Steve Jobs Doesn’t Get Network Effects

Judging by this interview in Business Week, Apple CEO/founder Steve Jobs still doesn’t understand network effects. The miscue is in his answer to a series of questions about Apple’s currently dominant position in online music retailing. Before I explain further, let’s go to the “tape”:

Q: Still, many companies are lining up in support of various standards. Aren’t you concerned that this could play out like the PC market, in which Apple had a superior product, according to many people, and a market share lead?

A: Whoever enters this market now, is going to enter a market that’s not in its infancy. And they’ll enter a market against a competitor that has a 70% market share — and surprisingly, that competitor’s name will not be Microsoft. It will be Apple. Now, I understand that there’s no guarantee we’ll stay on top, but that’s the situation.

Q: So you don’t believe the history of the Mac and PC is useful in looking at the music business?

A: It’s ancient history.

Q: But you must think about it. There must be lessons to be drawn.

A: [Pausing] Sorry, I don’t think of it that way. I just don’t. I got back to Apple six-and-a-half years ago. The hand was dealt [by then]. And we’ve done a really great job of building great products for the best 25 million customers any company ever had. Hopefully, more customers will decide they want the world’s best computers, too.

It is classic Jobs: combative, superior, and generally unconvincingly convinced that no-one else gets things the way he does. As usual, in other words, he is exuding that Jobs-ian reality distortion field. But while it’s as superficially appealing as ever — you feel obliged to buy it — it is an alchemical combination of delusion and chutzpah.

Here is the problem. By Jobs’ admission he has no more than 25 million customers, most of whom, almost certainly, are much less wedded to Apple’s iMusic than Jobs thinks they are. What is really holding them there, beyond the fact that Jobs was first to get online music reasonably right? Because if that’s all, the history of first-movers doesn’t exactly augur well for him.

On that point, the history of the Mac and PC is not only useful, it is crucially important for understanding network effects and lock-in. Jobs is, in effect, once again first to market with something that is better engineered than its predecessors, and that has been reasonably widely purchased by early adopters. It should sound familiar: it is not unlike what happened with Apple’s Mac — before Microsoft finally figured out how to slap a decent graphical interface on its Intel-based personal computers.

As was a puzzle to Steve Jobs then, however, and apparently remains one now, network effects do not spring solely from having the most customers, nor are they necessarily driven by having the best-engineered product. No, they come in equal (and arguably larger) part from having the most people reinforce your position by exploiting your sizable installed base for their own success.

All anti-Microsoft conspiracist cant aside, it was third-party software vendors writing to an open hardware/software architecture that locked Microsoft Windows in place. One assumes it will be something similar that locks an “iMusic” in place in the future, certainly not Steve Jobs’ revved-up reliance on discredited 1990s dogma like “eyeballs uber alles”.

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