Inside Apple’s Incredible Power Grab

But within five years, I think Apple will be in the most powerful position of any other company. No, this isn’t some fanboy fantasy (and I’m no fanboy). This is the inescapable conclusion I’ve come to by simply looking at the current trend lines.

Sure, Apple has been getting some bad press lately. High-visibility fanboys Jason Calacanis and Michael Arrington angrily defected from the cult. Critics are coming out of the woodwork to slam Apple’s app store policies.

But nearly all these woes are short-term PR headaches, not market trends. There is no iPhone or Apple defection trend. There is no broad-based dissatisfaction with the app store. Quite the opposite. The trends that matter point to Apple dominating consumer electronics and digital media in the next decade the way Microsoft dominated the PC industry in the 1990s.

All Roads Lead to Cupertino

Apple’s most interesting product, of course, is the iPhone. Gartner reported recently that Apple’s market share in the smartphone market skyrocketed from less than 3 percent share in Q2 2008 to more than 13 percent in Q2 2009.

RBC Capital Markets analyst Mike Abramsky predicted this week that Apple would sell 31.4 million iPhones in fiscal 2010 fiscal year (which begins in October), and some analysts believe Apple will sell upwards of 50 million in 2011.

But it’s not just about smart phone market share or user numbers. It’s about what users do with those phones. And what do they do? They install apps, surf the Web and “consume” media, especially music, like nobody else.

The iTunes store for iPhone apps is experiencing unprecedented attention and growth. People are downloading and installing apps like it’s a bodily function. Apple’s advertising phrase, “there’s an app for that,” has become part of everyday conversation. The app store and third party applications have transformed the iPhone from a lackluster phone into a monstrously compelling platform where all the action is.

And iPhone users are connecting like no other group. Research firm Net Applications says two-thirds of all mobile Web traffic now takes place via iPhones.

All this iPhone success has come (in the United States at least) despite availability on a single, undesirable carrier: AT&T. The CEO of AT&T has already flatly stated that iPhone will become available on competitive carriers. It’s only a matter of time. What happens when iPhone is on Verizon, too?

Apple customers as a group are more active than any other. Network equipment maker Meraki says the use of the company’s Wi-Fi networks by Apple products, including laptops, iPhones and iPod Touch devices, has increased by 221 percent in the past year, and now represents one-third of all devices logged. At this rate more than half of all devices on Meraki Wi-Fi systems should be Apple products within a few years. Most of this growth is driven by iPhones.

In less than a single decade, Apple has gone from not selling any music, to becoming the industry’s top seller. NPD MusicWatch says Apple sold on iTunes 14 percent of all music sold in the U.S. two years ago, 21 percent last year and now a whopping 25 percent this year. As the economy comes out of recession, and the iPhone juggernaut continues, I expect that Apple will control more than half the music industry within five years.

It’s also worth noting that Apple customers are happy. Apple recently received stellar ratings again for customer satisfaction in the PC market by the American Customer Satisfaction Index. Apple received an 84 percent satisfaction rate, compared with Dell, HP and Gateway at around 75 percent or 74 percent.

A computer repair company called Rescuecom claims that Apple is second only to Asus in PC reliability, based on the number of repair calls they get.

Why the iPhone is Apple’s DOS

In the 80s, Microsoft leveraged its MS-DOS product to position itself to dominate the industry in the 90s. I think Apple is doing something similar with the iPhone.

When Bill Gates convinced IBM to install his operating system on their PCs, nobody thought much of it. But because IBM targeted business, and “IBM clones” like Compaq also targeted business, all the business software was written for DOS. As the PC industry grew, and went graphical with Windows, the business software market went along with Microsoft’s successive operating systems because they were all backward compatible with DOS.

Microsoft got everyone in the industry dancing to its tune — the chip makers, OEMs, application developers and others. Follow the money: every dollar Microsoft earns can be traced in a causal chain back to DOS.

Next Page: “If you think the future will be like the past (which in technology, it never is)…

The iPhone is Apple’s DOS. And just like Microsoft in the 80s, nobody seems to see what’s coming. Here how I think it’s all going down.

Apple is using the iPhone and the iTunes store to engender the most important and compelling application platform in the industry. If developers want to succeed in the fast-growing, all-important smartphone market, they need to be on iPhone. Meanwhile, users are investing real money in Apple-only applications and media.

It’s nearly certain that Apple will unveil a family of tablet devices with user interfaces like the iPhone’s, and that support apps from the app store. The tablet thing is a long-term play, but Piper Jaffray’s Gene Munster thinks Apple could sell two million of them next year.

I’ve detailed in this space why the coming Apple tablet “changes everything,” but in summary, I believe the future of mainstream desktop and laptop computing is multi-touch systems like Microsoft Surface and the Apple iPhone.

I think Apple will create an industry “drug dependence” on iPhone apps like Microsoft did with DOS, then leverage that dependence to own the future of computing like Microsoft did with Windows.

There’s another parallel, too. IT professionals resisted DOS, Windows and PCs with all their might. They viewed (and many still view) the whole Wintel thing as an insecure, low-powered plaything. But they lost that battle, because workers brought their own through the back door in such vast numbers that resistance became futile. The same thing happened with the Internet, PDAs, IM, social networking and a raft of other technologies and product types.

Lack of utility for business is viewed as Apple’s Achilles heel. But does anyone really believe IT will be able to hold back the tidal wave of iPhones, iPhone apps and, later, tablet computing devices? The iPhone and Apple touch computers will become mainstream business devices in the same way that DOS, Windows and PCs did — by popular demand.

All this is unlikely if you think the future will be like the past (which in technology, it never is). If you think consumer electronics are insignificant compared with business technology; if you think today’s WIMP (windows, icons, menus and pointing-devices) user interfaces will exist forever; if you think desktop PCs are the future; and believe expensive desktop PC applications will continue to dominate, then my prediction about Apple’s ascendance seems unlikely.

But if you think consumer electronics will continue its spectacular rise, multi-touch and mobility are the future; and cheap-and-easy app store software will continue its insane growth, Apple’s coming dominance seems more likely.

Following all the projections I’ve alluded to above (and a few I haven’t alluded to), I think it’s very possible that within five years, Apple will rise to become the number one “PC” maker, dominate the mobile phone industry, utterly control the music industry, hold sway over the TV and movie industries, and be in a position to force Web standards and practices on everybody. They will rise to become the Microsoft of the coming decade.

Nobody will want this. The Faithful will grow sour as Apple starts pushing its weight around (as they have already started to do). Those people and companies heavily invested in Windows applications won’t enjoy watching the blood drained from their platform. And the government won’t like it, either. If you combine Apple bundling practices, lock-out, control and dominance of its ecosystem with majority market share, you get charges of anti-competitive, monopolistic behavior.

After all these years, Apple has finally found its DOS. The iPhone is the innocent little product that Apple will leverage into unprecedented, and ultimately unwelcome, industry power.