Is Apple Abandoning the Pro Video Market?

We've all wondered about it. Is Apple going to exit the pro video market? Has it already started to? Should it? Just what is the pro market anyway?

Here is a look at where I think Apple's video strategy is going.

What the Heck Is the Pro Video Market?

To really talk about Apple exiting the pro-video market, we have to have some sort of definition of what a video pro is.

While I think that anyone who earns a living working with video is a pro, there is a huge range to this market. It runs the gamut from viral video creators like Freddy Wong and freelance video editors, to editors working for broadcasters and large post facilities.

The Pro market is far from homogeneous. As a result, different companies focus their products on different segments. Avid's stronghold is at the top-end of the market where the real pot of gold is in professional services and helping large clients with complex workflows. Apple was solidly entrenched in the middle of the market and was nipping at Avid's heels with Final Cut Pro 7 and Final Cut Server. Adobe was strongest at the lower-end of the market.

In the last year or so, we have seen both Apple and Adobe shift their target markets. Adobe has set its sights on the customers that were Apple's core user base. It's now setting its sights on Avid's stronghold with Adobe Anywhere. Apple by contrast tried to expand its market by dropping the price of Final Cut Pro X to $300 and shifting the editing paradigm to make it faster and easier than ever to make professional looking video. The bet is that by doing so, total revenue will be higher by expanding the market and selling at a lower price than selling fewer copies at a high price. All this to say, when I talk about Apple abandoning the pro-market, I really mean that it has shifted its target market towards a more mass-market offering. In doing so, Apple has disappointed many of its customers that valued the flexibility and adaptability of Final Cut 7.

While I don't think Apple is set to drop Final Cut Pro, I just think the product is increasingly going to be tailored to the prosumer type market, and that this will drive some of Apple's hardware decisions.

With that out of the way, lets move on to the fun stuff...

First Steps

None of this will surprise you, but here are the first signs that Apple has shifted its sights from the top-end of the market.

  • Apple discontinued Final Cut Server and rack mounted servers. Why is this important? I believe the future is along the lines of hybrid-cloud editing software like Adobe Anywhere, and this is going to need to run on powerful servers. While Final Cut Server may not have been the perfect solution, when properly configured it did provide a glimpse of the future.

  • The Mac Pro hasn't seen a real update in a long-time. It's plain wrong that the flagship computer doesn't come with Thunderbolt, when video professionals are the ones that have the most to gain from its speed. I think Apple demos that show people editing on an iMac connected the a Thunderbolt NAS device are exactly where Apple sees its target market going. Yes, Apple has promised something new in 2013, but it remains to be seen what that will be.

  • Rumors that it is killing off quartz composer. Whether Apple abandons the Pro Market or not, it looks like the ability for others to develop tools for Final Cut 7 may come to an end.

Why Pro Video Tools May Not be a Fit for Apple

Apple is a different company than it used to be and it's at the start of a new era under the helm of Tim Cook.

I know that it's stating the obvious, but Apple has shifted tremendously since the first iPhone was launched just over six years ago. In fact, much has changed since the 2011 Supermeet when Final Cut Pro X was introduced. iPhone / iPad sales have grown from 53% of revenue at the end of 2010 to a projected 74% in 2012. With numbers like these, it's no surprise that when iCloud was announced in mid 2011, Steve Jobs started talking about the post PC world and stated "we are going to demote the PC to just be a device" rather than the hub of people's digital life.

The Halo Has Shifted

Way back in the days before the iPhone and iPad, the professional video and design markets served as the halo in Apple's marketing strategy. People saw these beautiful products being used by pros, and aspired to have the same hardware at home.

The iPhone and iPad now serve as the halo products that are the gateway into Apple's Garden of Eden. People start using these lower priced products, have an exceptional user experience, and entrench themselves in the Apple world by purchasing additional hardware.

The Pro Market is Relatively Small

During the lean years, the professional (and education) markets kept Apple afloat.

As the company has launched one breakthrough product after another, these market segments have become relatively small parts of Apple's business.

At Supermeet in 2011, Apple announced cumulative Final Cut Pro Sales of 2 million. Even assuming a generous 500k more seats, sold since the launch of Final Cut Pro X, this is peanuts to Apple.

To put this in context, Apple's iPhone 5 sales topped 5 million on the first weekend of launch and in that same time frame 100 million iOS devices were updated with iOS 6.

It's not just the professional market that's eclipsed by mobile earnings. Sales of computers, peripherals, software, and other music products are projected to make up 27% of 2012 revenue, and 24% of gross profit.

The Pro Market is Very Demanding

The Professional market is a tough one to serve. It is probably more demanding than the consumer segment, and it has very different value drivers. These value drivers may be increasingly at odds with the direction Apple is going in.

It seems that the consumer market values simplicity above power and flexibility. Most Apple customers are content purchasing apps and media within the walled gardens that are the app store and iTunes. Yeah, it's not easy to play that collection of mkv files on your Apple TV, but it sure is easy to make a whole bunch of small impulse purchases. Apple doesn't tout the clock-speed of it's mobile processors, it talks about the end benefit that is the result of having fast processors. With software, there are fewer preferences to set because Apple has thought about how most people will use it.

With Pro-Video it's another story. Many users want a much higher degree of control and flexibility than Apple likes to grant its users. For example, professional video users want to use a vast array of plugins and third party peripherals. Companies like Avid, have learned the hard way that editors don't want to operate in a walled garden. In this market, Apple must reign-in its urge to control the entire experience.

Many of the complaints that have been leveled at Final Cut Pro X are around the new paradigm for editing and media management that Apple introduced. Apple has essentially dictated how media will be managed in the future. Some love it, while others hate it. I suspect that those who take the time to invest in learning the new system would come to appreciate it. This change may be easier for new users, but for people that have followed established conventions for media management, this is a disruptive change. I think the underlying issue for most, is that there is a huge cost in terms of both time and energy associated with learning new ways to do things in FCP X. Whether these new ways of editing are better or worse is open for debate, but for many, it seemed far less disruptive to switch to Premiere Pro CS6 than use Final Cut Pro X.

Finally, the Professional market values certainty in terms of hardware roadmaps. While many consumers are happy to play the rumor game and speculate on when the iPhone or iMac will be refreshed, people that are running a business would much rather know when the Mac Pro is going to be updated and that Apple is fully committed to it. It's hard to plan your capital investment around a secretive and irregular roadmap.

For some FCPX works, for others it doesn't. The question is, will it win enough converts to justify continued investment in the professional video market? Did it expand the market enough with the price drop to offset the loss of some vocal critics with established workflows? Will Apple continue to play the long-game and win over critics of its approach.

The Pro Market is Going in a Direction that Doesn't Play to Apple's Strengths

I believe that the video market will start shifting to cloud-enabled services like Adobe Anywhere. While I can't say whether Adobe Anywhere will meet expectations, Apple has demonstrated that its weak flank is developing cloud services.

Want some examples? It's pulling the plug on the Ping, MobileMe has been shuttered, iCloud has had some problems, and its much heralded maps application for iOS 6 has unleashed a storm of criticism.

Now I'm not saying that Apple won't get the cloud right with iCloud, I'm just saying that it's going to be hard to do this with the very discerning pro video market. Perhaps its starting point for this will be consumers.

Delivering High Margins in Pro Video is Hard

Apple delivers investors astoundingly high margins in very competitive markets by continually optimizing operations and aggressively managing its supply chain. This is challenging to do in a relatively low-volume professional market.

Since a disproportionate share of Apple's gross profit margin comes from the iPhone, let's look at what it does to keep margins high. A big factor here is that Apple only updates the iPhone once per year (at most), it ships incredible volumes, it enters into long-term purchasing agreements to lock out competitors, and it keeps the number of device variations to an absolute minimum. For example, with the iPhone 4S, there were only 2 models (CDMA + GSM), in two colours, and 3 memory sizes, for a total of 12 versions with only minute differences (the iPhone 5 has 18 due to the number of frequency bands it must support with LTE). Compare this with Samsung, who is the only one who keeps up in terms of global volumes. To do this, Samsung splits smartphone shipments across a large number of models that are tailored to the needs of different carriers. The variety of models and constant refresh cycle for Samsung means that it can't deliver the same margins as Apple, in spite of the huge efficiencies that come from its position as a vertically integrated manufacturer that makes many of the components constitute the majority of the bill of sales for the phones.

What's this mean to the MacPro? It's very hard to hit the same kinds of margins with this product. It ships in relatively small volumes, there are a wide variety of configurations, it needs to support a build to order program, and video pros demand a constant refresh cycle (but don't get it). In fact, one reason we see such infrequent refreshes of the flagship product is that refreshing the hardware design or updating the processor has an impact on supply chain efficiencies and product margins. The longer Apple stretches out the lifecycle of the design, the better the economies of scale, and the higher the margins.

To keep margins up in this relatively low volume market, Apple has to keep pricing hardware much higher than the competition. In an industry that faces, significant challenges, it's difficult to pay the significant design premium that Apple commands.

Bottom line here is that it's harder to deliver the margins that Apple wants in this relatively small and demanding market.

Tim Cook's Influence is Only Beginning to be Felt

The changing of the guard at Apple is only beginning to be felt. The iPhone 5 was supposedly the last product that received detailed input from Steve Jobs (other than maybe a much speculated on game changing TV product). We are moving into an era where Steve's touch is not as strongly felt.

Tim Cook is a different leader. Less a product visionary and domineering personality, and more of a pragmatist and operations expert. I don't want to call him just a numbers guy, because he's obviously so much more (Jobs wouldn't entrust the company to anyone that is less than brilliant), but it's clear that he is going to tackle different problems than Jobs did. Some examples of this:

  • Cook appears interested in settling some of its patent battles, while Steve Jobs said he'd 'go thermonuclear war' on Google over iPhone 'theft'.

  • Apple's new retail chief started to cut staffing levels in Apple and reducing hours in order to boost margins in a retail operation that already has the highest sales per square foot of any major retailer in America. Apple has since backtracked on this, calling it a mistake, but it does highlight that no stone is going to be left unturned in terms of keeping margins up.

  • Cook started to pay out a dividend to investors. This is something that Jobs steadfastly refused to do despite having over $100 billion in cash on its balance sheet. Some schools of though argue that when a company starts to offer dividends, it is signaling that there are fewer growth opportunities where it can invest that cash. While Apple's case is probably unique in that it has so much cash, it is clear that Apple putting on a more friendly face for investors.

  • Apple's operations capabilities keep getting stronger. While there will undoubtedly be some shortages, the scale of the iPhone 5 launch is unprecedented. Ten countries at launch, an additional 22 countries several weeks later, and plans for sales in approximately 100 countries by year-end.

In the new era, growth may come from expanding to new markets (Cook's visits to China are an important signal of this) and incremental improvements to many of its blockbuster products, rather than the launch of completely new categories.

The Bottom Line

In the hard decision about allocating resources, is there enough of a halo or enough profit for Apple to continue servicing the Pro market as I have defined it?

Perhaps the argument for continued investment in the professional market is like trickle down economics: investment in cutting edge technologies for professionals will help keep Apple ahead in the consumer markets.

Unfortunately, this seems to run counter to how things are working. Final Cut Pro X incorporated features that were pioneered in the consumer iMovie application. Mountain Lion borrowed heavily from iOS features. It's starting to look like a trickle up world where consumer tech leads the charge with innovative features and business follows.

As Cook looks to improve operating performance of the company, it will be interesting to see where Final Cut Pro X and the Mac Pro fit in.

What do you think? Let me know in the comments?