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As posted on iPhone 5C: why the naysayers are wrong to say Apple is in trouble

The doommongers misunderstand the nature of Apple’s market share when they claim the recent high-cost iPhone launches showed an error of judgment

Remember netbooks? When Apple was too greedy and stupid to make a truly low-cost Macintosh? Here we go again: Apple refuses to make a genuinely affordable iPhone. There will be consequences – similar to what happened when the Mac refused to join netbooks circling the drain.

My first moments with the iPad back in April 2010 were mistaken attempts to use it as a Mac. Last year, it took a long overdue upgrade to my eyeglasses before I warmed to the nimbler iPad mini, never to go back to its older sibling.

With that in mind, I will withhold judgment on the new iPhone until I have a chance to play customer, buy the product (my better half seems to like the 5C while I pine for a 5S), and use it for about two weeks – the time required to go beyond my first and often wrong impressions.

While I wait to put my mitts on the new device, I’ll address the conventional hand-wringing over the 5C’s $549 pricetag ("It’s too damned high!" cry the masses).

iphone5c copie

Henry Blodget, who pronounced the iPhone dead in the water in April 2011, is back sounding the alarm: Apple is being shortsighted – and this could clobber the company. His argument, which is echoed by a number of pundits and analysts, boils down to a deceptively simple equation:

Network effect + commoditisation = failure

The network effect posits that the power of a platform is an exponential function of the number of users. Android, with 80% of the smartphone market will (clearly) crush iOS by sucking all resources into its gravitational well.

Commoditisation means that given an army of active, resourceful, thriving competitors, all smartphones will ultimately look and feel the same. Apple will quickly lose any qualitative advantage it now enjoys, and by having to compete on price it could easily fall behind.

Hence the preordained failure.

As a proof of concept, the naysayers point to the personal computer battle back in the pre-mobile dark ages: didn’t we see the same thing when the PC crushed the Mac? Microsoft owned the personal computer market; PC commoditisation drove prices into the bargain basement…

Interpret history how you will, the facts show something different. Yes, the Redmond Death Star claimed 90% of the PC market, but it failed to capture all the resources in the ecosystem. There was more than enough room for the Mac to survive despite its small market share.

And, certainly, commoditisation has been a great equaliser and price suppressant – within the PC clone market. Microsoft kept most of the money with the de facto monopoly enjoyed by its Windows + Office combo, while it let hardware manufacturers race to the bottom (netbooks come to mind). Last quarter, this left HP, the (still) largest PC maker, with a measly 3% operating profit for its Personal Systems Group. By contrast, Apple’s share of the PC market may only be 10% or less, but the Mac owns 90% of the $1000+ segment in the US and enjoys a 25% to 35% margin.

After surviving a difficult birth, a ruthlessly enforced Windows + Office platform, and competition from PC makers large and small, the Mac has ended up with a viable, profitable business. Why not look at iDevices in the same light and see a small but profitable market share in its future?

Or, better yet, why not look at more than one historical model for comparison? For example, how is it that BMW has remained so popular and profitable with its One Sausage, Three Lengths product line strategy? Aren’t all cars made of steel, aluminium, plastic, glass and rubber? When the Bavarian company remade the Mini, were they simply in a race to the bottom with Tata’s Nano, or were they confidently addressing the logical and emotional needs of a more affluent – and lasting – clientèle?

Back to the colorful but "expensive" 5C, Philip Elmer-DeWitt puts its price into perspective: for most iPhone owners, trading up to the 5C is ‘free’ due to Apple’s reuse and recycle programme. We’ll have to see if The Mere Matter of Implementation supports the theory, and where these recycled iPhones end up. If the numbers work, these reborn iPhones could help Apple gain a modest foothold in currently underserved price segments.

Still thinking about prices, I just took a look at the T-Mobile site where – surprise – the 5C is ‘free’, that is no money down and 24 months at $22 – plus a $10 "SIM Kit" (read the small print.) You can guess what AT&T offers: 24 months at $22/month (again, whip out your reading glasses). Verizon is more opaque, with a terrible website. Sprint also offers a no-money-down iPhone 5C, although with more expensive voice/data plans.

This is an interesting development: less than a week ago, Apple introduced the iPhone 5C with a "posted price" of $99 – "free" a few days later.

After much complaining to the media about "excessive" iPhone subsidies, carriers now appear to agree with Horace Dediu who sees the iPhone as a great "salesman" for carriers, because it generates higher revenue per user (ARPU). As a result, the cell philanthropists offer lower prices to attract and keep users – and pay Apple more for the iPhone sales engine.

Of course, none of this will dispel the anticipation of the Cupertino company’s death. We could simply dismiss the Apple doomsayers as our industry’s nattering nabobs of negativism, but let’s take a closer look at what insists under the surface. Put another way, what are the emotions that cause people to reason against established facts, to feel that the small market share that allowed the Mac to prosper at the higher end will inevitably spell failure for iDevices?

I had a distinct recollection that Asymco’s Horace Dediu had offered a sharp insight into the Apple-is-doomed mantra. Three searches later, first into my Evernote catchall, then to Google, then to the Guardian, I found a Juliette Garside article where Horace crisply states the problem [the passage quoted here is from a longer version that’s no longer publicly available; emphasis and elision mine]:

"[There’s a] perception that Apple is not going to survive as a going concern. At this point of time, as at all other points of time in the past, no activity by Apple has been seen as sufficient for its survival. Apple has always been priced as a company that is in a perpetual state of free-fall. It’s a consequence of being dependent on breakthrough products for its survival. No matter how many breakthroughs it makes, the assumption is (and has always been) that there will never be another. When Apple was the Apple II company, its end was imminent because the Apple II had an easily foreseen demise. When Apple was a Mac company its end was imminent because the Mac was predictably going to decline. Repeat for iPod, iPhone and iPad. It’s a wonder that the company is worth anything at all."

This feels right, a legitimate analysis of the analysts’ fearmongering: some folks can’t get past the "fact" that Apple needs hit products to survive because – unlike Amazon, as an example – it doesn’t own a lasting franchise.

In the meantime, we can expect to see more hoses attached to Apple’s money pump.

Next week, I plan to look at iOS and 64-bit processing.

JLG@mondaynote.com

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