Apple's Stake in Higher Education

This is part 3 of a series of posts documenting a vist to Apple headquarters in February, 2005. For the full series, see part 1, part 2, part 3, part 4, part 5. and part 6.

If you want to understand how a company is going to treat you as a customer, you have to understand what’s in it for them. In the case of Apple and higher education, the answer is simple but not obvious.

First and foremost, Apple is still a consumer-focused company. While they don’t mind selling to the higher education institutional market, they make their big money selling to individual teachers and students. (If I recall correctly, the total higher ed institutional market is around two billion dollars while the higher ed consumer market is closer to twenty-two billion dollars.)

How do they sell Macs to consumers? They focus on two big differentiators: content creation and content distribution. Apple is betting big on what they call the ‘democratization of digital expression.” They think that, increasingly, everyone is going to be a photographer, everyone is going to be a movie maker, everyone is going to be a webmaster or weblogger, everyone is going to be musician–and so on. To them, the digital revolution is about creation, not consumption. Sound familiar? Think e-Learning 2.0.

So the first product you need to study if you want to understand Apple’s strategy is iLife ’06. If you haven’t seen it yet, then get your Apple rep to demo it for you. Simply put, it is the most powerful and intuitive consumer-level toolset out there for creating all types of digital content. Nothing else comes close. And it’s free with new Macs. Note, too, that the content is created in open, standard formats-HTML, MPEG 4, MP3, AAC, JPEG, and so on.

So that’s creation. What about distribution? To begin with, there’s iTunes and the iTunes Music Store (iTMS). It’s easy to forget just how much the iTMS has changed (and continues to change) music distribution. First of all, prices have been commodified. $9.99 for an album, no matter whose album it is. There’s some question about whether that will hold completely, but there’s little question that it will never go back to what it used to be. Second, Apple succeeded in unbundling the songs from the album. You can now buy just three songs you like and not have to get the seven others that you’re not thrilled about. Third, Apple has broken the distribution stranglehold of the major record labels. Independents can now get onto the iTMS via CDBaby without having to sign with one of the majors. In the process, they managed to control the monster that is DRM. You may not like the restrictions placed on your ability to copy music by Apple, but it’s far less restrictive than the alternative DRM schemes that were floating around at the time. All in all, iTMS is an economic revolution. It really is “democratization of digital expression” via commoditization of distribution.

One reason they were able to pull it off is that record labels gained substantial benefits in return. To begin with, by utilizing Apple’s cheap, easy-to-search, easy-to-use, quality-controlled online store, they were able to recapture a significant (though still small) percentage of the revenue they were losing to illegal downloads. Second, because of much lower distribution costs and the ability to sell individual songs, record companies have gained substantial revenues from increased sales of back catalog items. Feeling nostalgic for the one-hit-wonder theme song from your junior prom? It’s only a short search and $.99 away from being yours.

And, of course, Apple gains from it too. But not from sales on iTMS. They break even on song sales, but they don’t make any real money from it. Most of the $.99 per song goes to record labels, artists, bandwidth, disk space, credit card transaction fees, and other related costs. No, Apple gains by selling more Macs. More on that a bit later.

The iPod was originally conceived as an extension of this ecosystem. Steve Jobs asked his design team to create “iTunes to go.” Obviously, nobody expected it to be the phenomenon it has become. But it’s important to understand that, as significant as iPod sales have become for Apple, they still see sales of PCs as where their long-term growth is at. Nobody knows how big the MP3 player market is going to be, but Apple already owns most of it at the moment. In contrast, we know that the PC market is massive, and Apple only has a tiny market share at the moment. They have huge amounts of headroom to grow. Now, I don’t want to understate the value of the iPod sales themselves. Given that they currently account for somewhere in the neighborhood of 40% Apple’s revenues, and one third of all iPods ever sold were sold in the last three months. So both the current revenues and the growth potential are quite important. Nevertheless, the long-term potential for Apple to grow revenues by taking market share in the huge, mature PC market still probably dwarfs the long-term potential for iPod sales. According to IDC, Apple’s sales in units shipped grew 32% from 2004 to 2005. Given that they only have 4% market share, they could have a lot more years of 32% growth ahead of them. (In contrast, Dell’s sales grew only 11.2% in the same period, and all others grew even less or shrank.) So Apple still sees the iPod very much as a tool for selling more Macs.

The key to it all is Apple’s market research, which shows that their biggest barrier to sale is consideration. A very high percentage of people who consider Macs in their computer purchasing evaluations end up buying Macs. The problem is that only a very small percentage of potential buyers think about Macs in the first place. The iPod changes that. Apple doesn’t release concrete numbers on the “halo effect” of iPod owners becoming first-time Mac owners, but it’s easy to guess from what we do know about their sales that iPods could easily be giving them a 10% or 20% boost in computer sales.

So that’s it. For Apple, it’s still all about selling Computers to the Rest of Us. The iPod, in addition to giving them a strong boost to their revenues, fuels market share growth in what they still consider to be their core business. iTunes, the iTMS, and iLife, all do the same thing, only without the strong boost to revenues. By extension, one can imagine that iTunes U is also ultimately about selling more Mac desktops and laptops. I’ll dig into the specifics of iTunes U in my next post.