Inside Apple: How America's Most Admired--and Secretive--Company Really Works (20 page)

Over the next fifteen years or so, the business world will get to watch the drama of whether Apple truly has found a way to cheat the hangman’s noose or if the period between 1997 and 2012 or so was a golden aberration driven by one extraordinary individual the likes of which we’ll never see again. If the former is true, then Apple will defy almost all of business history.

Geoffrey West, the Santa Fe Institute physicist, studies the life span of organizations. His groundbreaking research showed that cities, with few exceptions, never die. More recently he, together with colleagues Luis Bettencourt and Marcus Hamilton, has turned his attention to companies, studying a [, sr die. data set of more than twenty thousand publicly listed outfits. West’s conclusion: The exact opposite is true for companies, which not only tend to die, but behave like living organisms.

“We studied scaling laws and asked: How do organisms change when you change the size of the organism?” said West, whose unruly white beard and devil-may-care
demeanor make him a cross between Old Saint Nick and the mad scientist from Central Casting. “People, which are organisms, are stable for a long time. They grow for fifteen or sixteen years, then live for another fifty stably.” His conclusion was that companies bear an uncanny resemblance to humans. “Companies generically all have a kind of sigmoidal growth curve of a living organism.” (A sigmoidal curve grows quickly, plateaus for a time, and then declines.) “Almost all of biology is like that. The same data led to our discovery that companies die.”

The similarities between Jobs’s fifteen-year-old musings and West’s scientific conclusions are striking. West continues:

A company begins as a start-up. It creates tremendous buzz and goes through a period where anything goes. There is no concern for paying bills as the company explores new rules. Below a level of fifty employees, there seems to be a lot of random behavior. Between fifty and one hundred employees, if the company has survived, this is when the sigmoidal behavior begins. At that stage the company needs bureaucracy, human resources, compliance, and so on. The company more and more becomes the bureaucracy. The innovative phase gets phased out, unlike a city. A city tolerates all sorts of crazy people walking around. No corporation will tolerate that. Companies become very intolerant to new ideas, rhetoric to the contrary. When a company starts cutting down the bloat, it no longer can be cool. The last time I was at Google I already could feel the tentacles of the bureaucracy
encroaching—and Google’s awareness of the problem. There are signs of mortality creeping in. It may well be that Apple recognizes this problem and is fighting it like crazy by being open to new ideas. The question is: Is that possible?

Apple already has survived several transformations. It endured the transition from tiny start-up to bloated multinational. Then it slimmed down to essentially a single-product company before beginning again to broaden its product line.

With all the attention focused on the death of Steve Jobs, it has been less noticed that an even more significant—and, internally anyway, unsettling—shift was under way. In 2001, shortly after Apple introduced the iPod and its retail stores, desktop and notebook computers made up the bulk of Apple’s business. In 2011, iPhones accounted for 44 percent of Apple’s revenues, iPads made up 19 percent, and iPods another 7 percent. All desktop and notebook computers amounted to 20 percent of the overall pie.

Culturally, this represents a massive change. “I was there when [the transition] was mid-swing,” reflected Frederick Van Johnson, product marketing manager from 2002 to 2005. “Initially, it was all about the Mac. iLife was created to sell Macs. That was the point. The whole building was about selling more Macs. It started swinging with iTunes. People said, ‘Oh crap, we’re making more money selling bits than we are atoms.’ ” Now a similar swing is in motion with the shift to non-PC devices and “cloud” services like iCloud, a radical shift for the industry and for Apple. and ۀpple. “It’s becoming a completely different company,” said Johnson. “It has left people in a kind of kerfuffle.
They’re afraid. You’ve been working on the cruise ship and your job has been selling drinks, and now the cruise ship is changing to something else. Now it’s a cargo liner: What’s your job? Are they going to find a place for you?”

Apple is a company of paradoxes. Its people and institutional bearing are off-the-charts arrogant, yet at the same time they are genuinely fearful of what would happen if their big bets go bad. The creative side of the business that was dominated by Steve Jobs is made up of lifers or near lifers who value only an Apple way of doing things—hardly the typical creative mind-set. The operations side of Apple runs like any company in America, but better, and is led by a cadre of ex-IBMers, the cultural antithesis of Apple. Apple has an entrepreneurial flair yet keeps its people in a tightly controlled box, fol
lowing time-tested procedures. Its public image, at least seen through its advertising, is whimsical and fun, yet its internal demeanor is cheerless and nose-to-the-grindstone.

Tim Cook undoubtedly is mindful of his own weaknesses and the hole that Steve Jobs left. There’s no way he’ll aim to remake Apple in his own image. The trick will be finding the right leaders who can guide Apple in a way that Steve Jobs would have appreciated, understanding that it’s impossible—and even foolhardy—to try to run the company the way Jobs would have. In this regard, Tim Cook may be a caretaker CEO of Apple, even if his regency lasts ten years.

A
n unexpected guest crashed Tony Fadell’s first date with the woman who would become his wife. Fadell joined Apple in 2001 as part of a special products group, ultimately becoming senior vice president of the iPod division. Danielle Lambert was a top recruiting executive who later became Apple’s VP of human resources. Fadell had been at the company for about a year when a co-worker set him up with Lambert. The two met for their blind date in the lobby of 1 Infinite Loop, where, rather than leaving for dinner or a drink, they sat for hours talking.

In the middle of their love-at-first-sight moment, Steve Jobs appeared. He walked up to the budding couple and started a conversation with Lambert, ignoring Fadell, who assumed it was the CEO’s way of showing his disapproval. After a twelve-week, highly hush-hush courtship, the two became engaged, but they immediately told Jobs. He called them into his office and said, “I have always
been advised: Never allow anyone at the company to be married to anyone who is senior in HR.” Fadell said Jobs agreed to make an exception for them. But he had a warning. “I trust you will keep your professional life separate and never discuss anything about work,” Jobs said.

Fadell and Lambert married and continued working at Apple for most of the decade. Fadell became one of Apple’s most celebrated executives, called the “father of the iPod” in the press and whispered about as a future Apple CEO. He left Apple, however, in 2008, after clashing repeatedly with Jobs as well as with his software counterpart, Scott Forstall. Jobs valued Fadell so much that despite banishing him from Apple’s executive team, he kept Fadell on as an adviser to the CEO for a little over a year. (“Advisers” oft ^>

Since ending his relationship with Apple, Fadell began a high-stakes experiment: testing the hypothesis that Apple executives can translate their skills outside Infinite Loop. Top Apple people have left to join other companies, but most don’t. Fadell is the first member of the modern Apple executive team to start a consumer-electronics company from scratch. Given his triumphs at Apple, his success or failure will speak volumes to how well the Apple experience translates.

Fadell’s new company, Nest, doesn’t compete with Apple. Not yet anyway. It markets a “learning thermostat,” a $249 device that mildly competent do-it-yourselfers can install to replace the dumb thermostat in their homes. Nest’s device is intelligent. (Fadell calls it a “smartphone
with some temperature controls.”) It learns a user’s desired behavior and adjusts the environment according to whether someone is home or away, among other energy-saving tricks. The device wouldn’t look out of place at an Apple store, with its smooth chrome circular design housing an LED screen. Though he didn’t work in product marketing at Apple, Fadell has mastered the keep-it-simple technique for describing a new product. The three key facets of the Nest thermostat verily trip off his tongue: “It saves energy, it programs itself, and it’s beautiful.”

Fadell worked at other companies before Apple, including Philips Electronics and the now defunct General Magic, itself a popular repository of Apple alumni from an earlier generation. This gives him perspective on what he’ll take from his Apple experience and what he won’t—or, in some cases, can’t. “Even if you have constrained resources, do not cut corners,” said Fadell, stating his number one rule from Apple. “People will feel it.” He noted that Nest spends far more than a typical start-up. For example, it includes a custom-designed screwdriver with each thermostat—a bit of customer hand-holding meant to ease the pain of installation. “Our ops guys are like, ‘Get rid of it,’ ” said Fadell, citing their argument that customers already have screwdrivers and the unnecessary expense will hurt margins. Fadell defends the screwdriver for its contribution to user experience. On the flip side, Nest by necessity is a humbler company than Apple. He likened it to the Apple of 2001 and 2002, “when we were trying to prove we had something of value” with the iPod. Nest must outsource customer service, unlike Apple. “We also don’t have Apple’s leverage with Best Buy,” said Fadell. “It’s more of a shared relationship.”

If Tony Fadell had risen up the ranks at General Electric rather than Apple, it’s likely he’d be running a major corporation today. There was a moment during the end of the Jack Welch era when GE was viewed as the incubator for CEOs. Boeing, Home Depot, Honeywell, Albertsons, and Nielsen were just some of the companies that plucked GE executives to run them. The company’s unique management mojo convinced many boards that if executives could thrive in the Land of Six Sigma, they could do anything. So pervasive was GE’s legendary stature that Tina Fey could wring multiple seasons of guffaws on the TV show
30 Rock
from the relentless ambition and management bromides of Jack Donaghy, GE’s fictional Vice President of East Coast Television and Microwave Oven Programming.

Judging whether the Apple way is a portable system is trickier for a couple of reasons. Apple’s senior ceheightexecutives tend to stick around a long time and often are exhausted—and very wealthy—when they’re done. Apple hasn’t until very recently begun to train managers in any formal way. Much of the learning has been by osmosis, and even so, huge swaths of relatively senior executives aren’t exposed to something as basic as a financial analysis. For many years, it was rare to see an ex–Apple executive reappearing in a leadership role at another tech company compared with the number of former Oracle executives, for example, who have gone on to run billion-dollar enterprises including
Salesforce.com
, PeopleSoft, Siebel Systems, Veritas, and Informatica.

The data set of Apple alumni leaving Cupertino and trying their hands elsewhere, in other words, is small. But a few have taken up significant roles, typically after a post-Apple grace period. Mitch Mandich, who ran sales
at Apple following the NeXT acquisition, later founded a high-profile ethanol company called Range Fuels that struggled to gain traction.

Jon Rubinstein ran hardware engineering at Apple, including the division that made the first iPod. After leaving Apple, he became CEO of Palm in a turnaround effort. Rubinstein completely revamped Palm’s smartphone lineup, to critical acclaim. But Palm failed to take hold in the market as an independent company—a victim of having too little money to go toe-to-toe with Apple and Google in the fast-growing smartphone market. (A secret of success for Apple’s new products and Google’s Android mobile operating system is that their efforts are funded lavishly by existing cash-cow products, the Mac in Apple’s case and search advertising for Google. Palm had no such advantages.)

Fred Anderson, Apple’s longtime chief financial officer, helped found the private-equity firm Elevation Partners, which blundered with ill-timed investments, including Palm. Elevation counted another friend of Apple, and Steve Jobs, among its partners: U2 front man Bono. Awkwardly for Elevation and Palm, and Apple for that matter, U2 became spokesmodels for Research in Motion’s BlackBerry smartphone.

Going forward, the business world will get to watch a top Apple executive try to apply his considerable success at Apple to another company. In late 2011, retail chief Ron Johnson became the CEO of JCPenney, vowing to turn around the retailer by reinventing the department store. Johnson’s reputation reached heroic proportions at Apple. A former VP of merchandising at Target who led the team responsible for launching Michael Graves’s exclusive line of products, Johnson was the founding
head of Apple’s retail stores. Having taken the Apple retail concept global—by the end of Apple’s fiscal year in 2011 the company had 357 stores in eleven countries—Johnson was ready for a change.

F
or years it was an article of faith in Silicon Valley that Apple should not be emulated. Its closed approach to business as well as to hardware and software development was widely deemed to have been a grievous strategic error, allowing a technologically inferior Microsoft to dominate the industry. Even after the success of the last ten-plus years, remarkably few big companies openly mimic Apple. HP, for example, is experimenting with retail stores in Latin America and Canada, but not in the United States. The Apple approach seems to hold more sway among the younger generation of entrepreneurs, especially in Silicon Valley. These Tech 2.0 titans admire Apple’s obsession with detail and the company’s ability to build a closed world that seduces and ensnares consumers.