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Apple's on top, time to worry

Even innovative juggernauts like Apple can fall prey to the tendency of dominant companies to make mistakes at the height of their power. CNET looks at the threats and opportunities faced by Apple.

Apple CEO Steve Jobs, perhaps the iconic baby boomer executive, is often fond of quoting those other baby boom icons The Beatles. "You and I have memories longer than the road that stretches out ahead," Jobs told Microsoft CEO Bill Gates in a whimsical, shared moment onstage at the D5 conference three years ago.

It's with no shortage of irony that Jobs quoted a lyric from The Beatles, whose albums still can't be found in the voluminous iTunes library, thanks in part to a branding feud with another company called Apple, which owns the rights to much of The Beatles' music. Few other parts of the digital world remain unconquered by Jobs 14 years after he returned to the struggling company he founded.

Jobs Gates
Steve Jobs and Bill Gates at the D Conference in 2007. Ina Fried/CNET

Unlike that meandering, Sunday-driving couple described by Paul McCartney in "Two of Us," Jobs has single-mindedly defined the modern era of mobile computing and digital entertainment, from the original iPod and iTunes to the iPhone to Apple's latest hit, the iPad (2 million units sold in two months, and growing). Apple is now the world's most valuable technology company, recently passing Microsoft with a $233 billion market capitalization.

Apple's influence and the near-fetishistic attention paid to its products will be on display Monday at the company's Worldwide Developers Conference in San Francisco. Jobs, as anyone who's surfed the Web or picked up a newspaper in the last few months knows, is expected to announce the fourth version of the iPhone: Apple fans will go wild, the tech and business press will cover it with the kind of attention the mass media normally pays to presidential elections and celebrity breakups, and Jobs and his employees will yet again be at the center of the tech universe.

But how far can this joyride go? The seeds of sometimes-fatal mistakes are sown when a company is at its peak: Expectations become unrealistic. Management loses focus. A new competitor finds a cheaper way to do what you're doing. Regulators start asking if you've grown too powerful. And all the while, you're too busy enjoying your success to recognize the dangers.

Jobs, who in 1996 returned to an Apple that had nearly gone out of business because it was outmaneuvered, out-partnered, and out-marketed by Microsoft, clearly knows this. Last week at the annual D conference, he described Apple as the world's largest start-up.

Translation: We're not some slow-footed, bureaucratic beast that's going to get pushed aside by new competitors you've not yet heard of. Jobs, after all, isn't just a student of business history; he's part of it, and he likely knows what happens when you take success for granted.

The tech industry, of course, is famous for humbling its titans. Digital Equipment and Wang didn't pay attention when Sun Microsystems started selling cheaper workstations and servers. Later, Sun (now part of Oracle) ignored the rise of cheap servers based on Windows and Linux and Intel's x86 architecture because it was too busy selling pricey servers to dot-com and telecommunications customers.

Microsoft doubled down on its Windows development and aggressively (too aggressively, according to the U.S. Department of Justice) went after upstart Netscape, just as the rest of the tech industry was trying to figure out how to do computing over the Web. Even more relevant: Microsoft was an early challenger in the smartphone market but failed to keep pace. Now it ranks somewhere around fifth, depending on how you count.

So when Jobs takes the stage at the Moscone Center, a few Cassandras will surely be worried about whether Apple can yet again meet, and even exceed, the hype. History, even more than inflated expectations and longtime competitors, can be mighty hard to beat.

"Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another, until there is nothing left," Intel's legendary CEO, Andy Grove, once wrote.

The seeds
No doubt, the ability to wow customers with new products gets harder every time Jobs takes the stage. Apple depends on the ability to surprise and capture consumers' imaginations.

iPhone iPad

Did Jobs lose that ability with the recent missing-iPhone soap opera? Sure, we know there's going to be a new iPhone, because that's what Apple has done every June since 2007. But thanks to gadget blog Gizmodo, now we seem to already know what design changes are in store, including one of the major new features: a front-facing camera.

That's likely one reason that Jobs, who has never been shy about brutally quashing leaks, is angry. He considers secrecy one of Apple's most valuable assets--part of the mystique. Gizmodo, which paid $5,000 for an allegedly lost iPhone prototype, gave the world a peek behind the curtain. As any magician would tell you, you just can't let that happen.

"When this whole thing with Gizmodo happened, I got a lot of advice from people that said you've got to just let it slide; you shouldn't go after a journalist because they bought stolen property and they tried to extort you," Jobs said onstage at the D8 conference last week. "I thought deeply about this, and I ended up concluding that the worst thing that could possibly happen, as we get big, and as we get a little more influence in the world, is if we change our core values and start letting it slide. I can't do that. I'd rather quit."

Playing nice with others
If there has been one consistent knock on Jobs since his days as Silicon Valley's wunderkind, it's been that he can be arrogant, too convinced of his own vision.

The App Store, while being a monumental success and a model for the industry, is also creating enemies. Apple's insistence on having employees personally review every application submitted--in line with Apple's deep desire to control perfection--is drawing frustration among developers, accusations of bias, and worse: the attention of antitrust authorities.

The Justice Department has been asking about Apple's grip on digital music, and the company's influence on e-book pricing may have attracted the attention of the Texas Attorney General's Office. The Federal Trade Commission is also interested in why Apple is banning certain developer tools from its popular App Store platform.

The latter issue stems from Apple's very public dismissal of longtime partner Adobe Systems. Jobs insists that Adobe's Flash, widely used on Web sites, is too unstable on mobile devices and can't be allowed to run on the iPhone and iPad. Instead, Jobs has pushed HTML 5, an open Web standard that's relatively new but under development by browser makers such as Google, Mozilla, Opera Software, and Apple.

Jobs may be betting that the average consumer doesn't know or care about Flash vs. HTML 5, but software developers care a great deal. And while third-party apps have been a key to the iPhone's success, developers do have options now, thanks to Google's competing Android mobile operating system.

Does that mean developers are fleeing the iPhone? No way. But Google, just a tiny bit, has managed to weaken Apple's position. It's a seed of doubt--something Jobs is clearly trying to address.

"We know from painful experience that letting a third-party layer of software come between the platform and the developer ultimately results in substandard apps, and hinders the enhancement and progress of the platform," Jobs said in his open letter on Flash in April. "We cannot be at the mercy of a third party deciding if and when they will make our enhancements available to our developers."

Playing hardball with third parties isn't new to Apple, of course. When NBC wanted to raise the price of its shows sold through iTunes from $1.99 each to $4.99 each in 2007, Apple refused and stopped distributing NBC shows for close to a year. The two eventually made up, with both sides claiming victory, once Apple started selling TV episodes in high definition for $2.99. In the end, NBC was cowed by Apple's market heft.

Google Nexus One
Google's Android platform and phones like the Nexus One are proving to be a legitimate competitor to the iPhone and iPhone OS. Josh Lowensohn/CNET

Google has started wooing developers by pointing out Apple's reputation along these lines. During Google I/O last month, Google's Vic Gundotra, vice president of engineering, paraphrased something Android leader Andy Rubin once said to him in explaining the motivation behind Android: a hedge on Apple's ambitions.

"If Google did not act, we faced a draconian future, a future where one man, one company, one device, one carrier would be our only choice. That's a future we don't want," Gundotra said.

The Web looms
Apple's "own and control" philosophy espoused by COO Tim Cook on a conference call years ago reveals why Apple's biggest weakness is a technology that no one owns and few control: the Web.

The criticism is a little unfair: Apple developed the open-source WebKit Web-browsing technology that's emerging as an industry standard for mobile browsers, and desktop Safari usage exceeds that of Google's Chrome in North America, although Chrome is gaining in North America and has passed Safari worldwide. And itself regularly cracks the top 10 most visited sites on the Web.

But in terms of extending its technology advantage to the Web, Apple has a long way to go. MobileMe, Apple's mid-2008 revision to the aging technology, was supposed to fix the perception of Apple as an Internet laggard. MobileMe allows users to synchronize bookmarks, contacts, and calendar appointments between their Mac or PC desktop and their iPhone.

But MobileMe is pricey, at $99 for an annual subscription, and many consumers wonder why they should spend that when so many resources on the Web are free. Making MobileMe free would be a start toward getting the general public to accept the idea of Apple as a Web company.

What else could Apple do? Apple has spent hundreds of millions of dollars on data centers to power the Internet-connected, software-based iTunes Store and what many suspect are future Web ambitions. Its acquisition of Lala points strongly toward a future Web-based version of iTunes--kind of like what Google is trying to do.

Google is the obvious foil to a future Apple, and many would argue that it's the biggest competitor to the current Apple. Some believe Apple will entertain the idea of getting into search: not necessarily Internet search, but rather its own take on application discovery. But Facebook is also showing the world that mildly compelling applications can run atop very little infrastructure at all--and that no matter who's driving the train, software development will move more and more onto the Web every year.

The man behind the curtain
Jobs is worshipped by employees, fellow executives, customers, and media types. He's also battled life-threatening illness. He's beaten pancreatic cancer and survived a liver transplant over the last decade, and while he has appeared on the mend in recent public appearances, his health is in the back of everyone's mind.

Steve Jobs
Jobs may well be his company's most important asset. Apple has refused to discuss succession plans for the day he leaves Apple. James Martin/CNET

Jobs' influence at Apple is both overstated and understated, if that can be believed. More than 34,000 people work for Apple, and it's not like Jobs is down in the trenches, writing code or designing hardware. At the same time, however, he's the ultimate arbitrator at Apple, enforcing a demanding set of standards for quality, usability, and profitability with his willingness to put everything aside for the sake of the product.

The day Jobs leaves Apple, the company will likely lose its spot atop the technology world--at least as measured by market capitalization criteria subject to the whims of hedge funds and day traders. Apple has refused to discuss succession plans for Jobs, but it's impossible to believe that such a carefully managed company has not planned for that inevitability.

Executing that plan and convincing the world that Apple is more than Steve Jobs might do more to dictate its long-term health than any single factor.

Creating the future
Tech industry veterans who remember the first era of Steve Jobs have recently started to wonder if he himself remembers it, as they see Apple seemingly following the sort of go-it-alone strategy that cost it the "PC era."

Yet Apple in 2010 is a very different company from Apple in 1984. It has multiple lines of profitable businesses, and its most promising business line is one that will evolve differently from the PC: mobile computers are going to reach more people around the world than PCs ever could.

Sustaining an innovative business across multiple generations of technology--perhaps the fastest-moving industry yet created--has only really been done by a few companies: for every IBM and Intel, there's a Digital Equipment and Palm. It's hard to convince yourself that you need to change when most things you touch seemingly turn into gold.

People wondered if Apple had peaked with the iPod. Then the company introduced the iPhone. People wondered if Apple had peaked with the iPhone. Then it introduced the iPad.

When the "Stevenote" is finished on Monday, people will wonder again. Apple has drawn a road map to the next era of computing, but that doesn't guarantee it safe passage.

Clarification, 12:13 p.m. PDT: This story was updated to specify that Safari exceeds Chrome in North America only.