Daniel Lyons: Apple Is What Microsoft Was—Bigfoot

A former lieutenant of Steve Jobs's once told me something surprising about his ex-boss. "Steve is a monopolist at heart," he said. "He's just like Bill Gates. He just hasn't been as successful." Well, Jobs is getting there. This summer, Apple's market capitalization surged past Google's, making it the financial king of Silicon Valley. True, Apple still holds only 11 percent of the U.S. consumer PC market, according to researcher NPD, but its influence is far greater than that market share suggests. The iconic iPod dominates its market, and the iTunes music store has sold more than 5 billion songs, making it the No. 1 music retailer in America, ahead of Wal-Mart, according to IDC. Apple's iPhone is the No. 3 smart phone in the United States, according to NPD.

Not long ago Apple was just a niche PC maker selling to diehard fans who were quick to forgive (or even celebrate) Apple's quirks and foibles. But Apple is no longer an underdog. In fact, Apple has started looking like what Microsoft was 10 years ago—a company that so controls certain market segments that smaller competitors can survive only by living on its scraps or staying out of its way. (Apple declined to comment for this story.)

A year ago a small company called Vudu was winning rave reviews for its dynamite little box that attaches to the TV and downloads movies from the Internet. Vudu had advantages over Apple TV: it had a larger catalog of movies, you could rent movies instead of buying them and you didn't need to download the films to a PC first before watching them.

In January Apple struck back, introducing a vastly expanded catalog of movie titles, which it started renting, as well as selling. And it came out with a new, cheaper version of the Apple TV box that matched most of Vudu's features. Now Apple is selling or renting more than 50,000 movies a day, and Vudu is laying off staff. A spokeswoman for Vudu says the company is doing fine. I will point out only that this is what Microsoft's victims used to say, too.

The really scary thing about Apple is that it doesn't just make hit products—it controls entire ecosystems. Just as Microsoft controls both the operating system and the applications that run on top of it, Apple owns popular hardware platforms (iPod, iPhone) and operates the only store that can sell music, movies and software programs for those platforms. Apple sets prices and takes 30 percent of the money.

With iPhone, Apple decides which independent applications will be allowed, and it can pull the plug on any application at any time, without explanation—as happened in July to several developers of iPhone apps. "I spent four weeks trying to get through to Apple via e-mail and phone calls, and they wouldn't return my messages," says Cyrus Najmabadi, developer of an iPhone application called Now Playing, an online movie-theater guide that Apple yanked in July after receiving a complaint about the program. (Najmabadi persisted and finally got Apple to put his application back online; Apple declined to comment on the matter.)

With its retail stores, Apple controls another ecosystem—the market for iPod and iPhone accessories, like speakers and cases. Apple determines when accessory makers can announce new products, and charges them a variety of fees, including one for putting a MADE FOR IPOD sticker on the items. One iPod accessory maker—who insists on anonymity, as he fears reprisal from Apple—gripes that Apple takes up to 75 percent of the sales price, leaving him with zero profit on some of his products when he sells them in Apple stores. This guy plays along because having his products on display in Apple stores builds awareness of his brand, and he can make a profit selling his speaker systems through Best Buy, Target and Circuit City.

Apple's tactics might seem like smart business: why not squeeze every penny out of every deal? The problem is that if Apple squeezes too hard, some partners may go out of business, harming the ecosystem. Bully behavior also invites backlash, as it did for Microsoft when that company rose to power in the 1990s. In the U.K., a regulatory board has banned an Apple advertisement that claimed its iPhone gives you "all the parts of the Internet," when the phone won't display information created using Flash or Java, two popular Web software programs. In Alabama, a woman has filed a class-action lawsuit because her new 3G iPhone won't always attach to a 3G network, which provides faster wireless Web downloads. In July customers howled when Apple rolled out MobileMe, a new online service for synchronizing personal data to the iPhone and iTouch that wound up having some pretty serious glitches. Apple offered three months of free service to subscribers as a form of appeasement.

In the old days, stuff like this didn't matter. Apple was such a fringe player that nobody really cared how the company behaved. I wonder sometimes if Apple misses those days.

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