Posted on 03/05/2013 1:01:54 AM PST by Swordmaker
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:
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.
Yes, I would like to know how you are using it/what carrier you use and it it’s less than the mentioned $85/month. We currently spend $20 for 2 dumb phones monthly. We are willing to pay more for a smart phone, but not $85-month for 2 years.
I have been converted to all-apple because I rely so heavily on my computer for every day living. They are just so well integrated, it makes my life easier.
Best laugh of the morning. ;-)
Hey, glad to see you’re still around. Someone took your name in vain on a thread the other day. I appreciate the information you post.
I think you’re right, but Amazon has the goods to do some serious harm to other outfits from the “cloud” business side more than the handset business.
The whole Google “cloud” and Apple “iCloud” and Blackberry biz services, blah, blah, blah... that’s where Amazon has *huge* capacity and capability - capability to go up against Google if they wish... and win.
If Amazon is looking to get into the smartphone business on the backside of their tablet business, I would expect to see them ship a very low-cost handheld device that has a lot of support from the huge computational resources Amazon has in their cloud. Think of something like Siri, but with Amazon’s servers and customer fulfillment network backing it up. Suddenly, you could have a phone that’s also a “wallet” that’s also a Amazon POS terminal. Need a book? Order it by voice. Need hardware, replacement parts, software? Order it with your amazon smartphone.
Apple is the one who has sort of shown the way here on this. iTunes is hugely successful and contributes a fat wat to Apple’s revenues... but iTunes delivers only “software” - whether we’re talking programs/applications on your phone or desktop, or music, video, etc. Basically, iTunes just ships streams of bits.
Amazon ships real stuff. Oh, and they ship all the tunes, movies, software and other “stream of bits” stuff that iTunes does, too.
If you could do your amazon shopping from your phone, seamlessly, effortlessly... everyone else is in for a rough right right away, because they can’t hope to build the “customer fulfillment” network that Amazon has fast enough to compete with Amazon. Imagine getting news of specials and deals that Amazon sniffs out for you alerted to your phone, and all you need to do to buy the crap is hit a button on your phone. The payment mechanism is already attached to your phone bill.
So if I were Amazon, I’d play my strength and not get invested in making the next super-hot handheld widget. I’d make a low-cost widget that’s “good enough” to get my shopping and back-end capacity into the customer’s ear... and then tell the back room guys to get busy coding to pivot the “smarts” in “smartphones” into Amazon’s racks of servers. Why obsess over the handsets? What customers want is a device that makes calls, takes pictures/movies and... does stuff. Do they care *where* it “does stuff” for them? For the vast majority of dumb customers... no. They can’t even tell you what a speculative fetch on a CPU is, much less where the code is executing to do their bidding. If I took a poll of iPhone users and asked “what happens when you make a Siri request?” I’d wager than over half think that feature is in their phone.
Google, tho... I’ve seen companies make the mistakes they’re making before. When Google falls, it won’t be pretty. They’ve believed their own propaganda for far too long, and it will be a reality disconnect for lots of their people when they fall. One of their larger reality disconnects is that they’ve based their phone s/w on rehashed Java... thinking that it would be robust and secure.
Whoopsie.
The more I learn about Google’s involvement with the Obama campaign, the more I realize that people should stop worrying about the NSA or some other government agency as “Big Brother” snooping over their shoulders...
and start worrying about Google.
Go check out “Smart Talk” at your local Walmart.
No, I’m not kidding. Unchained phones and no contracts.
At Walmart.
My monthly charge is $105 [give or take]. But that's because I go all out on data and texting. I just don't like being tethered to one carrier; but could save a chunk off that figure.
But, hey, that's why I got a smartphone: data and texting. Without the contract, though, I can modify my plan through the AT&T app instantly with no penalties. Just have an aversion to long-term relationships. :)
I just checked the iPhone5 and the price is quite high but when I checked the carrier prices the lowest was 85.00 per month. I don’t want to do that either.
To use a smartphone, $85/mo. is probably on the low end of what you can get. The whole purpose of having one is the Internet and texting. I pay $105 but that includes 3 gigabytes of data per month.
I previously had a dumb phone on a pre-paid plan [which is really my comfort level] but [after buying the phone] I found out that AT&T won't grant data access [except over Wi-Fi] on pre-paid plans for smartphones.
Go figure.
The iPhone's a beautiful contraption, but you'll definitely pay more to use one than you're accustomed to.
The article was about profitability, not market share. Apple's hugely profitable. Your market share point is well-taken, but not the point of the discussion.
Not from the first day on the market, Van.
” and paying sales people to push your products—Samsung spent $9 BILLION in advertising their smartphones including sales spiffs in 2012”
Of course Apple pays nothing for advertising...Not one dime... No glossy ads, huge billboards, fancy setups in electronic stores, and no dedicated fanatics that pass around Apple propaganda pieces for free. Never seen it.
Apple's advertising budget is nowhere close to $9 BILLION, nor do they pay third party sales people spiffs to push their phones ahead of the competition's.
“However, Apple owns 80% of the worldwide PROFIT SHARE”
Apple makes more money off of me when I buy their stuff! Weeeeeeeeeeee!
Uh, yeah, but that's on devices that sell close to the same retail pricing to YOU as the competition: free to $299 or so on contract. So what affect does that have on your bottom line?
Also Apple’s stock continues to plunge. Apple Superiority, baby!!!!!
Which has ZERO to do with Apple's success, profits, fundementals, or even how well it is doing as a company and everything to do with the concentrated FUD storm of negative false rumors being spread by manipulators.
So what is the advantage of buying the iPhone if you still pay $100 or more per month to use it?
Just call me confused. lol
Get an iPad Mini for data, you can even use it as a phone with a free Magic Jack app. Data plan is $15.00 a month. Wi-Fi is free in many places.
Samsung stock has gone up 50% in the last 9 months while Apple has been on a long swoon down to $425 or worse.
http://www.bloomberg.com/quote/SMSN:LI SAMSUNG CHART
Samsung makes solid profits in its cell phones and smart android phones. Apple had a good run, but now Samsung are the new KING OF THE HILL. Sammy is also the world’s largest consumer of chips
I have seen unlimited phone+data plans going for $45/month. This is what is killing the Apple business model. I don't know what phone comes with the $45/month deal or if you supply your own. On ebay you find plenty of Samsung Galaxy to choose from $100 (older ones) $200 new ones etc etc So do the math. No wonder you can't find any Advil in Cupertino stores
I wasn’t happy initially about having to get new cables for the iPhone 5. But you know what? The lightning plug is better. It also takes up less space inside the phone which leaves more room for other things.
And they do make a simple adapter so I can still plug the phone into a dock or older charging cable. I haven’t found it to be as big an issue that I originally thought.
Yes, the new cable is smaller and I like the way it can insert either direction.
BUT
the adapters you mentioned will not allow you to stream music through them, and you also can’t stream video through the lightning cable like you could the old ones.
Their products work so well and they’re integrated very well - it’s a joy to use them (and my joy counts for something, too ... :-) ... ).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.