The Apple Walled Garden is Grounded in Old Fashioned Product Superiority

by Brian S Hall   |   March 4th, 2013

The value attributed to ecosystem “lock in”, such as the value Apple derives through tightly integrating its devices with its proprietary AirPlay, and the iTunes and App Store platforms, for example, is overstated both by industry analysts and by Apple’s competition. Counter-intuitively, I believe this is a win for Apple, as its competitors focus their efforts on a false equation. Even if switching costs were reduced to zero, few would leave Apple’s ‘walled garden’.

iTunes, App Store and accessories are a significant business for Apple. Recently, Horace Dediu of Asymco noted that these revenues are greater even than the Mac business line. Equally surprising, Apple’s content, software and accessories business generates more revenues than any mobile phone vendor is generating in total, excepting Samsung:

iTunes revenues surpasses mobile phone competition

Users have clearly invested a great deal in Apple-backed apps, content and accessories. I am just not convinced, however, that their intent — or effect — is to appreciably increase user “switching costs”. The real switching costs are more elusive to define but of far greater value. Competitors, such as Amazon and Google, appear convinced that app freebies, lower-priced music, below-cost streaming video and near-zero margin hardware will enable them to snare current and potential Apple customers away, hopefully forever. This is a strategy that I believe is doomed to failure.

The fundamental difference between Apple and its competitors lies not at the margins but in the totality of sterling hardware, comprehensive and ongoing support, usability assurances, unequaled product integration and unmatched reliability. To effectively compete with Apple, companies must tackle all of these. Be forewarned: these are costly, take years to achieve, demand a relentless focus and are hard to sustain.

Ready to Switch

Google’s Android platform has rapidly overtaken Apple to capture the lion’s share of the smartphone market. Numerous vendors offer Android phones at a variety of price points and form factors. Android – the OS – and Android the line of smartphones, has no doubt steadily improved over the past three years. In the mind of many analysts these improvements, when combined with relentless, price-sensitive competition will deeply cut into Apple sales and/or margins. Except, this continues to be proven false. The view which perpetuates the industry is that marketing and high switching costs are preventing many from leaving Apple’s ecosystem. This is false.

Consider some of the mission-critical and more commonly used smartphone applications across all major platforms. Phone, email, text, mapping and GPS. Skype, web browser and search. Facebook. Instagram. Twitter. Angry Birds. Words with Friends. Are all these or any of these truly so much better on iPhone than on any competitive Android product?

The fact is, for most users and for most user activities, the bulk of their interactions with their smartphone and tablet has a negligible switching cost.

There are numerous other examples. Your Kindle account can easily transfer to a different device. Same with your Netflix and Hulu+ services. YouTube plays just as well on Android as iPhone, maybe better. Yet in their last quarter, Apple sold a record number of iPhones and iPads. Their rather conservative guidance for the following quarter included gross margins between 37.5% and 38.5%.

Apple’s success is not due to switching costs. Rather, Apple products, systems and service is simply superior.

I do not want to suggest there is no financial cost whatsoever to switching. Your apps and accessories, for example, may become worthless if you move from iPad, say, to the Nexus 7. Plus, there are ‘costs’ borne through the often tedious process of switching to something new. Additionally, moving your music collection from one platform to the next, for example, or across multiple machines, takes time and patience. These cost. Such costs are real. But, most analysts appear to be overestimating such costs. They operate under the assumption that if only Google or Samsung, for example, can offer viable alternatives to iTunes, then Apple can be beat. This strikes me as a strategic misstep. Instead, these companies need to undertake the long, hard, costly effort of building a truly better product; one that is reliably serviced, simple to operate and fully supported for years to come. To date, who else is doing this?

Apple Assurances

We can get nearly anything we want, from anywhere, at any time. This has led to reduced prices, more competition and often to greater innovation. It has also created massive uncertainty. Where, exactly, do I go to service my Google Android Nexus LG phone? From my carrier? Who will guarantee it is updated regularly? How well will the newest HTC Android phone work with my Samsung Google Chromebook? What of the content I purchased from the Android Market, which was fully revamped as Google Play?

The real switching cost is manifested through the massive uncertainty that other users face on a regular basis, which Apple users do not.

Anyone remember Google Television? Why are there several Android phones by Google’s Motorola division yet for the true “Google experience” I should purchase a Nexus phone made, this year, by LG? Or a Nexus 7 tablet by Asus. Or a Nexus 10 tablet by Samsung.

The Apple premium is earned not through high switching costs but by the assurances Apple delivers, day after day, and across the millions of customers it sells to and services. Moving me off Paypal and iTunes, for example, and over to Google Play and Google Checkout, is a minor hassle, nothing more. Kill off any iTunes and App Store advantage. Wait for Google, or Amazon or Samsung to have as many active credit cards on file. Assume Apple’s accessories products become universal standards – including for Windows Phone, Blackberry, Nexus tablets, even competitor notebooks. Reduce “switching” costs to nearly zero. How many will leave the Apple fold? I suspect very few.

The User is the Buyer

One of the revolutionary aspects of this new age of personal computing, where we have rapidly transitioned from PCs and laptops to smartphones and tablets is not only the rise of mobility, nor the rise of the touchscreen nor even the slow, inexorable rise of the voice UI. Rather, this new age of computing has aligned the actual product user with the actual product buyer. This is a clear advantage for Apple. As Steve Jobs noted in 2010:

What I love about the consumer market, that I always hated about the enterprise market, is that we come up with a product, we try to tell everybody about it, and every person votes for themselves. They go ‘yes’ or ‘no,’ and if enough of them say ‘yes,’ we get to come to work tomorrow. That’s how it works. It’s really simple. With the enterprise market, it’s not so simple. The people that use the products don’t decide for themselves, and the people that make those decisions sometimes are confused. We love just trying to make the best products in the world for people and having them tell us by how they vote with their wallets whether we’re on track or not.

I am the buyer. I am the user. I am prepared to switch. Neither my apps, my downloads, nor my music collection is holding me back. Apple’s competitors have simply failed to offer me equivalent or better value.

Apple competitors are actively copying the parts of Apple that are easiest to copy. Instead, they need to do the hard work of building a superior product, offering superior customer service, committing their company to improving its product, bit by bit, year after year. Like Apple, they need to do everything they can to assure their customers that everything will be exactly the same next year – only better. This is hard. This is why Apple is rewarded. This is why so few switch.

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Brian S Hall

Brian S Hall writes about technology and change. His work has appeared in Techpinions, ReadWrite, Macworld, the Wall Street Journal, LinkedIn, and others. He operates the site 140TE.CH.
  • Rich

    On the subject of whether Apple will make a TV, here’s the best information I know:

    “I think Apple is largely stymied in the US to do anything truly disruptive in terms of the television ecosystem. All of the content that people care about most is in the hands of the US media companies … None of them has really any discernible upside to gain from entering into any agreement to make that content available to Apple … In fact, they have a lot to lose by doing that … Apple would need to do that to really disrupt things. What Apple has left to do is to build a device.”

    - Sanford C. Bernstein senior U.S. media analyst Todd Juenger.

    Juenger says the absent middle ground in the U.S. TV ecosystem — between the expensive multi-channel pay TV most viewers buy and the five-network free TV a minority take — is not about to be occupied any time soon by a cheaper or alternative service offered by the likes of Apple.

  • Rich

    For $120, you can get AppleCare when you buy your computer. That gives you two things:

    Tech support. You can call Apple tech support every day for 3 years and it will cost you nothing. And they tell you how long you have to wait for an advisor (typically 5 minutes or less).

    Repair coverage. Even if your computer needs a major item like a motherboard replaced it will cost you nothing for either parts or labor, for 3 years.

    If any other tech manufacturer provides that kind of value to the customer, I’d like to know who it is.

    • pawhite524

      I agree AppleCare is the way to go. I have had nothing but good results with them. The closest Apple Store is 300 miles from me so “popping into” one is not exactly an option.

      Yeah, I know, Consumer Reports disagrees but guess what, they won’t pay to have my device fixed if it breaks and I took their advice.

      BTW, the the $120 you note in your comment is for Apple desktop computer only. Your comment implies that is the price for Apple Care for all Apple computers though it does not say so specifically.

      Cheers!

      • http://twitter.com/pumacho Puma cho

        You can buy Apple care for iMacs, Macbook Pro’s, iPhones, iPads, and iPods. Not just computers.

        • pawhite524

          Agreed. I think it is the way to go.

          I was referencing Rich implying $120 would buy Apple Care for any Apple computer.

    • http://freedensburg.myopenid.com/ Nick Freedensburg

      Rich, isn’t it true that the premier support packages from any of the larger American or Chinese vendors (which are priced similarly, certainly as a percentage of the product purchase price) offer something very similar?

      My neighbor once told me that after he purchased his Dell computer, he purchased their premier support plan, and when a component of his unit failed in the third year of operation, he called Dell late at night, and by the next morning, a technician appeared at his house and swapped out the unit’s mainboard.

      I believe that both Lenovo and HP (to take two other obvious points of comparison) offer similar packages at similar price points.

      • steve_wildstrom

        The big PC makers offer solid support options for enterprises, but consumers are pretty much out of luck. You can get an extended hardware warranty with expedited service, but that is a partial solution. The big difference between Apple and anyone else is that Apple takes total responsibility for the system. There’s none of the back and forth between Microsoft and the OEM that is the curse of the Windows world. and if you do live within striking distance of an Apple Store, there’s no customer service experience remotely like it with any competitor.

        • http://www.brianshall.com/ Brian S Hall

          This is the great differentiator that Apple has through its 300 stores.

      • Rich

        Dell doesn’t create their own software like Apple, so Dell’s support package wouldn’t include free tech support on the phone for 3 years.

    • Kenneth

      I was quite happy paying the $350 for a 4 year comprehensive onsite with Accidental damage protection for a ThinkPad. Got quite a lot more machine when buying the ThinkPad then what I would have gotten with a similarly priced MacBook. Onsite is NBD too.

  • stevesup

    Apple: The best for the rest.

  • eldersignin

    WOW, very slowly, bloggers are coming around to looking at Apple with an open mind and critical eye. I don’t think I saw even one pre-blogged anti-apple post used here to sell hits. Just facts and critical thinking.
    Good work Brian.

    • benbajarin

      I think you would find that most of our content and analysis here at tech.pinions is grounded in critical thinking. That’s the goal at least. Thanks for commenting.

  • krabbie

    Quality is the name of the game for me. Apple Care, Genius Bar, and One to One are the places where my tech tire meets the tech highway. Genuine customer service, and total focus on the product and the end user…. ME! I get Apple Care on every device I buy. On my iPad first gen was 21 days away from the two year Apple Care agreement, the Genius Bar diagnosed a problem and issued me a brand new replacement. My mother in law now has a very good working iPad and btw she got me a gen 4 for Christmas!!!! ;-)) I trust only a few MultiGinormousCompanies, Apple, Costco, Patagonia….to name a few.

  • Chesteracorgi

    I beg to differ, the choice of Apple over alternatives is driven not by quality but more by social cachet. Apple has a history of making easy-to-use and innovative products. They stole the charge from Wintel in the 80s & 90s with a superior GUI and software. However, Wintel caught up by improving their products and Apple lost its competitive edge by failing to innovate. The firing of Jobs was a major event, even if it later lead to its rehiring him back, because Apple became just an expensive alternative for the technophobic without any real added value. Apple lost both market share and its social cachet.

    When Jobs returned, so returned the innovation: first the iPod, then the iPhone & iPad. All of these products were both cutting-edge innovative and unique. The competition lagged while Apple created new product markets. But over in the desktop business Apple could not leverage their into greater market share. Apple desktop and notebook users are the least price-sensitive consumers who are either technophobes, Apple fan-boys, or status seekers. Apple shows your friends that you are both rich and cool.

    Apple makes wonderful product and gets great margins for their product. It has so much cachet that you had a stock price that was pumped up almost double its market value (which is just now returning to reality). The problem is that the competition has caught up and even surpassed Apple in innovation. Leap (Cricket Wireless) could be left with over $100 Million in unsold iPhones (http://www.tomshardware.com/news/iPhone-Sales-Leap-Wireless-Stock-Not-Selling,21348.html). Older Apple product is loosing out to Obamaphones and the like at the low end and Androids at the high end. Customer service and a integrated ecosphere are important, but not generally the deciding point for consumers. Much more important are value, reliability and ease-of-use.

    Up until the Google Nexus 7 the Android Pad was a joke: kludge-y, slow and unreliable. However, with Android 4.1 devices Apples dominance in the pad market was slashed. But, instead of attacking with innovation and product Apple countered with lawsuits. The same is true of the smart phone market.
    The question for Apple is whether it will continue to innovate and come up with the new got-to-have thing, or will it slowly wither by continuing to choose to litigate over innovate.
    Apple is a great company with great products, but it is at a crossroad. Which path will it take?

    • http://www.brianshall.com/ Brian S Hall

      Given that their last quarter had record sales and revenues, I’m not so sure Apple is at a crossroad. Years from now, perhaps.

      • jfutral

        And this gets to the whole “bumblebee” analogy Macalope deconstructed and Ben’s RDF article points out. Everyone has this idea of how a successful tech company is supposed to work and Apple is not cooperating. So to them Apple is always at a crossroads to stop playing around and take their job seriously. What they don’t/refuse to see is that they continue to try to impose a formula on Apple that just doesn’t apply.

        Additionally, the above responder seems to think innovation is purely Apple’s responsibility and no one else’s. Heaven forbid any of these other companies should innovate on their own and bypass the whole need for litigation (never mind how much of this went on before Apple and is only now getting noticed because it involves Apple).

        Joe

    • jfutral

      “Leap (Cricket Wireless) could be left with over $100 Million in unsold iPhones”

      This actually illustrates an issue I’ve long been pointing out, there is another part to the cell/smartphone equation that is as important as the phone itself—the carrier. Apple’s distribution is deliberately restricted. They do not offer the iPhone to any carrier who is breathing, T-Mobile for instance. A lot of people went Android because they were not willing to ditch Verizon. Now they don’t have to and iPhone is the top selling smart phone on Verizon.

      And Leap illustrates the other part of the subscription issue, a crappy data/voice plan attached to a smartphone, no matter how desirable, will quell the demand for that device.

      That Apple has been able to succeed in spite of industry practice and S.O.P. is extremely innovative in its own right.

      Joe

      • steve_wildstrom

        There’s also the huge problem that as a prepaid carrier, Cricket has to sell the iPhone unsubsidized. Add to that the fact that Cricket subscribers typically have less money than Verizon or AT&T postpaids and you see the problem.

  • http://www.tumblr.com/blog/his-divine-shadow His Shadow

    This is a strategy that I believe is doomed to failure.

    I think it can be argued in the consumer space, this strategy has already been shown to be a failure when contrasted with the Wintel hegemony’s continued decline as well as the dire straits of the PC manufacturers who bought into a razor thin margin business model.

  • http://www.facebook.com/markgoldmd Mark Gold

    Great analysis! The only point that was not mentioned was Apples point of service to the world, the Apple Store. AppleCare was the beginning of Great Service and Support, but the Apple Store was the Home Run. Now even if you did not pay for Apple Care you can get help, advice and occasionally free service for out of warranty Apple devices.

    Microsoft has begun to add stores, Samsung has a couple, Google may or may not be thinking about it, Amazon is also wavering. As Brian mentioned “where do you go for service?”

    • http://www.brianshall.com/ Brian S Hall

      Those stores seem always crowded, always filled with staff. Grand slam home run.

  • http://www.igeeksblog.com/ Jignesh Padhiyar

    One good article about Apple amidst all the Apple posts. Although a proud Apple fan, I’d like to note that despite all these things, the innovative streak has definitely gone stale. The service, the iOS, the apps, the adherence to perfection.. it’s all fine! But Apple definitely needs something innovative to turn out to be truly interesting in these rapidly changing times.