“Deciding what not to do is as important as deciding what to do,” intoned Steve Jobs to his executives at Apple. “That’s true for companies, and it’s true for products.” Jobs’s strategy to save Apple from bankruptcy in 1997 was to produce only four products: two desktops and two portable devices, one of each aimed at consumers and the other at professionals. Four great products for four target segments. All others were canceled.
It’s therefore interesting to see that, around its March 25 event this year, Apple is introducing a new iPad Air and iPad mini, as well as AirPods 2 and upgraded iMacs. And that’s just for the new hardware. Laptop users are still greeted with the choice of a MacBook that comes in three colors, two different models of MacBook Air, and three MacBook Pros to choose from, with additional options of different microprocessors and storage size. Jobs would have questioned his team of top managers, “Which ones do I tell my friends to buy?” No wonder Wired magazine pronounced, “It’s never been harder to buy the right Apple laptop.” How come even the best-run company in Cupertino is drifting towards this maddening complexity?
There are three types of innovation, and “not all innovations are created equal,” as Harvard Business School professor Clayton Christensen said. The most common kind of innovation is sustaining improvements to existing products, which target customers who demand better performance. In a patent granted by the US Patent and Trademark Office, it’s been shown that Apple is developing a “variable response key and keyboard” that will alter the weight of individual keys depending on finger strength and typing speed. That’s classic sustaining innovation. The same can be said for iPhone X. Most users are simply trading up from iPhone 7 to get access to facial recognition and an OLED screen. Sustaining innovation is important to keep existing market share, but it doesn’t generate market growth. That explains why Apple’s recent profits were flat and revenues were down.
In contrast, the original iPhone was a “market-creating innovation, catalyzing a new market for smartphones and corresponding apps.” It created a new group of consumers that didn’t exist before. My mother, before her first iPhone, loathed personal computers and rarely used any electronic gadgets at all. She had not been a customer of Sony, Nokia, or Blackberry. Only Apple pulled her in.
The real challenge for Apple in 2019 is not the fight for market share but to unleash a new wave of growth. Thus, Apple’s video streaming and music services are all the rage. Yet Apple TV+ is late. Early players—which are software-based rather than device-driven—have already built up formidable distribution channels as well as highly sophisticated data analytics.
Users’ behavioral data have always been crucial for producing hits and curating titles in games, TV shows, and music. With a market valuation of $150 billion, Netflix is the ultimate matchmaker between films and film watchers. And so it’s important to remember that, when Reed Hastings and Marc Randolph founded Netflix in 1997, it was a DVD-by-mail rental startup. During the intervening years, Netflix climbed a steep learning curve in DVD-specific tasks, including negotiating with the studios for access to movie DVDs and coordinating the logistics required to ship them to and from consumers. But Netflix also built a recommendation system to de-emphasize less-frequently-in-stock, high-demand new releases so that they were less visible on its webpage while recommending, for instance, a lower-profile independent film based on its refined understanding of customers’ preferences. Netflix was trying to get customers to rent not the most popular titles but titles that they would love and that were available in its inventory so that the DVDs could be shipped overnight. Building a recommendation system so fine in matchmaking also helped lower its overall film acquisition cost. Less chasing after a single blockbuster meant more money for multiple lesser-known titles. And over the years, Netflix acquired the largest movie library on Earth.
So the difference between Apple’s movie and Netflix goes deep. Netflix today tracks not only its streaming subscribers’ preferences and viewing habits but also how long they spend watching each episode and how many episodes they watch in one night. It organizes its library into thousands of categories, from Foreign Sci-Fi & Fantasy to Dark Thrillers Based on Books, to better predict what people want to watch next. The more a person uses Netflix, the better Netflix gets at providing exactly what that person wants. The legendary screenwriter William Goldman famously wrote of Hollywood, “Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess—and, if you’re lucky, an educated one.” To which Reed Hastings can confidently reply, “Not Netflix. Netflix knows.”
Hence, we see experimentations, such as releasing House of Cards in 2013 with 13 episodes all at once, which resulted in average viewers watching two-and-a-half episodes in one sitting. Or more recently, it premiered the interactive movie Bandersnatch as the latest installment of the anthology series Black Mirror. These bold experiments cannot be ascribed to the bravery of Netflix executives alone. Netflix has data to guide its efforts.
In a way, Netflix’s current innovation is also sustaining in nature. Netflix, Hulu, Disney+, HBO, and Apple’s new streaming video service are all fighting in the same pool for market share. But when a new entrant like Apple movie tries to fight against a market leader like Netflix in the game of sustaining innovation, 30 years of research in disruptive innovation has demonstrated that it’s usually the market leader who wins. One last data point: Netflix’s current price/earnings ratio (P/E) is trading at 130; Apple’s, at 15. In other words, for every dollar paid to Apple for its earnings, an investor is willing to pay 8 times more for Netflix’s. That’s collective wisdom from the stock market.
Howard Yu is the LEGO professor of management and innovation at Switzerland's IMD and is director of the advanced management program (AMP). His book Leap: How to Thrive in a World Where Everything Can Be Copied was published by PublicAffairs in 2018.
