Is Apple Taking The Pepsi Challenge?

Years ago, in an effort to encroach on Coke’s seeming stranglehold of the soft-drink market, Pepsi began a marketing campaign called The Pepsi Challenge. The drill was as follows: A consumer would try a small sample of Coke and a small sample of Pepsi while remaining unaware of which brand of cola they were actually drinking. Invariably (on the television ads), they would choose Pepsi over Coke as the brand having the superior flavor of cola. The astute will note that the taste differences between Coke and Pepsi are minute (as Berkeley Breathed once opined: “they both taste like malted battery acid”) and chalk the whole thing up to nothing more than an example of brilliant marketing.*

One battle isn’t enough to win a cola war and, according to the Wall Street Journal, Pepsi concluded that they were never going to catch Coke by making a similar soda. Giving up, more or less, on the cola wars didn’t mean Pepsi was content to stay smaller than Coke. Indeed, the admission served to motivate Pepsi to find other ways to become larger than Coke. Instead of out cola-ing Coke, Pepsi decided to expand it’s offerings and its global reach. To achieve their redefined goals Pepsi focused on promoting their other brands worldwide, Fritos for the orient so to speak. The battle plan seems to be working, while Pepsi still trails Coke in cola consumption Pepsi stock is performing much more robustly than Coca Cola’s. In fact, Pepsi’s market valuation just passed that of Coke’s.

One is forced to wonder if Apple is adopting a similar strategy. It isn’t hard to deduce why Apple would be amenable to a multi pronged approach, after all, there is seemingly nothing Apple can do to significantly move the market share of Macs in a positive direction. Steve Jobs called the problem a “5%-operating-system-market-share glass ceiling.” Stated differently, no version of Mac OS is slick enough, no hardware is powerful enough, and there doesn’t seem to be an ad campaign clever enough to sway a vast number of people from the PC side to the Mac side. A wisely governed corporation should realize, at some point, that competing head to head against a clearly dominate opponent is fruitless and concentrate their best efforts elsewhere.

It appears that Apple may be on the cusp of doing just that. There are consistent rumors of an Apple branded PVR (personal video recorder) and an online movie store. Both, if true, would be strong indications that Apple has ceded the desktop OS market to Windows and is putting more of their resources in expanding business by expanding the diversity of the product line rather than by taking share directly from Windows.

It is clear where Apple got the idea that expanding into other, non-traditional, markets might allow the company to grow to previously unimagined levels: the iPod. Apple’s internal expectations for the device aren’t public knowledge (and Steve, once again, won’t return my calls) but it’s a safe bet that they didn’t expect to sell 24.5 million iPods in 2005 when the iPod was first revealed. While the iPod showed Apple that they could compete with non-Mac hardware the associated iTunes music store revealed that Apple also had the ability to overwhelm the competition in distribution services.

With those experiences in mind, it is hard not to imagine Apple introducing a PVR and a movie distribution service. It is also increasingly difficult to imagine that Apple won’t trot out an iPod specifically designed for video playback. Apple’s recent growth, after all, has been almost solely attributed to the strength of iPod sales. Even the minimal growth of the Mac platform was due to, most aver, the “iPod halo effect.” As the old saying goes: “you dance with who brung ya” (who comes up with these trite things?). Most analysts sincerely believe the only thing that has taken Apple anywhere lately has been the iPod.

At this point diehard Mac fans may feel a twinge of worry. If the fuel for Apple’s growth is everything but the Mac how long will it be until the Mac sits there unupdated and unloved like an old dot-matrix printer? The misgivings are likely shortsighted. For all of the success enjoyed by the iPod and all the success attributed to Apple because of the digital audio player it sometimes becomes too easy to forget that Apple was a profitable venture even before the iPod took the world by storm. Ergo there is no reason for Apple to abandon the Mac even when cash generated from iPod sales surpasses revenue generated by the Mac.

There is one final point to consider, and that is one of competition. Even if Apple tries to build off the success of the iPod Microsoft and others will be trying to dominate the entertainment space as well. Microsoft’s biggest foray into that arena is the Xbox 360. Sure, it is pitched as a game system but the thing is really a proprietary computer with heat issues. Sony will be introducing their version of a game machine/Trojan horse sometime in 2006. The question isn’t: Can Apple compete with these leviathans in the entertainment arena? The iPod proves they can. The real question is one of Apple’s focus. Will Apple try to compete for your living room as well as your pocket? Will Apple take the Pepsi challenge and try to dominate markets outside of the computer realm? One suspects MacWorld will provide all the answers.

Irrelevant but interesting fact: The Pepsi Challenge was the brainchild of John Sculley who later became President of Apple Computer.