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Innovation Strategy

Is Privacy the new iPhone?

Apple is playing big on privacy against the other GAFA and right now specially Facebook. This seems to be an obvious move easy to play. But is it really?

Apple is in a dangerous place this year. You might think that it’s because China doesn’t buy as much iPhones as in the previous years, or because their Mac Pro is still not updated, or whatever other reason… But no, the real reason as that Apple has been a success in the market for far too long.

Think culture

Apple is an incumbent, and no matter what efforts you make and how many bright people you hire to deal with your culture, a 132,000 people company doesn’t move fast and break things.

So that logic apply to the other GAFA? You bet! And probably even more if you consider how Amazon ended up rejected from New York because they acted as an arrogant quasi-monopolistic company. Or of course, how Facebook is being repeatedly hit for shamefully trading on our privacy. And Google? Amusingly enough, it seems that Facebook is acting as a lighting rod for them. This is for now, at some point 2019 will not be an easy ride for Google ever.

When I say these companies are incumbents, I’m being to vague. I mean literally that Facebook or Apple are to our ear, what IBM and GE were in the 80s. Abusive bullies exerting asymmetrical bargaining power on their customers, or an army of complacent twhite collars playing politics the money just drops in every month. (At this point re-read The Innovator’s Dilemma if need be.)

And Microsoft? They are the most interesting. In the sense that the ‘nowadays’ Microsoft is trying to move as fast as possible from being again the ‘1980s’ Microsoft. Under the leadership of Satya NADELLA their have been actively trying to reinvent, rebuild and rebrand themselves (that last part is still a long shot).

So to circle back to Apple, their long term and on-going problem is not so much China(¹) as reinventing themselves. When tech media ask « Where’s the next iPhone?! » they should ask « How are you sustaining a culture that will allow you to reinvent your value for the market over time?! ». But hey, that’s a longer question and doesn’t make for good headlines.

Customers over time

Those of you that know me, know that for years I tried to use the simplest definition of innovation available. For that Schumpeter’s distinction between innovation (see below) vs. invention (building new stuff, involving very often technology) is just perfect:

Innovation = Change the Market

Since last year, I have used my very own definition more often. It’s as short and even simpler to understand:

Innovation = Customer over time

And this is what Apple is in danger of: not leading anymore with new value for their customers on and on again. Because, despite all the efforts that Apple has made to rewrite history, let me tell you that neither the Apple II or the first Macintosh were revolutions. They were nice sure, but it’s the IBM and Intels, and Microsoft that transformed the world in the 80s.

As you know Apple became transformative with the iPod in 2001, and the iPhone in 2007. Not because of the mp3 or the touch screen, but because they created new values for the consumers. First, by destroying the music’s majors oligopoly and rewriting the rules (buy tunes for $0.99, not a full album for $12 or more) and then by destroying the mobile phone business (this is not an expensive phone, this is the portal where you will do everything from now on — which yes, requires that we remove the keyboard to make this slab of glass as flexible as possible).

Did they see the future and built it?

Oh come on! Maybe with the iPod (maybe), but certainly not to the extent of Apple believing they would become a music company for years. And as for the iPhone, I don’t believe for a second that anyone at Apple would believe this would push them to be a trillion dollar company in 10 years.

The new iPhone

If you look at where Apple’s consumer market is going right now, privacy seems to be big. Zuckerberg just announced 4 ans ago that now « he really gets it » and that Facebook is going to focus on privacy with messaging and social networking. He went as far as saying that « the new core targets will be private interactions, encryption, permanence, safety and interoperability. » To which I say: not a chance, you can’t just decide to be customer driven overnight. (Culture remember?)

But for Apple, privacy could just be their next « customers over time »… their next « iPhone ».

But will they get there?

On the plus side: they do have a strong hand in term of IT, biometrics, back to back encryption, etc. This is more than obvious. They have been the first to play that game before the market was even asking or starting to think that maybe (just maybe) facebook was not a benevolent company after all. They also have most of the products required to deliver and sustain privacy for consumers: from photos in the cloud to digital credit cards(³). But they also a very strong culture about it, to the extent of yes, fighting the FBI in 2015 and 2016 over not unlocking potential terrorist’s iPhones .

On the minus side: well I could say many things, but essentially it’s all about China.

For Q1, 2019 Apple’s sales in China were of $13.17b vs. $20.36 in EU and $36.94 in US. This is not pocket money and in any case China is still the largest reservoir of growth for Apple, with the potential of being 2 or 5 times a larger market than the US. But to say the least, China is not to privacy what Disneyland is to Mickey. And it’s plain obvious that if Apple starts to position itself as a privacy company, eventually they will have to get of China or just sell hardware without their ecosystem (which is plain impossible).

End game question

All that being said, how far is Apple ready to go on privacy?

Fighting Facebook (and Amazon, and Google) on their abuse of consumers data at this point is trivial for Apple. In the Eurozone they don’t have to convince us much (if only they’d agree to pay their taxes!) and their domestic market starts to see the light. Fine.

But if they push their advantage in the US and EU how will this impact China? Their position is already precarious because whatever you’re doing in China you’re doing oit through WeChat — not so much iOS or Android. And let’s say that Tencent (who owns WeChat) does play really nice with the government. If Apple pushes for more privacy there will be a conflict.

These kind of conflicts are usually resolved in the same way: the Chinese government explains that this Western company is anti-patriotic, Chinese consumers get in outcry mode, sales drop overnight and sometimes (not that often) formal bans end up happening. With all this Apple has been very careful up to now. Investing $1b in Didi Chuxing the company that ousted Uber from China, was a smart way to play nice with the government (and do R&D for project Titan). But would Apple oppose a China investigation as they did in the US with the FBI? I seriously doubt it.

Consider the current irony of Apple investing so much on Face ID while Chinese gouvernement is pushing for social scoring with facial recognitions cameras everywhere in the streets…

In the end, my prediction is simple: Apple is going to play its strong hand on privacy more and more in the West, while playing a different tune in China and try to value more the Apple luxury or premium experience against WeChat.

Which gives them two years max.

Meanwhile they have to decide where’s their core value for the next 10 years. And yes, on paper privacy seems to be a winner, if (and only if) they are ready to let go of China to a large extent.

 (¹) Well it is to some extent, but we could argue that they are doing better than the other GAFA by, you know, not have been cast out of this massive market. 

(²) I loved my Apple IIe as a teenager. And I could never afford a Macintosh at the time, and I’m actively trying not to buy one on eBay for my 12 years old self.  

(³) I’ve said that many times: watch at which speed Apple is going to develop their digital banking card solutions with Apple Wallet and you’ll know how serious and involved they are in term of privacy.

By Philippe Méda

Philippe has been training about 200 startups a year since 2007, consulted for dozens of multinationals on rupture innovation or corporate incubation. He also teaches innovation in key MBA programs in Paris and Shanghai.