- James Titcomb
Apple is unique among the big tech giants in that it’s not truly an “internet company” – its revenue primarily comes from selling computer hardware.
But CEO Tim Cook has signaled this is set to change this year as Apple puts more of an emphasis on its online services like iCloud, iMessage, and Apple Music.
There’s just one problem: Apple doesn’t seem to be very good at online services. At the very least, it does appear as if rivals like Google and Microsoft are better at executing.
Analyst Ben Thompson at Stratechery thinks a big reason why Apple can’t seem to get online services right is because the company isn’t organized in the right way.
He has some interesting advice for Apple – drawing on Dupont’s history, he proposes that Apple might add a secondary bottom line for its services, so that the managers in charge might have their own targets to hit.
The root problem in all these [services] cases is the lack of accountability: as long as the iPhone keeps the money flowing and the captive customers coming, it doesn’t really matter if Apple’s services are as good as they could be …
The solution to all these problems – and the key to Apple actually delivering on its services vision – is to start with the question of accountability and work backwards: Apple’s services need to be separated from the devices that are core to the company, and the managers of those services need to be held accountable via dollars and cents.
Apple’s organization issues were backed up earlier this week by a report from The Information that indicated that there are two separate teams working on Apple’s online services, and there’s some bad blood between them:
Two engineering teams working on new internal cloud-computing infrastructure to power Apple’s Web services are in open conflict, the people say. Already, the infighting has sparked at least one key employee departure, with more expected soon.
I believe that one of the best ways to solve this problem is for Apple to simply purchase Dropbox, a once superhot startup sporting massive growth that’s since cooled down a bit, but still one of the most consumer-friendly cloud-storage systems out there.
Dropbox famously turned down a “nine-digit” offer from Apple in 2009, but now may be an even more opportune time for Apple to make the plunge. Although Dropbox would most likely be Apple’s largest purchase ever, bigger even than the $3.1 billion Beats deal, it makes a lot of sense for both companies. Here’s why:
Right on cue
- Ramsey Cardy/SPORTSFILE via Getty Images
Currently, Apple doesn’t have a senior executive whose only responsibility is online services.
The two teams mentioned by The Information both report to Eddy Cue, whose title is senior vice president, internet software and services.
But Cue’s not a cloud guy – his focus has always been more media-oriented. He helped build the iTunes store, for example, which is an impressive online service, but on a different level from syncing massive amounts of data.
And recently, Apple took the App Store – one of its most profitable online services – away from Cue and gave it to Craig Federighi, who heads software engineering at Apple. It’s a logical move, considering Cue has his plate full trying to convince Hollywood types to join an Apple streaming service and produce exclusive TV shows.
But for Apple to really embrace online services, it needs someone who really gets how to engineer them, because as Thompson points out, developing something like iCloud requires a different engineering approach than building iPhones. For great online services, the development approach requires a “good enough” solution thrown online quickly, and continually improved on a daily or even hourly basis for years.
And for that to happen, it needs a clear leader. Someone whose only responsibility is services, and who is listed on Apple’s leadership page.
Drew Houston, CEO at Dropbox, could fill that role. Cue already knows the young executive – he spoke with him onstage at a Dropbox conference last fall. There’s even a family connection: Cue’s son works as an engineer at Dropbox, according to his LinkedIn profile.
Buying Dropbox would be a very easy way to add a second bottom line to the company. It’s believed to have booked $400 million in revenue in 2014. It has its own engineering schedule. It has customers who don’t use Apple products. If Apple were to buy Dropbox, it could slowly start to transition its services business into its own quasi-independent subsidiary.
It’s about the tech
- Wikipedia/James Fry
Apple doesn’t usually buy companies for their users or their revenues – although Dropbox has 500 million of the former, and had roughly $400 million of the latter in 2014, according to reports at the time.
Instead, Apple typically buys smaller companies “from time to time” mainly for two things: talent and interesting technology.
Dropbox now has over 1,200 employees, according to COO Dennis Woodside, and many of those employees are ex-Google who have successfully built massive online systems that get used thousands to millions of times a second.
And although Dropbox used to be based on Amazon Web Services, it recently announced that it had successfully converted its backend to a homegrown solution – exactly what Apple’s currently trying to do with a initiative called “Project McQueen.”
In fact, it turns out there is some interesting technology that Dropbox has developed that could help Apple build its cloud. As part of a system it calls “magic pocket,” it created has a machine called Diskotech that can store a petabyte of data in a tiny device the size of a breadbox.
As Dropbox’s head of infrastructure wrote earlier this year:
We knew we’d be building one of only a handful of exabyte-scale storage systems in the world … Few companies in the world have the same requirements for scale of storage as we do.
Well, Apple has the same requirements, and additional “hard problems” that ambitious and enthusiastic Dropbox engineers would love to tackle.
Apple might be able to swing a bargain on Dropbox, which last received a round of funding over two years ago in January 2014, at a valuation of $10 billion.
Since then, as Business Insider’s Eugene Kim has reported, Dropbox has struggled to find a business model to support that valuation. And as cloud storage becomes a “race to zero,” the company will face growing challenges to live up to expectations – in January, T. Rowe Price marked down its holding in Dropbox by half.
Apple has more than $200 billion in cash on its balance sheet, so it could pay list price, plus a premium, for Dropbox, and angle it as a strategic investment.
It would be Apple’s biggest purchase ever, and it would be a win for both companies – both for Dropbox, which is full of employees who might be getting nervous about their options amid a shifting tech-business environment, and Apple, which understands that becoming a top-tier internet-services provider is essential if it wants to remain the world’s most valuable company.