I hate lock-in. Lock-in is when you wrap a product up with so much proprietary stuff that the customer can’t move to a competing offering. The advantage to the company is that they dramatically reduce customer churn—thus reducing the need for marketing—and can focus sales efforts more on acquiring new customers, rather than keeping existing customers happy.
That last part is also the problem, because once lock-in is achieved, companies tend to defund efforts to keep customers happy…and increasingly focus on raising prices as a way to raise revenues. Companies that embrace this strategy effectively morph from being customer-focused to being more like organized crime and a protection racket. You don’t buy because you want to, you buy because you don’t have a choice.
At the heart of my hate is that this was the practice common with IBM until the mid-‘90s. IBM had some of the most loyal customers on the planet—kind of like Apple does now—and then almost went under while I worked there. IBM got away with it for a long time because they were also incredibly customer-focused and had such legendary Steve Jobs-like executives as Thomas Watson Jr.
But over the course of decades, IBM gradually increased customer abuse and, eventually, in the 1990s, customers fled the company. The stock dropped like a rock, the then-CEO was fired, IBM hired a new CEO from the outside who subsequently executed some of the largest layoffs in the firm’s history.
Prior to this catastrophe, IBM was an employer-for-life firm, so that experience was fairly traumatic—both for both the employees who left and those, like me, who initially stayed. Microsoft—who also implemented (and was damaged) by this practice—and IBM have both abandoned this ill-conceived strategy with a vengeance and now seem to compete with each other on who can be the most open. [Disclosure: both IBM and Microsoft are clients of the author.]
Lock-in also focuses a company’s energies on covering up problems rather than fixing them. Apple’s recent decision to stop reporting unit volume (which wasn’t very well received) is a case in point.
Unit volume
When a company has achieved lock-in and begins to abuse customers, they will begin to revolt by not upgrading or replacing products long before they figure out how abandon the platform. In addition, rather than being strong advocates, they’ll increasingly complain about their treatment—or the product— effectively driving away new customers.
Because the company controls prices, and customers can’t easily move, the firm can defer the financial impact of this by raising prices on the products themselves. My old (fired) boss referred to this as “selling air” and argued that when you have lock-in strategy, the customer had to buy what you sold and pay what you charged because, like air, the alternative was far more painful. But tech products aren’t air, and while the migration to another offering could be painful, if you create enough customer pain (like over-charging) they will eventually bite the bullet and make a move.
One of the early indicators of the problem is unit growth (or decline, in this case) because, unlike pricing, management can’t change that number easily though management action. You can stuff the channel but, as Acer found out, that doesn’t work indefinitely.
Now there are firms like IDC and NPD that do report volume, but NPD gets their numbers by asking the retailers to report (and Apple stores likely won’t talk to them) and IDC largely gets their numbers from the vendor itself. Vendors can lie to IDC, where the SEC takes a far dimmer view of that practice on the financials. However, the SEC tends to get excited, and not in a good way, about any attempt to mislead. Recall Elon Musk’s unfortunate Tweet.
If you look at past unit volume—and given this was on the last page of Apple’s financials it’s apparent few read that far—the numbers have largely sucked with regard to market growth, as they were generally flat or declining. And they were doing this while revenues were increasing, dramatically showcasing that Apple is milking their customers. We also know they are really hard on their suppliers.
But neither of these things are sustainable indefinitely. Suppliers have to make a profit to stay in business and can only cut so much before they fail. And customers won’t pay prices they feel are exorbitant…and Apple pricing is already reaching scary levels.
The 5G trigger
But, like supercooled water, it often takes an event to drive people to realize they’ve been screwed and abandon the platform. For IBM it was Sun Microsystems coming in and aggressively pointing out that IBM was both charging too much and providing too little. While Apple is involved in litigation that might provide a trigger (depending on how pissed off the other guy gets), I think the more likely trigger is 5G.
You see, Intel isn’t ready…and Intel is Apple’s modem supplier. There are reports that Apple won’t have a 5G solution till 2020 and 5G rolls out next year. And when I say 2020, Apple typically launches late in the year—meaning not only will they be selling increasingly out-of-date hardware for all of 2019, but for most of 2020 as well.
Now I don’t expect a lot of people to abandon the platform, but I can certainly see how many will choose to forego a new non-5G phone in 2019 and 2020 because they won’t want their new expensive device to become prematurely obsolete.
5G is a big deal and promises a massive improvement in data performance. Particularly at the network edge were 4G performance sucks at the moment.
People expect their new smartphones to last for at least two years, but anyone buying an iPhone (or any 4G phone) up until the 5G products become available will probably be looking to replace their phone early.
I’d anticipate the adverse impact on Apple’s volumes will hit sometime in the second half of 2019 and make the iPhone launch then a loser. I think Apple is anticipating this, and that they think they can mitigate by financial impact by again raising prices and protect the firm’s valuation by concealing what will likely be a catastrophic decrease in unit volume.
Wrapping up
Lock-in is a detestable practice not just because it leads to customer abuse but because, as I found out in person, it can be a company killer. It very nearly killed IBM while I was there. It is increasingly leading Apple to execute badly with poorly named products like the Apple Watch, and Home Pod, which underperform expectations. They have already effectively stalled iPhone and iPad growth. Even their PCs are being treated like cash cows, rarely updated or upgraded, and they, too, have been in decline.
Most recently, the firm seems to be trying to hide the adverse impact by concealing volume sales. I expect it won’t be long before they start misrepresenting volume sales to firms like IDC, because I’ve seen that before, too.
Dan Lyons’ new book “Lab Rats: How Silicon Valley Made Work Miserable for the Rest of Us” even calls the company out for practices that decrease its effectiveness—pointing to incompetent management as a cause. (To be fair, he calls out a lot of companies for this and, after reading that book, you’d never want to work for a Silicon Valley startup). I think this book should be required reading for anyone who works at or plans to work at or invests in tech companies…or buys tech products.
I don’t think this will end well for Apple. My hope is that once again people will learn to avoid implementing a lock-in strategy and know better to avoid companies that practice it. We’ll see.