Is Apple Taking The Pepsi Challenge?

by Chris Seibold Dec 20, 2005

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.


  • While I agree with your analysis and predictions you have omitted an important feature of the new 2006 Macs.  They will be able to run Microsoft’s OS simultaineosly with OS X, no reboot required.

    Apple isn’t attempting a frontal assault on the enterprise market as it’s not oportune at the moment.  They will expand their current markets in science, education, and graphics/multimedia.  The personal computer market is another matter.  I find it difficult to analyze personal computer sales from available statistics.  Nevertheless, I expect Apple to do quite well expanding their share of this market which dovetails nicely with their other personal entertainment products.

    To conclude, Apple’s computer sales are expanding, just not at the same pace as the iPod.  The new computers should quicken their computer sales, removing the cost of new software and lack of games to run on their hardware.  New products will likely produce similar success in new markets as well.

    REB had this to say on Dec 20, 2005 Posts: 8
  • Apple would do well to position themselves at the forefront of the digital convergence revolution.

    Everything in our lives is becoming digitized and commoditized. We have digital cameras and digital music players and digital video players. Computer companies have been dealing with binaries longer than anyone. They need to feel as if they are the ones to lead is burgeoning revolution.

    Apple can indeed infuse themselves into more households. Product design is their strong suit and they’d be silly not to take advantage of this.

    My life is more hectic than ever. I find that I “must” use technology to maintain any semblence of efficiency. As of today I think the solutions are almost there but we’re still a ways away from the type of interoperability and functionality that is needed.

    Forget the PC…it’s a commodity..the money is going to be in tying everything together in a foolproof and functional way.  Can Apple do that? That…is the right question.

    hmurchison had this to say on Dec 20, 2005 Posts: 145
  • The 5% glass ceiling is cracking.  The PC problems is that OEMs have had to make them as cheap as they can, in terms of parts and customer support/service.  Customers generally are able to see what is happening and a lot are not happy with what they are getting for their hard earned money.

    Another big problems for the Windows world is malware - and this problem is only going to increase over the next few years.

    Apple challenge?  Continue to make the Mac as great as they can.  Push hard on design elegance as it does make a difference in the consumer market.  Continue development on OS X and all the free goodies that come with Macs - especially iLife (an add Front Row into iLife for 06).  Most important is to continue providing the exceptional level of support, especially under Apple Care.  This is a huge selling point when compared to Dell, HP, etc.

    The iPod has generated a halo effect simply because it has given PC users a peek at a Mac app and the elegance that Apple’s design brings.  Apple leverages this benefit with the other iLife apps and now Front Row.  I talked to an Apple Rep at Comp USA a few weeks ago and he said that Front Row was the single deciding factor in people buying new iMacs - and he was totally sold out!

    My leveraging Apple’s design abilities (in both hardware and software) Apple will continue to grow at a rate that is greater than the PC market and this, in time, is going to shatter the 5% ceiling.  The best part is that Apple will shatter the ceiling in a profitable manner, something a lot of PC makers can’t seem to achieve.

    Each year the performance AND outlook for Apple gets better and better.  I think the best is yet to come for Apple.  How many computer companies can you say that about?

    MacKen had this to say on Dec 20, 2005 Posts: 88
  • “One suspects MacWorld will provide all the answers.”

    Love that sentence.

    Apples power in product design allows for insanely complicated structures to be operated with insane ease. Bonjour AirTunes I say. Know how I installed our new laserprinter into our wireless network? Right, I plugged it into an AirPort Express & turned it on. A complicated thing with a useful purpose made simple. Most other companies just get the insanely complicated structures bit & forget about the rest. That is why Apple & the Mac are still there, and that is why the marketshare of OS X will grow. Structures tend to get evermore insanely complicated.

    Bad Beaver had this to say on Dec 20, 2005 Posts: 371
  • Who ever said MacIntels will run the MS OS alongside Mac OS X without rebooting? I dare say it will only be the realm of engineers, hobbyists, and a new breed of Mac fans who will be able to even get a dual booting system working.

    Virtual PC, if that is what the next best thing is, running at native speeds is a long shot at best. Running it is and would be a mess - its more difficult to manage than two seperate machines.

    Chris, great article btw. Is Pepsi really a more global brand? I seem to remember that Coke is perennially the top most recognized brand in the world. I can see that Pepsi may derive more revenues internationally, but probably with a huge outlay in infrastructure that Coke didn’t.

    I agree that Apple is definately shifting and growing in areas well beyond the OS, and it is refreshing to see. My hope is that they take over the cellphone biz sometime soon!

    Nathan had this to say on Dec 20, 2005 Posts: 219
  • “apple rep” @ compusa. does anyone find that to be an oxymoron?

    captkirk had this to say on Dec 21, 2005 Posts: 3
  • “Is Pepsi really a more global brand?”

    Coke is better known (as you point out) but Pepsi has a wider range of offerings. Pizza Hut, Frito Lay, the list is nearly endless. So while Coke remains on top in sugar water Pepsi comes out on top in many other areas. I think your insight into infrastrucure is spot on.

    and thanks for the “great article” comment, I appreciate it.

    As for the other comments, I am continually amazed at all the things AppleMatters readers think of that I didn’t. There is always, at least with articles written by me, more insight n the comments than in the article.

    Chris Seibold had this to say on Dec 21, 2005 Posts: 354
  • Apple will never intentionally allow another OS running on its computers.  It would be destructive.

    Isaac Smith had this to say on Dec 21, 2005 Posts: 3
  • Milk then? Lovely. Whole or Skim?

    Thank you for referencing Berkeley Breathed. Makes me feel warm and fuzzy.

    Kris Thom White had this to say on Dec 21, 2005 Posts: 18
  • Apple already intentionally allow other OSes on Macs via Virtual PC. As well you can run Linux on Macs - Linus does.

    Apple has never done anything to prevent either of these.

    If they do nothing to prevent an OS running, then they are therefore intentionally allowing it.

    I don’t expect Apple to deliberately prevent users from installing and running Windows or Linux on the Intel Macs.

    Chris Howard had this to say on Dec 21, 2005 Posts: 1209
  • its all about support thought, cuz too many users will need an answer to something they know nothing about. i am sure apple will NOT provide an ounce of support for anything but OSX. why ruin a better thing.

    captkirk had this to say on Dec 22, 2005 Posts: 3
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