Apple Is Being Shortsighted -- And This Could Clobber The Company

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Let me start by saying that I'm a loyal Apple customer and shareholder. I have a lot of respect for the folks who are running Apple, but I think they are making a big mistake. I think Apple is letting its obsession with short-term profits blind it to the current realities in the mobile industry. And I think that Apple's emphasis on short term greed instead of long-term investment will end up hurting the company and its shareholders and customers over the long haul.

Five years ago, when Apple introduced the iPhone, it had the market to itself. Apple was so far ahead of its competitors that, for the next three years, the iPhone was by far the best phone available. Apple's manufacturing prowess and volume advantage, meanwhile, enabled it to produce and sell iPhones at the same or lower price than its competitorsThis combination--best product, best price, and lowest unit cost--produced astounding profits for Apple, giving the company a mind-boggling ~30% profit margin and allowing it to amass a staggering $150 billion in cash.

But in the last two years, several things have changed:

 

  • Apple's competitors have caught up: The iPhone is no longer obviously the best phone on the market
  • Apple's competitors are now selling their excellent iPhone competitors for much less than Apple is selling the iPhone, allowing them to capture the extraordinary growth in emerging markets
  • Another smartphone platform, Google's Android, has taken over the world, rendering Apple's iOS a niche platform in many markets 

If smartphones and tablets were not a platform--if the only thing that mattered to the value of the product and a customer's purchase decision was the gadget itself--then Apple's loss of market share would not make a difference. Apple zealots would be correct when they smugly assert that what matters is Apple's "profit share" not "market share."

But smartphones and tablets are a platform.

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. 

In platform markets, as the often-hated but always insanely powerful Microsoft demonstrated for decades in the PC market, the vast majority of the power and profits eventually accrue to the market-share leader.

 

smartphone market share

BII

Niche platforms, meanwhile, get marginalized--just the way Apple's Mac platform was marginalized (and nearly killed off) in the PC market.

READ ENTIRE ARTICLE HERE: http://www.businessinsider.com/apple-is-being-greedy-2013-9

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