By Betsy Morris
March 17, 2008

The mass market is supposed to be dead, but you would never know it from Apple. In February the iTunes Store became the second-largest music retailer in the U. S., right behind Wal-Mart. The iPod is to music players what Kleenex is to tissue or Xerox is to copiers. Almost everything Apple makes transcends gender, geography, age, and race. An Apple Store is a demographic melting pot, with computer games for kids and a Genius Bar for their parents and so much cool stuff to touch that it’s a magnet for teens and twentysomethings.

Apple scoffs at the notion of a target market. It doesn’t even conduct focus groups. “You can’t ask people what they want if it’s around the next corner,” says Steve Jobs, Apple’s CEO and co-founder. At Apple, new-product development starts in the gut and gets hatched in rolling conversations that go something like this: What do we hate? (Our cellphones.) What do we have the technology to make? (A cellphone with a Mac inside.) What would we like to own? (You guessed it, an iPhone.) “One of the keys to Apple is that we build products that really turn us on,” says Jobs.

With that simple formula, Apple not only has upstaged the likes of Microsoft but has set the gold standard for corporate America with an entirely new business model: creating a brand, morphing it, and reincarnating it to thrive in a disruptive age. Now, just seven years after it unveiled the first iPod, fully half of Apple’s revenues come from music and iPods. Interest in the iPod and iPhone has rubbed off on the Mac, whose sales growth outpaces the industry’s. Apple has demonstrated how to create real, breathtaking growth by dreaming up products so new and ingenious that they have upended one industry after another: consumer electronics, the record industry, the movie industry, video and music production.

In the process the company that ranks as the new No. 1 among America’s Most Admired Companies has become a roaring financial success. In the five years ended last September, sales tripled to $24 billion and profits surged to $3.5 billion, up from $42 million. While Apple’s stock is slumping along with the market, tumbling 40% this year on worries about less-than-stratospheric sales growth, it doesn’t usually stay down for long. Apple ranks No. 1 among Fortune 500 companies for total return to shareholders over both the past five years (94%) and the past ten (51%).

The decade coincides exactly with the return of Jobs as Apple’s maestro, bringing his particular mix of genius and obsession, as well as a tendency to play by his own rules (see the following story). His utter dedication to discovery and excellence has created a culture that has made Apple a symbol of innovation. You won’t find that word on a placard or apiece of propaganda at One Infinite Loop, Apple’s headquarters in Cupertino, Calif. There innovation is a way of life. But it isn’t like creating new variations on Crest toothpaste. At Apple, every endeavor is a moon shot. Sometimes the company misses, but the successes are huge. Apple’s goal for iPhone sales this year is ten million units, up from 3.7 million during its six months on sale in 2007.

Apple requires a special kind of workforce. The place is divided by product but also by function along what COO Tim Cook calls “very faint lines.” Collaboration is key. So is a degree of perfectionism. Apple hires people who are never satisfied. A designer has to be a borderline fanatic to care about the curve of a screw on the underside of a MacBook Air or the apparent weightlessness of the tiny door that hides its connectors. You don’t get a foot in the door here unless your eyes light up when you talk about your Mac. (Head designer Jonathan Ive referred to a new MacBook Air as “this guy” as he pointed out features in a recent interview.) The place is loaded with engineers, but it’s not just the skills that are important, it’s the ability to emote. (“Emotive” is a big word here.) The passion is what provides the push to overcome design and engineering obstacles, to bring projects in on time—and a peer pressure so great it sometimes causes a team to eject a weak link or revolt against an underperforming boss. “Apple,” says Cook, “is not for the faint of heart.”

Here there is no such thing as hedging your bets. “One traditional management philosophy that’s taught in many business schools is diversification. Well, that’s not us,” says Cook. “We are the antibusiness school.” Apple’s philosophy goes like this: Too many companies spread themselves thin, making a profusion of products to defuse risk, so they get mired in the mediocre. Apple’s approach is to put every resource it has behind just a few products and make them exceedingly well. Apple is brutal about culling past hits: The company dropped its most popular iPod, the Mini, on the day it introduced the Nano (a better product, higher margins—why dilute your resources?).

Apple might look like a high-wire act. But while success is never guaranteed, it’s not random either. Ownership of its operating system gives Apple an unusual degree of control over its ability to design, change, and adapt. That allows Apple to follow the product—with no preconceptions about where it will end up. The iPod has evolved from a device the size of a deck of cards to a Nano to a Shuffle and now to a Touch. The Touch, says Cook, “has another roadmap in front of it” if it becomes, as he predicts, the first mainstream Wi-Fi mobile device. “Apple’s DNA has always been to try to democratize technology,” says Jobs, in the behef that if you make something “really great, then everybody will want to use it.” Who would have thought that a cult brand like Apple would be resuscitating a mass market? Jobs and his true believers have proved that if you’re bold enough to build it, they will come.

Steve Jobs on Apple’s Chemistry

Fortune senior editor Betsy Morris spoke with Jobs in February in Kona, Hawaii, where he was vacationing with his family, on the keys to Apple’s success, obstacles along the way, and the prospect of Apple without Steve Jobs.

On the birth of the iPhone
We all had cellphones. They were so awful to use. The software was terrible. The hardware wasn’t very good. We talked to our friends, and they all hated their cellphones too. And we saw that these things really could become much more powerful. It’s a huge market. I mean, a billion phones get shipped every year, and that’s almost an order of magnitude greater than the number of music players. It’s four times the number of PCs that ship every year.

It was a great challenge: Let’s make a great phone that we fall in love with. Nobody had ever thought about putting operating systems as sophisticated as OS X inside a phone, so that was a real question. We had a big debate inside the company whether we could do that or not. And that was one where I had to adjudicate it and just say, “We’re going to do it. Let’s try.” The smartest software guys were saying they can do it, so let’s give them a shot. And they did.

On Apple’s connection with the consumer
It’s not about pop culture, and it’s not about fooling people, and it’s not about convincing people that they want something they don’t. We figure out what we want. And I think we’re pretty good at having the right discipline to think through whether a lot of other people are going to want it too. That’s what we get paid to do.

On choosing strategy
We do no market research. We just want to make great products. When we created the iTunes Music Store, we did that because we thought it would be great to be able to buy music electronically, not because we had plans to redefine the music industry. I mean, it just seemed like writing on the wall that eventually all music would be distributed electronically. Why have all this [cost] when you can just send electrons around easily?

On Apple’s focus
People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the 100 other good ideas that there are. You have to pick carefully. I’m actually as proud of many of the things we haven’t done as the things we have done. The clearest example was when we were pressured for years to do a PDA, and I realized one day that 90% of the people who use a PDA only take information out of it on the road. They don’t put information into it. Pretty soon cellphones are going to do that, so the PDA market’s going to get reduced to a fraction of its current size. So we decided not to get into it. If we had gotten into it, we wouldn’t have had the resources to do the iPod.

On what drives Apple employees
We don’t get a chance to do that many things, and every one should be really excellent. Because this is our life. Life is brief, and then you die, you know? So this is what we’ve chosen to do with our life. We could be sitting in a monastery somewhere in Japan. We could be out sailing. Some of the [executive team] could be playing golf. They could be running other companies. And we’ve all chosen to do this with our lives. So it’d better be damn good.

On why people want to work at Apple
The reason is because you can’t do what you can do at Apple anywhere else. The engineering is long gone in PC companies. In the consumer electronics companies, they don’t understand the software parts of it. And so you really can’t make the products that you can make at Apple anywhere else right now. Apple’s the only company that has everything under one roof. There’s no other company that could make a MacBook Air, and the reason is that not only do we control the hardware, but we control the operating system. And it is the intimate interaction between the operating system and the hardware that allows us to do that. There is no intimate interaction between Windows and a Dell notebook.

On whether Apple could live without him
We’ve got really capable people at Apple. I made Tim [Cook] COO and gave him the Mac division, and he’s done brilliantly. I mean, some people say, “Oh, God, if [Jobs] got run over by a bus, Apple would be in trouble.” And, you know, I think it wouldn’t be a party, but the board would have some good choices about who to pick as CEO. My job is to make the whole executive team good enough to be successors, so that’s what I try to do.

On his demanding reputation
My job is to not be easy on people. My job is to take these great people we have and to push them and make them even better. How? Just by coming up with more aggressive visions of how it could be.

On dealing with roadblocks
There always seems to come a moment where it’s just not working. Take the iPhone. We had a different enclosure design for this iPhone until way too close to the introduction to ever change it. And I came in one Monday morning, and I said, “I just don’t love this. I can’t convince myself to fall in love with this. And this is the most important product we’ve ever done.” And we pushed the reset button. We went through all the zillions of models we’d made and ideas we’d had. And we ended up creating what you see here as the iPhone, which is dramatically better. It was hell because we had to go to the team and say, “All this work you’ve [done] for the last year, we’re going to have to throw it away and start over, and we’re going to have to work twice as hard now because we don’t have enough time.” And you know what everybody said? “Sign us up.” That happens more than you’d think, because this is not just engineering and science. There is art too. Sometimes when you’re in the middle of one of these crises, you’re not sure you’re going to make it to the other end. But we’ve always made it, and so we have a certain degree of confidence, although sometimes you wonder.

On his management style
We’ve got 25,000 people at Apple. About 10,000 of them are in the stores. And my job is to work with sort of the top 100 people—that’s what I do. That doesn’t mean they’re all vice presidents. Some of them are just key individual contributors. So when a good idea comes, part of my job is to move it around, just see what different people think, get people talking about it, argue with people about it, get ideas moving among that group of 100 people.

On his marathon Monday meetings
When you hire really good people, you have to give them a piece of the business and let them run with it. That doesn’t mean I don’t get to kibitz a lot. But the reason you’re hiring them is because you’re going to give them the reins. I want [them] making as good or better decisions than I would. So the way to do that is to have them know everything, not just in their part of the business but in every part of the business. So what we do every Monday is we review the whole business. We look at what we sold the week before. We look at every single product under development—products we’re having trouble with, products where the demand is larger than we can meet. All the stuffin development, we review. And we do it every single week. We don’t have a lot of process at Apple, but that’s one of the few things we do just to all stay on the same page.

On finding talent
When I hire somebody really senior, competence is the ante. They have to be really smart But the real issue for me is, Are they going to fall in love with Apple? Because if they fall in love with Apple, everything else will take care of itself. They’ll want to do what’s best for Apple, not what’s best for them, what’s best for Steve, or anybody else.

Recruiting is hard. It’s finding the needles in the haystack. I’ve participated in the hiring of maybe 5,000-plus people in my life. I take it very seriously. You can’t know enough in a one-hour interview. So in the end, it’s ultimately based on your gut. How do I feel about this person? What are they like when they’re challenged? Why are they here? I ask everybody that: “Why are you here?” The answers themselves are not what you’re looking for. It’s the meta-data.

On the iPod tipping point
It was difficult for a while because for various reasons the Mac had not been accepted by a lot of people, who went with Windows. And we were just working really hard, and our market share wasn’t going up. It makes you wonder sometimes whether you’re wrong. Maybe our stuff isn’t better, although we thought it was. Or maybe people don’t care, which is even more depressing.

It turns out with the iPod we got out from that operating-system glass ceiling. It was great because [it showed that] Apple innovation, Apple engineering, Apple design, did matter. The iPod captured 70% market share. I cannot tell you how important that was to Apple after so many years of laboring and seeing a 4% to 5% market share on the Mac. It was a great shot in the arm for everybody.

On what they did next
We made more. We worked harder. We said, “This is great. Let’s do more.” I mean, the Mac market share is going up every single quarter. We’re growing four times faster than the industry. We’ve helped it along. We put Intel processors in, and we can run PC apps alongside Mac apps. But I think a lot of it is that people have finally started to realize that they don’t have to put up with Windows—that there is an alternative. I think nobody really thought about it that way before.

On catching tech’s next wave
Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely, it actually unfolds fairly slowly. It takes years. One of our biggest insights [years ago] was that we didn’t want to get into any business where we didn’t own or control the primary technology, because you’ll get your head handed to you. We realized that for almost all future consumer electronics, the primary technology was going to be software. And we were pretty good at software. We could do the operating system software. We could write applications like iTunes on the Mac or even PC. We could write the software in the device, like you might put in an iPod or an iPhone. And we could write the back-end software that runs on a cloud, like iTunes. So we could write all these different kinds of software and tweed it all together and make it work seamlessly. And you ask yourself, What other companies can do that? It’s a pretty short list.

On failing, so far, with Apple TV
Here’s how I look at it: Everybody’s tried to make a great product for the living room. Microsoft’s tried, we’ve tried everybody’s tried. And everybody’s failed. And that’s why I call it a hobby. It’s not a business yet; it’s a hobby. We’ve come out with our second try—”Apple TV, Take 2″ is what we call it internally. We realized that the first product we did was about helping you take the content from your computer and wirelessly send it to your TV. Well, it turns out that’s not what people really wanted to do. I mean, yeah, it’s nice to see your photos up on the big screen. That’s frosting on the cake, but it’s not the cake. What everybody really wanted, it turned out, was movies. So we began the process of talking to Hollywood studios and were able to get all the major studios to license their movies for rental. We only have about 600 movies so far ingested on iTunes, but we’ll have thousands later this year. Will this resonate and be something that you just can’t five without and love? We’ll see. I think it’s got a shot.

On managing through the economic downturn
We’ve had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren’t going to lay off people, that we’d taken a tremendous amount of effort to get them into Apple in the first place—the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that’s exactly what we did. And it worked. And that’s exactly what we’ll do this time.

With reporting by Joan L. Levinstein.

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