch.

I don’t think we've settled on the jobs to be done for the watch, but for now Apple seems to have narrowed it, in terms of notifications with health and fitness they put on the Watch series 2.

On Jony Ive's industrial design group: "This homogeneous group has been together for a long time, you do risk simultaneous retirements."

Jim: OK, at the beginning of this conversation you mentioned something about the inside and outside view of a company. Starbucks internally is in the business of selling coffee, but externally may be in the business of providing meeting space. Do you think Apple has an inside/outside problem? Do they have a difficulty understanding what customers may want in the future? Especially considering this is a company that doesn't believe in things like focus groups and is famous for inventing solutions and products for problems we don't yet know we want?

Steve: There's some risk. Apple is also extremely secretive and you don't see them as part of a consortium sharing AI research. They're typically not as externally cooperative, and there's some in the industry who believe that could hold them back. Just in terms of technology development if nothing else.

Jim: Scientists who work for Apple aren't allowed to publish research, right? And there's a lot of scientists who want to do that.

Steve: Yeah, that's right. If that affects their ability to see jobs to be done, I don’t know myself whether they have the internal processes to give them the outside view. I know they do, perhaps not focus groups, but they do some survey work. They probably do other things. The fact is the kind of products they make are, you know, proudly used by consumers. So, to some extent their own employee force is — although very tech-savvy — is not a bad place to start.

And it all comes down to the industrial design group — Jony Ive's group. They apparently have the power within the company. Most people have worked together between 15 and 20 years, and over time they've proven to be pretty successful in identifying new jobs to be done and finding ways to satisfy them.

Jim: How many people are in Ive's group?

Steve: Um, again, it seems like there's 15-20, with very low turnover.

Jim: And they've been together 15-20 years, most of them?

Steve: That's what we understand. Of course, Apple doesn’t supply statistics and names.

Jim: Jony's title changed recently to give him some sort of step up, or step back, and he's also working on odd outside projects like designing the Christmas trees for Claridge's. My worry would be that this group has been together for a very long time. They're getting old and there's a generational change coming. Some of these guys are going to retire, and these retirements are going to all happen at once, and that kind of mass-exit is going to be very difficult to handle.

Steve: It could. Just as my kids are much more on top of apps and new technology than I am as a consumer. You could think they might become out of touch with the market. I don't think they have any plan to replenish people, to mix in younger folks. I'm sure they access different groups within Apple but I agree that this homogeneous group has been together for a long time, you do risk simultaneous retirements, etc. We just don't have enough insight into the group to know exactly how it's run.

And this is where Apple University may play a role. Because Apple University allows them to continue the culture and principles that he put in place. And I think Tim Cook is a fantastic culture bearer. Jony Ive is, and hopefully the Apple University formalises some of these things as well. And again it's OK from the outside but we don't know exactly what it is they're teaching there.

"We see the ambient paradigm as the next phase of Apple’s growth."

Jim: Talk a bit about the "ambient paradigm." My understanding of this is, in the future, each individual will need fewer devices because all devices in our surrounding environment will have intelligent software and do what we need to do, and all we need to do is engage with them and login to see our personalised accounts and what-have-you. And that is to the advantage of a software company, like Google or Facebook. But Apple is a device company. You can only really use Apple software on an Apple device.

Steve: We see the ambient paradigm as the next phase of Apple's growth. So instead of thinking in linear set of products over time, we think of step function changes as paradigm. You have the PC paradigm with the Mac, and the mobile paradigm, and we're thinking about what might come next. In doing that it appears that there are these transition products. It could be argued that the iPod was the transition from PC to the mobile paradigm, of course it's now been consumed in the iPhone.

Because we're in this flat period where there doesn't seem to be huge innovation around the corner, we suspect that we may be in one of those transition periods, and that products like the watch or iPod are, in a sense, transition products which will take us to the next paradigm. So, thinking of that is Tim Cook's "iOS everywhere." I think their view is that wherever you are, as a consumer you will be surrounded by technology that Apple allows you to use. So I'm sitting at my Mac, I get up with my iPad, go outside with my iPhone. I get in the car and, we might even have Apple cars by then. I go to the store and there's beacons around that recognise me as I come in. I pay with Apple Pay, and so forth. I go to the hotel and my watch opens up the door, maybe tells me how my health is progressing. Maybe the Airpods play a role in that. I don’t think you'll see fewer products. I don't think you're going to see a proliferation on the product line, but I do think wearables could proliferate a bit more. I think Airpods could be an important early aspect of that. And you're right that Apple wants us to be in an Apple world, signified by the unification of their technology and the integration of software services.

I don't think you’ll see fewer products. I don't think you're going to see a proliferation on the product line, but I do think wearables could proliferate a bit more. I think Airpods could be an important early aspect of that. And you're right that Apple wants us to be in an Apple world, signified by the unification of their technology and the integration of software services.

"Apple can't afford failures."

Jim: In the world that we describe there, it would seem to me that Apple is at a disadvantage. Their devices are more expensive than everyone else's, and Apple has a very small market share of the total. It's down globally now to just over 10% of smartphones. Everyone else is on Android. And Google software runs everywhere, including Apple devices. It seems to me that the ambient world is to Google's advantage and Apple's disadvantage.

Steve: It could be, there would certainly have to be certain standards that everyone supports, from a communications standpoint. But it continues to come down to Apple's ability to provide a superior customer experience, and in doing so be a luxury brand that people worldwide aspire to own. Even in China, where the company's been losing share recently, there's a continued concern about a rival phone at a cheaper price coming up. Despite this, the Chinese aspire to own Apple phones.

They're losing share but I'm not convinced the brand per se has been impaired. It's a luxury brand for the masses. You can't just service a niche in the ambient paradigm, you have to service en masse, but you have to do so in a superior way and still in a luxury brand way.

Apple can’t afford failures. Unlike Google and Android that have a "fail-fast" approach and just throw things against the wall, Apple is a luxury brand, and they have to come out with a top-notch product every time because that's what you expect from them. And basically, if they're able to do that, they could have a sustainable franchise here. We talk about Apple as essentially a platform company where the software and services' primary role is to subsidise and differentiate the hardware in order to continue to enjoy a premium there.

Tim Cook has "had to deal with issues that Jobs did not. And arguably Cook has handled it a lot better than Jobs would have."

Jim: What do you think of Tim Cook's management so far? Apple's sales are in decline, the stock has been rocky for a period, it doesn't look like iPhone 7 has excited people. There's a question mark about whether iPhone 7 or the next iPhone is going to be the huge blockbuster that people want. And whenever Apple goes through one of these periods — and it went through it with iPhone 5S, if I remember — all the doubters and critics come out of the woodwork. And the one thing they say is "Tim Cook is not Steve Jobs. Apple is Jobs' company, and Cook is just an operations man who is basically not a product guy, and this is why Apple is in danger because Tim Cook is in charge of it." Does Tim deserve this criticism?

Steve: I think it's premature. I think it's too early to say now. I would say he's done a very good job up to this point. Particularly in the sense that he's had to deal with issues that Jobs did not. And arguably Cook has handled it a lot better than Jobs would have.

One is shareholders' demand seeing more of a capital return dividend. Jobs never really had to deal with that, he joked that he didn't like dealing with shareholders and analysts. Cook has handled that very well, and is giving a meaningful dividend to investors.

He's had to deal with China and issues there, like warranty and issues with Foxconn workers and so forth. There's been a lot of softer business issues that Cook has had to deal with due to Apple's success. Regulators as well — one could see Jobs having a prickly personality struggling to deal with [that].

In terms of innovation, it's too early to know. Again, my view is that the technology just may not be mature enough for Apple to do some of the things that they ultimately want to do. I think we need to give it more time, I mean obviously there has been up to six years between each announcement. The watch was kind of the last one and it would be considered minor by most investors. I think we have to see how things like augmented reality play out, and get a better sense of how they want to disrupt the transportation industry. I mean Jony Ive is certainly the one leading innovation.

There's a paper out that I think a professor wrote, wondering if Cook is the next Steve Ballmer, in terms of when an innovative founder hands over to an executor, a business person. Cook so far has proved himself to be very open-minded. If he's made any errors they've probably been ones of omission rather than commission, meaning Microsoft made acquisitions that were questionable and missed a lot of what happened with mobile. Investors are wondering why they aren't making more acquisitions, you know. They should have, but I don't think he's made any errors. And another issue is it's not like there's been a lot of companies doing things where people say "Apple should have done that." Now, you could argue maybe Netflix, maybe Apple should be a major content player by now.

Jim: Maybe Oculus?

Steve: Maybe Oculus, maybe Alexa, but you don't know what Apple's doing in the labs. Their approach, which I think is appropriate, is to not be the first on the market. You have to first make sure that that market is real and then come out with a full-bodied solution. You’re not going to typically see them be Oculus, nor should they be. Tim's talked a lot more about AR than VR, so I’m not sure if they'll ever want to be Oculus per se, but again, it's just too soon to know.

"You could argue that a larger company like Apple with more of a hardware presence is in a tougher position than Microsoft was."

Jim: On the question of the Ballmer thing: Is Apple going to turn into Microsoft? And I don’t mean literally turning into Microsoft. It's just that the company is so much bigger than when Jobs was alive. It has more products, it has a whole enterprise section that most people don't talk much about. It has a services division that is growing. It's just a bigger, more sprawling conglomerate with more and more products, and to make Apple grow and to make the company look alive and vigorous, it's not good enough just to add another £500 million in revenue. You have to earn several billion just to move the needle. They have, for instance, the watch. They have the No.1 smartwatch on the market. They've sold more smartwatches than any other company. They've probably sold more than all the other companies combined. But it's still regarded as a failure! And Microsoft had the same problem. The company became so massive with so many different products that it becomes very difficult to move the needle, and the company just moves more slowly, there are turf wars. Is Apple having those Microsoft-type problems? Do you see a similarity?

Steve: I think there's a similarity. The analogy perhaps holds in that Microsoft became a dominant force in enterprise computing. Apple's become the dominant player in consumer, so the market's already larger. Arguably the iPhone is unique even relative to Windows but I think the dominance of Windows and the iPhone are similar.

They're both platforms, technically innovation platforms not transaction platforms like Uber or Airbnb or eBay, but I would argue they're both platform companies and, just as Microsoft had a period of great growth, it was followed by 10 years of slower growth, and the stock didn't perform particularly well over those 10 years even though the revenue was still pretty great.

Apple had this huge period of growth from 2007; the iPhone growth. Now it's such a large company with very high margins and a disadvantage Apple has, arguably, is that they are still at core a hardware company. I know services are becoming a more material financial contributor but I would argue that it's not becoming a services company. Services, in our view, subsidise the hardware in a sense. I think Apple still thinks very much like a product company, and the margins in hardware just aren't what they are in software. You could argue that a larger company like Apple with more of a hardware presence is in a tougher position than Microsoft was. So Microsoft has obviously been able to recreate themselves as a cloud company in investors’ minds and the question is "is Apple going to be able to find that next leg?" Whether it's ambient computing, and whatever products might represent that to reignite their growth and investor interest.

Jim: You're currently, I presume, bullish on Apple?

Steve: Yes, we have a BUY and a $127 dollar target. So you know, bullish but pragmatic. We are looking for a better iPhone cycle.

Jim: Do you think that they did this iPhone 7 cycle deliberately? It's not a very dramatic iPhone 7. Is that deliberate, are they saving some good stuff for iPhone 8? Or is it underplaying expectations?

Steve: I think they leave it all on the floor every time, to use the basketball analogy. There's this whole, "do they hold back something for the 10th anniversary for the next iPhone?" I don’t believe that. I think they did make a decision that OLED wasn't ready, so Samsung led with OLED a generation before Apple, and that was a conscious Apple decision. So no, I think they make the phone the best they can every year, and I just think that these technologies are limiting what they can do. That's going to be an important feature that's coming. I’m sure there were others that they would've loved to put into the 7 that just weren't ready.

Jim: They could do cosmetic changes. I was disappointed because the new phone kind of looked like the 6s, and the 6. They could've just changed the body. In the way that Samsung does, just make it look cool and different.

Steve: I don't think they're into doing things for the sake of doing them. And you could argue whether they shouldn't or should, but they are to the point where, sort of like a Gucci bag. If you change it too much, it's not a Gucci bag anymore. There's so many iPhones out there that I don't think it's a good idea to change the format for the sake of changing the format, it could hideously backfire. And again, it's Apple’s judgment on what provides a better customer experience and so forth. People are going to disagree, but I think Apple's approach is probably quite different to Samsung. Samsung is more likely to put out gee-whizz features.