Apple To World: “Doomed? I Know What You Are, But What Am I?”

on October 4, 2013
Reading Time: 11 minutes

Last week, I talked about Apple: The Splendid Failure. How Apple was viewed as a failure because they prioritized product and customer experience over profits. This week, I try to put things into perspective and demonstrate where Apple really stands in relation to their rivals. Next week, I’ll conclude by focusing on Apple’s true dilemma.

Two Tenable Business Positions

strategy101Almost all industries have two tenable positions: the differentiated high-end, and the low-cost low-end:

This is not controversial. It’s Business School 101.

The iPhone faces little threat in the differentiated high-end of the market. “(C)ounting the days until customers flee for cheap phones is silly.” – Ben Thompson

Apple’s iOS Dominates The Differentiated High End (Premium)

Life is like a dog sled team. If you ain’t the lead dog, the scenery never changes.” – Lewis Grizzard

Apple is clearly the lead sled dog and their competitor’s view hasn’t changed much since 2007. Apple dominates the differentiated high-end (premium) portion of the connected computing devices market. ((How much premium ground has the iPhone lost? Based on an Aug. 5 note by investment research firm Consumer and Intelligence Research Partners (CIRP), Apple’s still holding its own; over the last year, 78% of iPhone users upgraded to another iPhone, but only 67% of Android users upgraded to another Android device.

In addition to better retaining customers overall, Apple also appears to have had an edge among high-end shoppers. According to CIRP, those buying a smartphone for the first time preferred Android to iOS by a wide margin, 56% to 35%. Those upgrading from another smartphone, however, preferred iOS 49% to 46%. First-time buyers tend to be less affluent, and to go for budget devices. Longtime smartphone owners tend to be more affluent, and to maintain or improve the luxury of their devices.

An Aug. 12 CIRP note added more context. It found that whereas 20% of Apple’s customers come from Android, only 7% of Samsung’s customers come from iOS. This is despite the fact that Samsung, according to IDC, now represents half of all Android shipments. Samsung users were also less likely than iPhone users to upgrade within the same brand. ~ Michael Endler, Apple’s iPhone Battle Plan: 6 Factors))

Apple’s iOS Dominates The Premium Purchasers

(T)he iPhone is more expensive than most of the phones on the market, and this shapes the kind of people who buy it. ~ Benedict Evans

“Premium device sales produce immediate benefits in the form of increased profit margins, but they also engender a number of recurring benefits.

[pullquote]Apple still has the customers that everyone else wants.[/pullquote]

Owning the premium markets means having the customers who are best educated, wealthiest and most likely to buy accessories. Apple users are more educated and affluent than Android users, for example. iPhone users upgrade devices more regularly than most other mobile phone users. (T)hese users are more likely to buy accessories, and Apple has more users between the ages of 18 and 34, which is widely considered by advertisers to be the demographic that drives taste. As Forrester’s David Johnson told InformationWeek in a recent interview, Apple still has the customers that everyone else wants. ” ~ Michael Endler, Apple’s iPhone Battle Plan: 6 Factors

The public is the only critic whose opinion is worth anything at all. ~ Mark Twain

Apple’s iOS Dominates The Premium Developers

“Premium customers attract premium developers. Despite Android’s massive advantage in global market share, surveys regularly show that iOS is still developers’ biggest priority. Why? Some of the imbalance has to do with logistics — Android is much more fragmented than iOS. But here’s a bigger reason: Apple’s customers are the ones spending money.” ~ Michael Endler, Apple’s iPhone Battle Plan: 6 Factors

Apple Doing What Apple Does Best

Price is what you pay. Value is what you get. ~ Warren Buffett

Apple’s premium strategy focuses on their strengths.

  • Apple is NOT competing on features, they’re competing on benefits;
  • Apple is NOT competing on hardware alone, they’re bundling hardware, software and services into a single ecosystem that their competitors cannot match;
  • Apple is NOT selling you a phone or a tablet, they’re selling you an experience.
  • Apple is NOT competing on price, they’re competing on value.

The quality will remain when the price is forgotten. ~ Henry Royce

If you disagree, well, Apple won’t sell you their iPhone.

What we want to do is make a really great product and provide a great experience. And I’m sure we’ll get enough customers that want to buy that. ~ Tim Cook

What’s Wrong With Being Mercedes-Benz, BMW or Disney World?

“Apple’s market share is bigger than BMW’s or Mercedes’s or Porsche’s in the automotive market. What’s wrong with being BMW or Mercedes?” ~ Steve Jobs

Apple is avoiding a market share fight, which is ultimately about price and compromise. Instead, they’re focusing on premium products, premium purchasers, premium developers and premium profits.

Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin

Apple has solidified its hold on the Mercedes-Benz/BMW portion of the U.S., European and Asian markets.

“Wait, wait, wait!”, I hear you say. “There IS no Mercedes-Benz/BMW Asian market.”

Bite your tongue.

Apple’s products are out-of-reach of the vast majority of Asian consumers but that doesn’t mean there is no market for them. Apple’s products are aspirational. And there are a LOT of people who can afford them.

Saying stupid things like “the iPhone 5C is equivalent to the average monthly salary in China” belies a fundamental misunderstanding of China, its inequality, and its sheer size. ~ Ben Thompson

Mercedes Benz and BMW dominate motor vehicle profits with little market share. Disney World dominates Amusement Park profits with relatively little market share, too. No one ever says that they’re doomed or that they need to create a lower priced product in order to attract larger market share.

What’s wrong with being the Mercedes-Benz, the BMW, or the Disney World of smart connected devices?

Presuming all decisions are based on price is the easiest way to mispredict the future. ~ Ben Thompson (@monkbent)

The Cult Of Market Share And The Mostly Misunderstood Network-Effect

“Aha!”, cry the Naysaysers, “There’s the fatal flaw in your argument. It’s okay for Mercedes-Benz, BMW or Disney World to have small market share, but the iPhone and the iPad are built upon Platforms and Platforms play by a different set of rules.”

Third-party companies are building apps and services to run on smartphone and tablet platforms. These apps and services, in turn, are making the platforms more valuable. Consumers are standardizing their lives around the apps and services that run on smartphone and tablet platforms. Because of these “network effects,” in platform markets, dominant market share is huge competitive advantage. ~ Henry Blodget

“At a certain point, growth becomes more important than absolute levels, so even if Apple is currently sending more money to developers than Android, if Android’s growth is faster than Apple’s, developers will bail and go to Google Play.” ~ Tero Kuittinen, analyst at Alekstra

Yeah, right. Almost all industries have two tenable positions: the differentiated high-end, and the low-cost low-end – but let’s carve out a non-existant exception for the iPhone. Sheesh.

The Counter-Argument

The Math Is All Wrong

You can’t simply take two things of unequal value, divide them into two separate piles, total the piles and declare the numerically superior pile to be the more valuable.

Question #1: Pile “A” has 10% of the items and pile “B” has 90%. Which pile is more valuable?

Answer #1: If you answered Pile “B”, congratulations, you’re a small child. Run along, now, and go play with a nice Unicorn.

If you answered “There’s no way to know which pile is more valuable”, congratulations, you have a lick of common sense.

Question #2: Pile “A” has 10% of the items and consists of ten, one-hundred dollar bills ($1,000). Pile “B” has 90% of the items and consists of 90 dimes ($9.00). Which pile is more valuable?

Answer #2: If you hesitated, even for a moment, to pick pile “A”, congratulations, you may have what it takes to become a TV talking head who evaluates Apple for a living. Run along, now, and go play with a nice Unicorn. Everyone else is qualified to read on.

The Comparison Is All Wrong

  • I could argue that not all market share is alike – that some customers are move valuable than other customers (See: The Math Is All Wrong, above).
  • I could argue that “Android” is not really a single entity and that it shouldn’t be totaled all together – that Android is many different operating system versions, forked user interfaces, innumerable screen sizes and hardware configurations, etc.
  • I could argue that things like customer satisfaction and ecosystem matter more than sheer quantity.
  • I could argue that market share doesn’t matter if the unit ends up in a drawer or isn’t isn’t interacting with the platform.

Yeah, I could argue all of that. And it’s all true, too. But I don’t really need it to prove my case, so let’s set all that aside.

The Naysayers Are All Wrong

Remember, it doesn’t matter whether you win or lose; what matters is whether I win or lose. ~ Darrin Weinberg

Apple doesn’t give a damn how much market share you have so long as their business is viable and profitable.

The “market-share-uber-alles” theory is like a marshmallow — easy to chew, but hard to swallow. If market share is King, then why are former market share leaders Nokia and Blackberry such Jokers?

Turns out pricing a phone at cost (i.e. the Lumia 520) gets you share! It’s the worst kind of share, but, yay! ~ Ben Thompson (@monkbent)

Focusing on market share instead of profits is like trying to make your car go faster by honking on the horn. (HINT: It’s going to take something more.)

Thunder is good, thunder is impressive; but it is lightning that does the work. ~ Mark Twain

Market share is good, market share is impressive; but it is profit that does the work.

Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.” ~ Albert Einstein

Any company who can drive market share while simultaneously pleasing their customer is simply not giving their customer the attention they deserve.

Technology Tourettes

Some Pundits have “Technology Tourettes.” They keep shouting out inappropriate things like “open” and “market share” and “history repeats” at all the wrong times and in all the wrong places. ~ John R. Kirk ((I often quote myself; it adds spice to my conversation. ~ George Bernard Shaw))

“But, but, but…” the afflicted stammer, “…history is repeating. PC vs. Mac. Windowzzzzzze!”

Apple’s approach in mobile ignores history, specifically the Mac/Windows wars of the 1990s, which Apple clearly lost. In this scenario, Android is Microsoft’s Windows—available to all kinds of manufacturers—while iOS is on only Apple devices.~ Sam Grobart, Bloomberg

Yeah, yeah, yeah, that’s all very nice, but it’s also all very irrelevant.

“Those who do not remember the past are condemned to repeat it.”-George Santayana

Maybe so, but those who only THINK they remember the past are condemned to misinterpret it.

“People that keep talking about smartphones evolving like PCs are just so clueless. … In actuality, the only lessons that can be drawn is that most low-end Android has zero lock-in. As expected. ~ Ben Thompson (@monkbent)

Tech history is not repeating itself, tech historians are repeating each other — and they’ve got it all wrong.

“God cannot alter the past, though historians can.”-Samuel Butler

Two Big Differences

I think we can agree. The past is over. ~ G. W. Bush

So what’s different this time around? Well, practically everything. But let’s just focus on two major changes that have occurred over the past twenty years: Platform and Scale.

Study history, not historians.

Platform

As a child my family’s menu consisted of two choices: take it, or leave it.”~ Buddy Hackett

When computers were in their adolescence, the Operating System menu consisted of two choices: Windows or Mac. They really weren’t compatible with one another so you had to make a choice. As it turned out, most chose Windows.

Is that true today with iOS and Android? Well let’s see. Whether you choose iOS or Android, can you still:

— Make phone calls?
— Do email?
— send texts?
— Transfer files?
— Surf the Internet?
— Make online purchases?
— Listen to music and watch videos?

You bet you can. Both iOS and Android are almost entirely interchangeable with one another because they both run on the same platform — the Internet.

The Internet is a gateway to get on the Net. ~ Bob Dole, former senator

The REAL platform is the Internet. And both iOS and Android have equal access.

Switching costs between mobile OSes are negligible. ~ iSky (@skyxi)

Seen in this light, let’s re-examine Blodget’s “Android-Must-Win”, thesis again:

Consumers are standardizing their lives around the apps and services that run on smartphone and tablet platforms.

Wrong. Customers are standardizing their lives around the Internet. iOS Apps and Android Apps are incompatible in the same way that Diesel fueled cars are incompatible from Petroleum based cars. The engines that power the vehicles are very different, but they’re more alike than unalike (four wheels, similar size, run on roads, fuel at gas stations, etc.). Similarly, the engines that power iOS and Android are very different, but the Infrastructure that they both run on is one and the same.

Choosing between iOS and Android is not like choosing between a Mac and a PC. It’s like choosing between a BMW and a Ford.

Scale

scale: noun|the relative size or extent of something.

Most industry observers have not yet begun to grasp the difference in scale between the PC market of yesterday and the mobile market of today. The mobile market is much, much, much bigger. When compared with one another, PCs look like a baby next to a giant.

(T)hese markets are so big, and there’s so many people that care and want a great experience from their phone or their tablet, that Apple can have a really good business. A really good business. ~ Tim Cook

There has been a fundamental change in the scale of the computing industry. In 2012:

350 million PCs sold.

1.7 billion phone sold.

1.6 billion PCs in use. 

3.2 billion mobile users.

PCs replaced every 4 or 5 (or 6 or 7) years

Phones replaced every 2 years.

PCs shared.

Phones, one per person.

(E)verybody in the world is going to have a smartphone. There are a lot of people that maybe worry that the market is so big now it can’t get any bigger, but it’s going to get a lot bigger. ~ Tim Cook

Take a step back and re-look at the sheer size of today’s mobile market vs. yesterday’s PC market. We are going from a world where:

  • 350 million PCs were sold every year to a world where 2 billion smartphones are sold every year.
  • Zero iOS devices existed to a world where there are 700 million iOS devices, and counting.
  • large

  • Zero Tablets existed to a world where Tablet growth is even MORE rapid than was Smart Phone growth.
  • slide-44-638-1

  • Zero tablets to a market that is going to surpass the sales of all PCs.
  • (Just to put things in perspective,) more tablets are sold each QUARTER than streaming TV boxes have been sold EVER. ~ Benedict Evans (@BenedictEvans)

  • The niche player in mobile (Apple) is closing on the dominant player in PCs (Microsoft).
  • chart919

  • Consumers used to “upgrade” to a new operating system by buying a new computer to a world where 200 million users upgraded to iOS 7 in FIVE DAYS.

The idea that Apple is vulnerable to the low end is a relic of an idea. It goes back to the Mac of the 1990s, at a time when the world-wide computing market was orders of magnitude smaller than today and where purchasing and development decisions centralized in the hands of a few large companies. And even when looking at that competition, the Mac somehow managed to survive.

That’s not likely to be the case for those who found themselves in competition with the Mac in its pocketable re-incarnation. ~ Horace Dediu, Asymco

Perspective: The iPhone Stands Alone

You say that iOS is a niche that’s going to be overwhelmed by Android? I don’t think so.

Just to put things in perspective, the iPhone – a product that did not exist in May 2007 – is, by itself:

  • Bigger than 474 companies on the Standard & Poor’s 500-stock index
  • Bigger than 21 of the 30 component companies in the Dow Jones industrial average.
  • Bigger than Microsoft and Amazon.
  • Bigger than Coca-Cola and McDonalds.

$AAPL 9M iPhone launch generated >$5.4 B in revenue in 3 days, more than $MSFT Surface, $GOOG Motorola, $AMZN Kindle and $5B put together. ~ Daniel Eran Dilger (@DanielEran)

1 out of every 800 people ON THE PLANET ordered an iPhone over a single weekend in September, 2013. Does that sound niche to you?

Apple’s revenue from iPhones in the launch weekend was around double its total revenue in the quarter Windows 95 was launched. ~ Benedict Evans (@BenedictEvans)

Apple is so much larger than Microsoft, that the iPhone — by itself — is larger than all of Microsoft and Apple — sans iPhone — is STILL larger than all of Microsoft.

Chart 2

That’s right. If the iPhone disappeared from the face of the earth, Apple would STILL be bigger than all of Microsoft.

Apple Is Doomed…Not!

I have never made but one prayer to God, a very short one: ‘O Lord make my (critics) ridiculous.’ And God granted it. ~ Voltaire

You say Apple is doomed because the iPhone is niche? Are you kidding me?

So many companies wish they are as doomed as Apple. ~ ßen ßajarin (@BenBajarin)

If the iPhone is niche, then what is the Kindle Fire, the Surface, McDonalds, Coca-Cola, Microsoft, the S&P 500 and the Dow?

Apple Now Holds 10% of All Corporate Cash ~ Moody’s

The whole debate is so silly, so childish, that sometimes I think that Apple would be well within their rights to simply say:

“‘Doomed?’ I know what you are, but what am I?”

I like companies who have a future and women who have a past.

Conclusion

“A conclusion is the place where you got tired of thinking.” ~ attributed to Arthur McBride Bloch

Question: Does Apple have enough market share to control its destiny?

Weather forecast for tonight: dark. ~ George Carlin

Some things are easy to predict. Some things are not.

Conversation would be vastly improved by the constant use of four simple words: I do not know. ~ Andre Maurois

The truth is, I don’t know. No one knows for sure. But one thing is for sure — Apple is betting the company on it.

Never tell me the odds. ~ Han Solo, Star Wars

Question: How much time does Apple have?

The iPhone is Apple’s Windows. It’s a moneymaker, par excellence. The only question is whether the proceeds from the iPhone will give Apple enough time to come up with a new profit stream.

Microsoft milked Office & Windows for 25 years without another big hit. Adwords is 13 years old. iOS is only 6 years old. ~ Benedict Evans (@BenedictEvans)

Based on the above, I’d say Apple will be just fine.

The problem is not that there are problems. The problem is expecting otherwise and thinking that having problems is a problem. ~ Theodore Rubin

Post Script:

I have heard your views. They do not harmonize with mine. The decision is taken unanimously. ~ Charles de Gaulle

Next week, I’ll conclude the series with: “Apple’s True Dilemma.” Until then…

There are two kinds of people in the world, those who need closure