"I don't really think that Apple was ever a hardware company, even at the beginning of time." -Tim Cook, February 2015
Tim Cook presented at the Goldman Sachs Technology and Internet Conference earlier this week to a crowd of Wall Street investors that have historically had trouble appropriately valuing hardware companies. Cook's comments on hardware/software piqued my interest. Cook reiterated that Apple has never been a hardware company but is instead all about the software. There is much more to the story with many implications on how the world sees Apple and where Apple's future lies. By putting the focus on software, Apple is purposely downplaying hardware.
Software plays a vital role in Apple's business, and there is little evidence to suggest otherwise. However, some of Tim Cook's comments would lead people to scratch their heads. For example, on one hand, Cook reiterates that it's all about the software, citing examples such as iTunes, iOS, OS X, and now services like Apple Pay. On the other hand, Cook is quick to say it's all about the experience of integrating hardware, software, and services, such as the iPod + iTunes juggernaut, iPhone, iPad, and soon Apple Watch. The two arguments don't quite mesh seamlessly as the latter requires well-designed hardware to produce the critical experience that Apple is focused on selling.
Apple is purposely downplaying hardware, which by incident is validation that hardware is a crucial piece to Apple's success. I've long felt that Jony Ive's design acumen and his creations ranging from iMac to iPod, iPhone, iPad, and now Apple Watch are responsible for where Apple is today. Why downplay hardware? They want to direct attention elsewhere.
Apple excels at producing hardware, and one can argue we are getting to the stage where Apple's supply chain is reaching such a point that competitors are simply unable to compete as Apple secures all available components and resources. By stressing software, Apple would be shifting the focus away from its hardware strength.
Another issue that I'm sure Apple is well aware of is that Wall Street and Silicon Valley simply don't understand hardware. There is a widely held view that all hardware becomes commoditized and as a result, companies with above average hardware margins and focus will see pain. GoPro, a 13-year old company now with a $6 billion market cap flew under the radar for years because of its reliance on hardware. Meanwhile, software enterprise start-ups are the envy of all. This is not to suggest that software is overrated, but that not all hardware is created equally, and it's when a single company begins to control the entire experience around that hardware that magic happens.
This dilemma leads to discussion of Apple's foray into different parts of our life including our home, health, car, and wallet, with platforms built on iOS. The situation magnificently encapsulates Apple's trick of downplaying hardware. While the focus is on software taking over our world, in reality, what is happening is the iPhone's value proposition is increasing. Software is increasing hardware's value. Of course, few will notice this and as a result hardware will continue to be underestimated, but Apple won't mind. It's not easy to downplay one's strengths, but Apple has excelled at it for years.