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.
59 thoughts on “We Shouldn’t Be Dazzled By Apple’s Multiple Disruptions”
Great comeback article in the analogy of sports is wonderful
I swear, Disruption, is arguably the most overused, abused, and misused business meme of all time. I read that article and it’s a rote, unsophisticated, application of a concept that is, in the first place, extremely susceptible to narrative fallacy. (Business theories, especially those arising out of case studies, tend to exhibit this characteristic. I suppose that’s understandable given that a case study is nothing more than a narrative that tries to explain one company’s experience. That is fine for understanding the company but if you try to bolster a theory by rounding up a collection of case studies that support it, you have to realize that nobody’s academic career is advanced by publishing a narrative that shows his hypothesis is wrong.)
There are certain pitfalls in disruption theory, the biggest one that is relevant to mis-applying it to Apple is that disruption theory doesn’t apply readily to consumer goods. Especially consumer goods that are subject to aspirational demand. (Some might say Veblen goods, but not all aspirational goods are Veblen.)
Here’s an alternative point of view about disruption theory. http://www.newyorker.com/magazine/2014/06/23/the-disruption-machine
Something I heard, that I liked quite a bit, was Apple’s most valuable disruption was to to disrupt disruption theory itself. 🙂
I’ve written quite a bit about the failures of disruption theory today as has Ben Thompson. Horace Dediu, is also working on this at Harvard as well to refine the theory for the modern age.
In general a “theory” has stood the test of time. It only get’s adjusted when a deeper truth is revealed. More often than not, it gets superseded by a broader theory that encompasses, and corrects, for the observables.
If that’s what Thompson and Deidu accomplish, then that’s great. If not, it’s just moving the goalposts.
The deeper truth that is revealed is the theory was developed when the market was not mature, focused on business, and not a commodity consumer market. This new evolution of the market and a giant global market for consumer electronics did not exist when they developed the theory, therefore it was not observable. Hence now it is entirely changing the way one has to think about the process. And more specifically the products, segments, companies, etc., that it applies to and the ones it does not.
Like many things I like to point out in this industry, disruption theory is in uncharted territory.
Being I don’t know what “disruption” is, I can’t comment. As long as it means the same thing when comparing theories, it could work, if quantified properly, and generally, not selectively.
A theory that only applies to hand-picked instances of the “universe” it’s supposed to apply to smells very fishy.
I mean, OK, specialty/handcrafted stuff becomes mass-produced/mass-market (for technological, purchasing power, … reasons), and then the handcrafters get marginalized or obliterated by economies of scale and/or network effects. That’s been happening since printing presses and the industrial revolution.
I find the “overserving” leg of disruption theory more interesting. It used to be called “dumbing down”, so it’s not really new either.
I haven’t yet read your theory(but i should), but Ben Thompson’s theory regarding the limits of disruption is a bit unproven,only shown in a few rare cases and especially when it’s really hard to seperate the value of experiences that are better than “good enough” from aspirational or luxury marketing.
A bit unproven?
Look around you. Notice how most people don’t drive Yugos. Or wear their no-name brand clothes? Or buy no-name food products?
Yup, and I attribute it to evolutionary biology. The part that explains why peacocks have tail fans and some dinosaurs have giant hollow tubes sticking out of the tops of their heads also explains why we drive around in overpriced, overpowered cars and make phone calls on jewelry-like slabs of precision-machined aluminum. We’re all just trying to get some booty.
“We’re all just trying to get some booty.”
Clearly some of us prefer nicer booty
Just realized the iPhone gives new meaning to the phrase “booty call”.
I’m with you here. But then again, disruption is mostly written about by analysts fishing for consulting jobs, and it is the buzzword du jour. I was getting sick of Innovation though, so for a while Disruption was a welcome change.. but no more. Time for the next buzzword !
I propose: Intensification. Buzzwords are mostly made by picking a successful company and over-generalizing some random aspect of its strategy (intentional or not), and Apple is being mostly great at getting a foot in the door then both grabbing a bigger share of and inflating its customers’ IT and media budget. That’s Intensification. Well, I’m sure someone will find a sexier word within a few years.
But, but but, we’ve all just discovered Clayton C, so we’ll just hit apple with that stick now. Coz he’s a professor or summink, wif a book. He’s got a theory and everything.
“…Apple’s disruptions have occurred at the top, not at the bottom, of the market.”
I would hope that someone in one of the thousands of ivory towers is working on a theory of high-end disruption. Or make it a corollary (or exception?) to the theory currently in vogue.
John Gruber put it this way:
“Apple is disrupting the conventional tenets of business even more than they are any particular product category in consumer electronics. There is something fascinating — in several ways unprecedented — going on with Apple right now. Rather than study it, understand it, describe it, and teach it, Sampere has chosen to deny that it’s happening.”
Ironic. Getting published in the Harvard Business Review is normally thought of as good for one’s career.
Getting published in HBR is nothing if it doesn’t come with Gruber’s Seal of Approval! 😉
Harvard has obviously been turning out exceptional graduates for the last two or three decades. I mean, just look at the quality and ethics of the people running businesses and banks.
What Ivory tower? These are paid goons spinning reality for their owners to manipulate markets to extract money from greedy idiots. People who are actually that stupid probably can’t work out how to breathe. Please invest in my snake oil v3.005 sir (not you, I’m speaking rhetorically).
new market disruption theory could apply to apple’s high end disruption.
Disruption almost always – certainty – comes from the bottom first.
In other words: high-end will receive plenty of notice beforehand.
Great article! Apple’s innovations are only visible with hindsight and I am betting the Apple Watch will be the next one. Not so much for its health and fitness technology but for its haptic engine which will encourage a new generation to learn Morse Code…or a more compact form. Also a boon to the blind and deaf.
I think the good professor should return to Gilligan’s Island, where he may be able outsmart the characters there but that’s about it.
Bigger screens are not innovation, to restate the obvious.
What passes for innovation these days cheapens what innovation really is. It’s like saying “world peace” at a beauty pageant.
Hey welcome back!
I say this as a spectator…
This is the second article I’ve read this weekend to “defend” Apple from this professor’s article. Must have struck a chord! The other is written by a mythical partisan, who somehow got stuck on the “doom” train.
Unlike the creature, you at least offer what appears to be sober analysis. I say “appears” because I don’t understand these things. I take you at your word. I think I agree with you on the assumption that any one entity, including Apple, can be expected to revolutionize anything on a regular cadence. Such expectations are folly.
The sports analogy that you raise, and as RobbieP already notes, is quite apt. I see it through a different filter. It really sounds like a conversation among fans. “Hey Nigel, did you hear the Vernal Equinox is on March 20th? Is that good for Apple?”.
All sports have fans who will go through every conceivable analysis, cite questionable statistics, and passionately defend and promote their teams.
I don’t think that there would be ANY response, on anything I would read at least, had the professor written the exact same article on Adobe, let’s say.
Meanwhile, all models have their assumptions. I think the professors models will not stand to the rigors of reality.
“In theory, there is no difference between theory and practice. But in practice, there is.” -Yogi Berra
Business School, acronym, BS. A Coincidence? I think not!
military intelligence anyone? Speaking of oxy morons.
I read the article. I felt like he was saying a lot of “These are not the droids you are looking for.” (I’m pretty sure I meant that pun.) Especially when he never really defines who are the “others”, as in the comment “Xiaomi and _other_ disruptors”. Exactly who are these other disruptors capable of monetizing their products more effectively than Apple? And what are they using for money? Seashells?
Good to see you writing again.
I’m, rather, dazzled by Apple’s lock-in. You’d think after the MS years we’d be more suspicious than that…
You seems to use the term “lock-in” over broadly. Every company — EVERY COMPANY — wants their products to be unique and uniquely valuable and no company stays in business unless that is so. Customer loyalty is not lock-in.
Yes, but intentionally making platform technologies, non-interoperable, crosses a line… iMessage comes to mind. There are others.
Thank god nobody’s forcing you, either by law or by monopoly-induced lack of market alternatives, to buy Apple products then, huh?
Thank God is right! Does it require the attention of the Almighty though?
Well, based on the endless torment and suffering the matter seems to bring you, apparently nothing short of divine intervention will help.
I didn’t say torment and suffering. You did. I’m having a “good old time”. But, tell you what, maybe these forums should switch to iMessage only, that way you get to not know I exist….
I’ll stop when the echo chamber stops. It’s called dialogue.
The limitations of communication purely by written text strikes again. Sorry, I’ve been in tongue-in-cheek mode the whole time. (Maybe tongue-in-jowl, given the ravages of time.) I assumed you were too. I grew up in an era where comedy was mostly irony not profanity and squirm-inducing situations.
No, no, friend (please take that term friend as sincere) I was truly responding, in kind, with my own flavor of irony.
I truly thank you for taking the time to respond.
We who learned to communicate face-to-face with vocal inflection and body language are a dying breed. Gotta stick together.
Well said, aardman.
Resentment running the tongue rarely checks the brain for understanding, quickly become redundant & boring. But old queens rarely take time from polishing their crowns to think on what they speak. But who pays heed to redundancy.
Namaste and care,
Indeed. Lock in is when your Apple media, apps and cloud services will only play/work on your Apple devices, when your iDevices will only talk to other iDevices (iWatch to iPhone, iPhone to Mac given the sorry state of iTunes/Windows…), when industry standards and formats are unsupported in favor of proprietary formats (dlna, widi, avi/mkv/flac/…) and when there’s no provision à la Google Takeout to take your data out.
Are you saying Apple are not focusing heavily on that ? Who’s pretending to not understand lock-in ?
Sing it Brother Obart! 😉
Well Microsoft did have it. But then we all know how Microsoft treated their customers…
HINT: Many left.
And yet there are still approximately 1.5 billion Windows users.
Yes yes there are.
But how many smartphone users will there be?
How many of those will be Windows Phone users? How many of the billions of smartphones perhaps have never owned a Windows PC?
how many of these 1.5b users are customers? what percentage of apple users are customers? you can get some clues from their most recent results.
I guess I’ll be the one to point out Apple isn’t calling out earnings to brag or distract. They’re calling out earnings because they’re federally required to do so each quarter. If they weren’t, they wouldn’t. They’re kind of okay with not communicating.
Also, I’m not following how Sampere or anyone else can arrive at the conclusion that Xiaomi and others have (I quote) “business models that are capable of monetizing their products much more effectively than Apple.” In what universe is this happening?
Apple is certainly an incumbent, and arguably they’ve slipped into more incumbent-centric thinking than in the past. I’m not sure they’re one of the crazy ones anymore. I see a lot of partnering with other incumbents to protect their respective fiefdoms, and not necessarily to the customer’s benefit. Hanging around too much garbage will drive customers to seek the fresh air of other alternatives. But that’s not anything Xiaomi and ‘Others’ are doing.
Extremely minor point, but following Spanish naming practice, Vazquez is the professor’s surname. Sampere is his mother’s maiden name. He is Prof. Vazquez or Prof Vazquez Sampere but not Prof Sampere.
That’s my vanishingly small contribution to greater global understanding.
Give yourself more credit. That was a better analysis based on facts in evidence than Prof. What’s-His-Face’s.
I’m not sure about the garbage/old baggage issue with Apple. Apple is known to simply hack-off any legacy platform, service, or product. Even it it pisses off a portion of their customer base.
Regarding customers leaving – absolutely – its ebb & flow. Nothing new.
However, it not going to be because “Apple slipped into incumbent-centric thinking”. As with any aspirational brand – their risk is becoming “less cool”
We shouldn’t be dazzled by one of the most successful tech companies on the planet. But maybe we should be dazzled at how clueless venal parasites are willing to appear in service of their agendas.
Mamas, don’t let your babies grow up to get MBAs. – Sung to the tune of…
I’ve long held that MBAs and Economics* have no place in a liberal arts college, and this Harvard clown has proven my point. One can’t do business analysis until one is capable of analysis.
*OK, maybe Economics can remain, as long as its in the Religion Department with the rest of belief systems.
I would keep the Religion Department. Regardless of whether your ascribe to the notion or not, at least they seek the truth (well, at least since the inquisition). MBA’s on the other hand….
Hey as an econ major, I don’t necessarily disagree. I’d keep econ in a liberal arts college provided it goes back to its roots which is Political Economy, where it at admits that political motivations underlie economic policy. The problem is not that a lot of economics is religious, the problem is that economists, or a lot of them, pretend that it isn’t. (Even as they slip in their highly ideological policy recommendations.)
“Hey as an econ major…” I appreciate the spirit of your response. I saw the risk of posting my comment on a forum dedicated to tech business analysis, so I opened with a paraphrase of a country western song.
Still, they don’t call economics the “dismal science” for nothing. It is fundamentally faith-based and can never be otherwise. I hope your professors introduced/indoctrinated you to the more enlightened cults. Err, I mean schools of thought.
When I think about “disruption” in its generic sense and then to Apple more specifically the following observations come mind:
Apple has a consistently unique way it seems when it speaks out its customers: “here is how our products make your life different/better!” I just have not observed that in other so called competitors. What’s the disruption here? You may pay more but through use of our products you will see much value (value that you personally care about)
Although it is in very plain sight, the logistics of manufacturing, delivering and selling this many units (especially phones) is to me just incredible. There is engineering here that is truly best in class. This includes obviously all the disparate suppliers doing remarkable work as well. For me the amazing aspect is the logistics of this scale. The disruption here for me is the logistic engineering here. I do not know of very many organizations who can do this so very well.
The commentary here about disruption being about the low and or high end leaves me disconnected on why when it is done it is successful anyway. Any argumentation that focuses on how to get something into a customers’ hands misses in my mind a key element in this “relay race”. The final leg in a relay race is the one who brings the baton home, I.e., the customer. Unless customers validate the disrupting effort it is of no consequence (that is it is not disruptive at all). I will use a very personal anecdote to illustrate how theory regarding production can be disconnected to the customer. I believe that disruption theory arrived out in part an examination of the hard drive business. The notions of the importance of commoditization and driving down costs, etc. as a customer I have from time to time purchased hard drives for different purposes. Price has always been a consideration but a second level one. I have tended to put more of a premium on reliability (MTBF) and even aesthetics. Price becomes an issue when other things are approximately equal.
Maybe I am a completely unique customer, but I suspect not as Logan has noted elsewhere. For many years I worked in. Adios retail settings and I know that at least in these areas my concerns about functionality and their connection to delivering value far outweighed the “what it takes to deliver these to me concerns”. Even in cases where I concern myself with how something is delivered (e.g., fair trade coffee) I do that because of what I value myself – a sense of justice in this example.
So disruption can focus on how we deliver things, but unless the customer is part of the theory I don’t see how we can make sense of all the forms that disrupting efforts succeed.
Incredible post. Thank you.
Perhaps this post is about disruption on a macro level.
Collectively each customer POV
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