How Steve Jobs rebuilt Apple by refusing to compete on price

The origin

Steve Jobs co-founded Apple Computer in a Cupertino garage in 1976 with Steve Wozniak and Ronald Wayne. The Apple I was a hobbyist machine. The Apple II, released in 1977, was the first mass-market personal computer, and for several years Apple was the fastest-growing company in American history.

Then came the 1980s. The IBM PC, launched in 1981, ran on an open architecture that any manufacturer could clone. Dozens of companies built compatible machines. Prices dropped. The computer market became a commodity business almost overnight, and Apple — which guarded its proprietary hardware and software — found itself squeezed.

The Macintosh, launched in 1984 with one of the most celebrated television commercials ever made, was a genuine breakthrough in personal computing. It was the first mass-market computer with a graphical interface. But its price — $2,495, nearly $8,000 in today's dollars — was too high for most consumers, and its hardware was too closed for the business market that IBM had captured.

Jobs was forced out of Apple in 1985 following a boardroom battle with CEO John Sculley. He spent twelve years building NeXT Computer and Pixar. When he returned to Apple in 1997, the company had 90 days of cash remaining.

The challenge

Apple in 1997 had forty different product lines. Printers, cameras, servers, PDAs, desktop computers, laptops — most of them losing money. The product lineup had been built by successive management teams trying to find something that would sell, and the result was an incoherent mess. Retailers did not know how to recommend Apple products. Engineers did not know what to build toward. Customers were confused about what Apple was for.

Jobs held a meeting with his senior team shortly after returning. He drew a 2x2 matrix on the whiteboard: consumer vs. professional on one axis, desktop vs. portable on the other. "These are the four products we need," he said. "Which ones are we building?"

That exercise — applied to an entire company — is the kind of strategic simplicity that is easy to describe and extraordinarily difficult to execute. It meant canceling products that people had worked on for years. It meant telling partners and distributors that the deals they had built their businesses around were ending. Jobs did it anyway.

The breakthrough

The iMac, introduced in August 1998, was the first product of the new Apple. Designed by Jony Ive, it came in translucent Bondi blue — a consumer computer that looked unlike anything on the market. It was not the fastest machine. It was not the cheapest. It was priced at $1,299 when comparable Windows PCs cost $800.

Apple sold 278,000 iMacs in the first six weeks. By the end of 1998, it had sold 800,000. The company was profitable again for the first time since 1995.

The iMac succeeded not because of its specs but because of what it signaled. Apple was not competing in the race to the bottom that defined the PC market. It was selling a different kind of computer to a different kind of customer — someone who bought the way they bought clothes or furniture, where design and feel were part of the purchase decision.

The iPod, launched in 2001, extended the logic. At $399 when MP3 players cost $50, the iPod was positioned as a premium product in a commodity category. "1,000 songs in your pocket" was a capability claim, but the aluminum chassis, the scroll wheel, and the seamless iTunes integration were the real product. Jobs had built the same purchase psychology into a device you carried.

The iPhone in 2007 made the economics explicit. AT&T initially subsidized the iPhone to $199 on contract, but the unsubsidized price was $499. Jobs told his engineers: we are going to charge more than anyone has ever charged for a phone, and we are going to sell more phones than anyone.

The impact

Apple's return from the edge of bankruptcy to the world's most valuable company is the most studied turnaround in corporate history. The numbers tell part of the story: Apple's market capitalization went from roughly $3 billion when Jobs returned to over $2 trillion at its peak.

But the more important story is what Apple proved about pricing. For twenty years after the IBM PC commoditized computing, the assumption in the technology industry was that hardware would eventually converge to cost. Apple disproved it. Premium hardware, with premium software and premium retail, could command premium prices indefinitely — if the experience justified them.

Every consumer hardware company since the iPhone has had to decide: are we competing on features and cost, or are we building something that customers want to buy even when it's more expensive?

The legacy

Jobs died in October 2011 at fifty-six. Apple under Tim Cook has continued the strategy he established, with iPhone margins that the PC industry of the 1990s would have considered impossible.

The transferable lesson is not about design, though design matters. It is about the courage to simplify and the discipline to price on value rather than cost. Every business, at every size, faces a version of Jobs's 2x2 whiteboard moment: which products are we actually building, and which ones are we tolerating because we haven't had the conversation about cutting them?

Jobs drew a 2x2 on the whiteboard. "These are the four products we need. Which ones are we building?" That question eliminated forty product lines.

The corner bakery that sells twelve types of bread and struggles to make any of them well is facing the same problem Apple faced in 1997. The answer is rarely to optimize all twelve. The answer is usually to find the two that people drive across town for, and make those so good that the price stops being the conversation.