On Wednesday, February 4, 2015, Juan Pablo Vazquez Sampere, professor of business administration at IE Business School in Madrid, published an article entitled: “We Shouldn’t Be Dazzled by Apple’s Earnings Report.”
Apple’s record Q1 earnings report may have led some consumers to believe the “old” Apple was back. And the world wants that Apple back. We want the Apple that revolutionized industries and communication in the last decade.
(D)oes the fact Apple earned more money in one quarter than any public company in history mean our beloved Apple is alive and well?
A look at the bigger picture within which these numbers sit suggests an alternate view. To see that larger picture, let’s locate Apple within its larger context as a once disruptive innovator that’s now essentially an incumbent.
To summarize, the Professor’s thesis is the once disruptive Apple has now become the defensive incumbent and Apple’s record quarterly profits are, in part, proof of Apple’s changed status.
Theory And Facts
A fundamental tenet of disruptive innovation is established firms normally do not react to disruptors and for a good reason. Generally, disruptors take over the least profitable customers of the industry. As that happens, established firms usually redirect the resources they might have spent defending their low value consumers toward their high value consumers.
While it’s true disruptors normally take over the least profitable customers of an industry, it’s important to note Apple’s disruptions have occurred at the top, not at the bottom, of the market. For example, the iMac attacked the high end of the desktop industry, the Powerbook attacked the high end of the notebook industry, the iPod attacked the high end of the MP3 industry and the iPhone attacked the high end of the mobile phone industry.
One of the most common misunderstandings about disruptive innovation is thinking that incumbents are either blind to the opportunity disruptors are creating or they are deliberately choosing to ignore it. It’s more accurate to say that they see it, but are unable to adopt the disruptor’s business model for some reason.
But not reacting at the business model level does not mean failing to react at the technological level. Very often incumbents do adopt a disruptor’s technology if it serves their best customers.
In many cases, what is gold for the disruptor is only the cost of doing business for an incumbent, which can now serve its best customers better — even if it does not earn much in the way of additional revenue or profits.
(T)here are the cases when new technology helps incumbents better monetize their premium customers. One such example is the smartphone’s screen size.
And now we come to the nub of the professor’s argument. He contends Apple’s increased profits in the last quarter were due to a technological innovation — screen size — rather than to a truly disruptive change in Apple’s business model.
In a smartphone market that is growing at a healthy rate of over 25%, data indicates that Apple had lost 2% of market share in the last three years.
I think we have to stop here and question why the professor is using market share as the yardstick for success. I recently read that Apple is taking 90% of all mobile profits. Profit share would seem to be a far better indicator of success — and disruption — than market share.
This loss of market share came from new customers that chose other brands and, even more importantly, from former Apple customers who defected because of frustration over a particular feature: screen size.
At this point, we need to challenge the factual premises being used to support the professor’s argument. Contrary to his assertion, all the available evidence indicates the iPhone’s customer loyalty is the highest in the industry and customers from other manufacturers are moving to the iPhone at a far greater rate than they are moving from the iPhone.
By launching the iPhone 6, Apple has regained a portion of these customers, as well as an additional share of new customers, who now can compare different phones without screen size being an issue.
So at a strategic level, what Apple has done is what incumbents usually do: adopt a disruptor’s technology (Samsung’s and Xiaomi’s, mainly) to sell more to its premium customers.
At this point I think we have to come full stop and examine the professor’s thesis with an extremely skeptical eye. Is he seriously suggesting Samsung is the disruptor here? Perhaps the good professor has been stranded on Gilligan’s Island for the past year and is unaware of the fact Samsung’s mobile empire is rapidly unravelling. Samsung is anything but a disruptor to Apple. And Xiaomi? Very disruptive. But very disruptive to Samsung, not Apple.
Despite these record numbers, though, the process of disruption continues. Xiaomi and other disruptors still eat away at the low end with business models that are capable of monetizing their products much more effectively than Apple.
Here’s the thing: That’s just not so. As noted above, Apple has always targeted the premium, not the low end, of the market. Xiaomi is not disrupting Apple in any way because Xiaomi does not compete for the same customers Apple does.
From Disruptor To Incumbent
If the professor is arguing the iPhone 6 and 6 Plus are not, in themselves, disruptive products, then I’m with him. They are iterations in a long line of iterations that followed in the disruptive path created by the 2007 iPhone.
If, however, the professor is arguing the iPhone is currently being disrupted by Samsung, Xiaomi or others, then I have to question both his theory and his facts, as I have done.
But what the Professor really seems to be chiding Apple for is Apple’s seeming reticence to continuously disrupt new markets and constantly re-invent new industries on an annual basis.
Apple used to revolutionize industries, announcing record sales numbers because it had introduced a new technology, feature, or product that we had never imagined but that, when we saw it, we all instantly wanted. That Apple seems no longer present. In this instance, all Apple has done is copy a feature for its own best customers. While that’s very effective for today, it does not solve the problem of tomorrow for a company that competes on serial innovation.
But even more fundamentally, this is not the Apple that we want or need. We, as loyal customers, believe Apple exists to revolutionize industries (and in the process earn a ton of money). Announcing boatloads of money, as if that were point, makes us think Apple no longer has the vision to keep on revolutionizing. It makes us think that it can no longer do what it did before — which is to tell us what comes next.
What’s more, by dazzling us with dollars, it seems that Apple’s leaders are deliberately trying to divert our attention. By making such a communication effort to let us know how much money they’ve made — instead of what they’ve done to change the world recently — they are inevitable forcing us to ask ourselves, is this what we get from the new Apple?
Is this a fair criticism? Exactly how soon and how often is Apple supposed to create disruptive innovations without fear of being demoted to the lowly status of “incumbent”? (An incumbent, mind you, that just made more quarterly profit than any other company in the history of the world.) I’m sure we could name several companies that have disrupted their respective industries over the past five years but how many companies can we name that have disrupted their industry twice in the past seven years, as Apple has done with the iPhone in 2007 and the iPad in 2010? How many serial disruptors can we name — companies that disrupted their industry over and over again the way that Apple has with the Apple ][, Macintosh, iMac, Powerbook, iPod, iPhone and iPad? ((Not to mention the upcoming Apple Watch…which I’m not going to mention because it hasn’t disrupted anything yet.))
Isn’t criticizing Apple for not having re-invented computing since 2010 or 2007 the equivalent to criticizing the New England Patriots for having “only” won four Super Bowls in the past decade and not having won a single Super Bowl since early February 2015? What Professor Sampere and many others are wishing from Apple is the equivalent of wishing their favorite soccer/football team would win the World Cup every year (even though the World Cup is only held once every four years) or that one’s favorite baseball team would win the World Series two or three times in a single season.
Personally, I’m still grateful for the mere two disruptions Apple has managed to produce over the past eight years and I’m anxious to see if Apple has done it again with Apple Pay or can do it again with the debut of the Apple Watch in April. But that’s just me. Unlike Professor Sampere — who demands Apple do the wholly impossible — I am content with Apple continuing to do the wholly improbable.
Author’s Note: For another, slightly more tongue in cheek take on the same article, see: “Too much book learning: Convincing yourself Apple’s doomed” from the great Macalope.
Addendum: Yet another great discussion of the matter is contained in “How Many Laws Did Apple Break?” by Jean-Louis Gassée. Highly recommended.