Apple: An Antidote to iPhone Complacency

by: Joel West August 24, 2008 | about stocks: AAPL    

Joel West

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My posting last night on Apple vs. Nokia got picked up by Seeking Alpha. It’s gratifying to get the exposure and discussion, although (as with any online discussion) the quality of the posts was variable.

Most of all, I was surprised to see the suggestion that I was too pessimistic on Apple. Readers of the Seeking Alpha site don't know me the way that my blog readers do, so let me fill in a few blanks.

I bought my first Mac in January 1984 and have never owned a DOS or Windows machine. I wrote a book on Mac programming and wrote columns or articles for 3 Mac publications. I started a Mac-only software company in 1987 and ran it for 15 years. Before the Jobs II era, we would have said "I bleed in six colors."

Today I'm a little more dispassionate as an academic strategy researcher. I did my PhD thesis on Apple losing market share in the US and Japan. I published a book chapter about why the conventional wisdom on Apple's cloning decision was wrong. Now I teach technology strategy to MBA students and consult to software companies.

My long history with Apple is EXACTLY why I think the ahisotric Apple bigots (particularly the iPhonatics) are missing the boat. In the 1990s, Apple had great products and technologies and still almost died. I know, I was there, and it’s why in 1993 I started looking for a new career to replace being a Mac ISV.

Yes Apple has had enjoyed a good run of innovation success. As I’ve noted earlier, in MP3 players Apple is crushing Microsoft and sells the vast majority of standalone MP3 players in the US. It also has dominant mindshare (again in the US) in smart phones.

However, when it comes to innovation, past performance is no guarantee of future success. Look at Apple in the 1990s. Look at Sony. Look at Ford or Chrysler or GE.

OK, some wiseass thinks because I make a blanket statement "don't stand still or (fill in the blank) will catch up," I don't know what I'm talking about. Would you prefer (say as an AAPL shareholder) that management says to the troops "We are so far ahead that no one will ever catch up?" Of course not.

Exhibit A is the old bumper sticker (and T-shirt) "Windows 95 = Macintosh '89". The problem was, Apple’s innovation (with the exception of the first PowerBooks) slowed to a crawl after System 7. Thus, Macintosh 89 = Macintosh 95 = Macintosh 2000.

Exhibit B is that 10x as many people bought Windows 95 as Mac OS 8, even though the latter provided a demonstrably better user experience. For Windows 3.1 the ease of use difference was dramatic, but for 95 it was not, and Windows 95 had other advantages: cheap hardware, more hardware variety, a larger potential installed base, more applications. Ease of use is important but it’s not everything.

A decade ago, Apple got crushed by Microsoft and nearly died. Today, there’s an even wider range of companies that could do to the iPhone what Windows 95 did to the Mac. What would it take?

First, Apple’s competitors would need to recognize what Apple has, and that it’s selling better. Nokia may be in denial, but I don’t think Microsoft or any of the major vendors in the US have missed Apple’s success.

Second, it would require the resources to apply to catching up to Apple. Samsung, LG, Microsoft and Nokia all have the resources to do so, and I think Research in Motion does too. In the short term, I’m ruling out Motorola and Sony Ericsson because their recent record on innovation is more dismal.

Third, it requires the ability to execute, in this case on software and user interface design. Obviously Microsoft could copy Windows and the iPod so there’s no reason that they can’t copy the iPhone. The other firms haven’t done well on software, but there’s no reason why they couldn’t procure that expertise. Maybe the gPhone is halfway decent. Or someone buys the PalmSource team. Or companies use the market to find some other open innovation solution.

Once LG or Samsung (or Nokia) has a decent alternative to the iPhone — particularly a CDMA phone — thanks to Apple’s foolhardy Cingular exclusive, the iPhone knockoff will have the upper hand with a majority of the market. The Koreans and Europeans will also have an advantage in their home markets where the iPhone has had a much smaller impact, in addition to the global economies of scale that Apple currently lacks.

Finally, other firms catching up to Apple will only happen if Apple is still roughly the same place when others match Apple’s existing offerings. Sure, Apple is on a roll, and as long as Steve Jobs remains savvy and healthy, their odds look good. But it’s not a lock.

Remember Netscape Navigator? The Motorola flip phone? The Sony Walkman? The Chrysler minivan? (The Boeing jumbo jet?) In many cases, a revolutionary product is all about the concept, and a concept can be copied. It’s not just about innovation activities, but also about the potential for those activities (as Geoff Moore argues) to achieve separation. If you can’t achieve separation, we call that commoditization. (NB: MCI, AT&T, the airlines, banks, or enterprise software vendors).

So I wouldn’t short Apple, but I also wouldn’t bet any sizable sum that all of its competitors will be asleep at the wheel for the next three years. And if Apple management shows signs of being as complacent as the Seeking Alpha iPhonatics, then sell! sell! sell!

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This article has 31 comments:

  •  
    Aug 24 11:28 AM
    Ridiculous article. Of course anything is possible, you could have summarized your blog by saying that Apple might continue to set the world on fire, and it might not.

    Look, investors simply need to weigh the odds of Apple surpassing a measly 4% share of the global PC market, or an even more measly 1% of the smart phone market. You suggest Apple's future growth is a huge gamble, I say it's not.

    And for someone that professes to be so up to speed about everything Apple you make no mention about the barriers to entry relative to the ecosystem Apple has carved out as it relates to hardware AND services, aka itunes/app store etc. Sure competition exists, but it's not just about hardware, or software. A good investment thesis recognizes that Apple doesn't need to rule the tech world to be an even greater success, then again, they just might rule this tech world someday to boot.
    Reply | Link to Comment
  •  
    Aug 24 11:30 AM
    What is the point of this article?

    "My long history with Apple is EXACTLY why I think the ahisotric Apple bigots (particularly the iPhonatics) are missing the boat."

    That company was a different company from today's company. Then, Apple Computer Inc. was dependent on a microprocessor vendor which did not help Apple carry its torch as Intel did for its customers. Today, Apple Inc. has freed itself from many shackles.

    "Today, there’s an even wider range of companies that could do to the iPhone what Windows 95 did to the Mac. "
    Apple is not the incumbent company at Risk here; I'd say these comments should be directed at RIM with respect to smartphones.

    I could take issues with a lot more, but my final comment is you imply you have a PhD, so name calling of Apple supporters and IPhone adopters as "Apple bigots (ahistoric or otherwise) and "iPhonatics" is unbecoming of people who have earned the distinction of Doctor of Philosophy.
    Reply | Link to Comment
  •  
    Aug 24 12:48 PM
    I have to agree with the first 2 comments.The only reason that I can fathom to write the article;is to fill up space .It was a waste of time to read it.
    Reply | Link to Comment
  •  
    Aug 24 03:01 PM
    The first two comments are cogent; the article is not.

    "Apple is on a roll, and as long as Steve Jobs remains savvy and healthy, their odds look good. But it’s not a lock."

    Duh. And here is more great advice:

    "And if Apple management shows signs of being as complacent as the Seeking Alpha iPhonatics, then sell! sell! sell!"

    The author might have acknowledged that if any company's management becomes complacent, one should sell, sell, sell.

    What tripe.
    Reply | Link to Comment
  •  
    Aug 24 03:04 PM
    I think the responses to "If Apple just stands still while competitors catch up" has to be put in context-Your context is Apple didn't innovate 15 years ago, and lost their lead.

    Today's context seems quite different. The Apple of yesterday would never have replaced a good selling iPod (the Mini) with the Nano. The Apple of yesterday would never have pushed the chip industry to develop a custom chip for a new notebook (The MacBook Air).

    That is why some people read your article with askance-your "long storied Apple history" doesn't help clarify anything. Rather, it makes you seem a bit out of touch with today's Apple.

    Could history repeat itself? Sure. Have we been given any indication today's Apple is acting like yesterday's Apple that lost the lead, much less like how Motorola lost their cellphone dominance by relying on the RAZR for too long?
    Reply | Link to Comment
  •  
    Aug 24 03:05 PM
    Joel,

    Daneil Elger at roughlydrafted.com has been powerfully making the case that Apple has a huge moat protecting its dominating positions in mp3 players, smartphones, and (arriving soon) correctly sized (150% bigger than a touch) iTablets. Apple is also growing Mac mkt share at close to 50% yoy thanks to the gift that keeps on giving - Vista!

    Your expert view of Apple's strategic advantages does not match up at all with Daniel's. I've been betting on Daniel for 3 years now and he seems to be divinely prescient in all things technical, strategic, mkting, competitive, financial, fundamental, whatever yada yada...

    You would do me a great favor if you perused his site and shared your view on Daniel's world.

    Thanks!
    Reply | Link to Comment
  •  
    Aug 24 03:05 PM
    i have to disagree with the comments, the article is well though out, iphone has not done well at all outside the us (in australia it got .5% market share during the first month of sales - pretty much the peak selling period of iphone).

    and in the us, the competition is getting tougher every day.

    further, apple pace of iphone innovation is lacking: iphone 3g didn't bring any significant new features besides 3g and slightly better location functionality. what's worse, the introduction has been plagued by difficulties because everyone at apple, as steve j. pointed out, has more than enough in their hands.
    Reply | Link to Comment
  •  
    Aug 24 03:06 PM
    RE: "I don’t think Microsoft or any of the major vendors in the US have missed Apple’s success."

    Apple is the freight train in the tunnel. Microsoft is blindly stumbling toward the (head) light of the train.

    ====================
    RE: "Samsung, LG, Microsoft and Nokia all have the resources to do so"

    Resouces do NOT guarantee success.

    Look at Microsoft's embarrassment with Zune and its core operating system, Vista.

    Look at Nokia being outflanked by the iPhone.

    Samsung and LG are hardware manufacturers burdened with creaky mobile phone operating systems.

    These companies have many BILLIONS in revenue to be directed to resources, and they continue to fail at matching Apple.

    ====================
    RE: "Third, it requires the ability to execute, in this case on software and user interface design."

    Yes it does, and no other company is even near Apple on software design and user interface design.

    Microsoft can't even get its most important software, Windows, to be user friendly. Don't expect it to bring to its mobile software a better User Interface than Vista has right now.

    ====================
    RE: "I also wouldn’t bet any sizable sum that all of its competitors will be asleep at the wheel for the next three years."

    Competitors will have to come up with something REVOLUTIONARY, and I don't expect that will happen for DECADES.

    Yes, Apple will have competition, and since no company has been able to come up with anything to successfully compete with the simple iPod over the last 5 years, I believe it will be MORE than 5 years for a company to SUCCESSFULLY compete with the Apple iPhone, a much more complex device than the iPod.

    Apple continues to rack up significant sales with its computer line. Over 250 million personal computers are sold each year, yet Apple continues to have the most desired computers, with the best UI and operating system.

    It is NOT so obvious that Samsung, LG, Nokia, and Microsoft with dethrone Apple during the next 3 years in the mobile phone market, when Dell, HP, Acer, etc. can't match Apple in personal computer sales growth.

    Personal Computers have been around for approximately 25 years and Apple is now having the best success of all computer companies. The mobile phone has been around for less than 10 years, and it will take a VERY LONG TIME for competitors to catch the Apple iPhone.
    Reply | Link to Comment
  •  
    Aug 24 03:30 PM
    At last someone who just not follows the crowd : "With 6 Billions worlwide potentials Iphone users..."
    Don't laugh. I read a very recent article telling the Iphone launch in East-European and South-American countries has a potential of 350M buyers (or 660 M according an other article : apple20.blogs.fortune..../)...
    Sure, with an average of 200$ monthly income by these "potential buyers", Iphone will be without any doubt a great succes in these countries...
    Reply | Link to Comment
  •  
    Aug 24 04:20 PM
    poor.
    Reply | Link to Comment
  •  
    Aug 24 04:48 PM
    The Boeing Jumbo 747-400? You mean the one thats still being produced in huge numbers and still flies the majority of heavy long-haul flights?
    Thats a VERY successful current product.

    Apple isnt going to be beaten down by people who, as you out it, 'procure' software.

    Apple have built their software dominance slowly and carefully - it will take the right people 5 years to even get close, and all the right people dont work at Microsoft or Nokia - they actually work at Apple.

    Screw market share - Apple is making big profits with a small market share.
    Microsoft - 90% share and twice Apple profit. Apple - 6% market share and 50% of Microsoft profit.

    Apple cash - 23 billion and counting.
    Microsoft cash - 25 billion and counting, but slowly.
    Reply | Link to Comment
  •  
    Aug 24 04:57 PM
    www.roughlydrafted.com

    Thats where you will find the best Apple analysis - put that together with the cash and the earnings and the almost 50% growth and make your buying decisions.

    Short term - who knows?
    Long term - Apple to hit $300 in 12 months.
    Reply | Link to Comment
  •  
    Aug 24 05:45 PM
    The author has missed a couple of *very* key issues. First, we're talking about a platform not a device. The iPhone comes linked with iTunes which means music, movies, podcasts, apps etc. all from one convenient place. Apple has ZERO competition in this regard and will leverage its huge market share accordingly. The tight integration between hardware and content gives the iPhone a HUGE advantage over any potential competitors. If MSFT came out with a phone, what would people put on it? Are they going to start buying their content from a dozen different sources and deal with all of the bugs and issues that will ensue? Who will make apps for it and where will they sell them? Can the CDMS network handle the huge data stream?

    Second, when speaking of devices, the iPhone has patented technology that will NOT be easy to duplicate or overtake. It's very simple to say RIMM, MSFT et al can just make an iPhone of their own but to actually do so will be enormously difficult.

    Third, while everyone else scrambles to catch up to Apple regarding the iPhone device, Apple will be moving forward into touchscreen computers, better Apple TV, home media integration etc. Apple in the early 80's was a complacent company compared to the new Apple. I do not expect history to repeat itself this time.

    At the end of the day, Apple has very little chance of losing its own, growing user base for the forseeable future whereas the Windows world is under constant threat. The future looks bright for Apple.
    Reply | Link to Comment
  •  
    Aug 24 07:13 PM
    This blog only proves one thing... Joel West doesn't know much about Apple.
    Reply | Link to Comment
  •  
    Aug 24 07:41 PM
    vision... Joel you lack vision and glasses won't help you either. Maybe your prior years experience can help Microsoft find better traction.
    Reply | Link to Comment
  •  
    Aug 24 08:36 PM
    I understand you were disappointed with Apple, you invested so much of yourself and Apple let you down. Perhaps at some point you even lost money on Apple.

    GET OVER IT!!!
    Reply | Link to Comment
  •  
    Aug 24 08:45 PM
    "In the 1990s Apple had great technology?"

    What alternate universe was this in?

    In the 1990s Apple had an operating system that was still crippled (yes, crippled) by the compromises that Apple made to fit it into a machine with 128k. By the time OS 9 came out a 233 MHz Power PC was struggling to operate, and doing something as simple as playing music in the background was more or less doomed. Until OS X was released Apple had no market other than people who perceived themselves, for whatever reason, as being locked in to Apple, or people who had no idea what their technology was like.

    Bad as the pre-NT Windows was, most versions of Windows sold in the '90s were still more stable and reliable than any contemporary version of Mac OS. Once Windows NT came out, Apple was a lame duck... it was clear that Microsoft had a credible desktop OS, and Apple was still floundering around looking for Compland to pull them out of the hole.

    No matter what else Jobs did, if he hadn't brought NeXTstep with him, Apple would have been out of business by now. And if that had been ALL he did, it probably would have been enough. NeXTstep on a 40 MHz 680x0 with 8M of RAM, from 1992, was faster, more responsive, and more reliable than OS 9 on a 233 MHz 604e with 112MB of RAM, from 1997.

    That's how bad Apple's technology was in the '90s. It cut 5 years off the performance of your computer just from operating system overhead... from memory partitions, desk accessories, and the great multitasking charade.
    Reply | Link to Comment
  •  
    Aug 24 09:14 PM
    tell whoever's paying you to write this article i'm not selling my aapl shares. on the contrary if it dips I'm going to buy more.
    Reply | Link to Comment
  •  
    Aug 24 10:13 PM
    Well, I was going to write a thesis myself about this obvious and worthless article but most have hit the highlights already so I don't have to do it. I too have a long technological history having developed and brought to market over 150 products and am also well degreed. I remember the old Apple days and troubles for Apple Dealers and ISVs but what are you-- a Dinosaur ? Your article has no place in today's world and certainly doesn't have any insight into Apple strategy because you apparently don't see the writing on the wall before you. Of course if we stand still and do nothing, competition will rise to the occasion. If your brain is stuck back in the ISV days due to resentment or otherwise, you will miss the reality and the boat. I don't see Apple standing still in any way shape or form. Apple knows they have the momemtum and you can see the competiton all scrambling to catchup. I don't foresee Apple dropping the baton do you ? Get some rest, take your mind out of the old crusty books, and think freely. The old days are over Sir and Apple knows they have the synergistic building blocks to stay ahead of the pack and grow market share. Where are you going to invest your dollars ?
    Reply | Link to Comment
  •  
    Aug 24 10:15 PM
    Mac OS 8 was better than Windows 95 in my book. And NT? That was a horrible OS that looked exactly like Win 3.1. Sure, it was stable, but it looked worse and gave worse user feedback than any version of Mac OS, ever. Most of the Mac stability problems were extensions related and could be ruled out fairly easily.

    This author thinks he knows about Apple because he bought a Mac in 1984. That's fine, but pretty irrelevant now. And I'd guess most of use posters have more experience with the technology than the author.

    He seems to think companies like Nokia or Microsoft could come out with an iPhone like device. I think that is a stretch at this point and even if they did, Apple has a huge head start. Nokia has no OS experience, etc... and Microsoft has no manufacutring experience outside of some mice, trackballs, etc... Zunes (total flop) etc...

    Rim coming out with an iPhone? How could they manage that? Using google phone? I don't see any competition coming for iPhone for a long while, and I doubt Apple is going to be sitting still.
    Reply | Link to Comment
  •  
    Aug 24 10:26 PM
    None of the examples given such as Walkman, RAZR, or Chrysler Minivan have ecosystem that Apple products enjoy. Better example would have been Microsoft Windows. Microsoft Windows with its ecosystem has enjoyed several decades of success and it's still a cashcow for a foreseeable future. Apple is building an ecosystem of integrated system, service, and contents. Not one hit wonders...
    Reply | Link to Comment
  •  
    Aug 25 01:55 AM
    I concur with all the comments posted before disregarding this article. but I do think the article and comments do miss out in a certain point of view that could lead to an Apple's slowdown (slowdown not crash or 90s like bankrupt tendencies): not isolated competiton but rather a time when several industries competitors join to battle Apple.

    As it is well put in several comments: apple has the ecosystem and the integration of services in its behalf... can one single company compete with apple? no, not in the next years, but... as several movements like Universal's breaking off with the itunes, there are indications that could lead to a several companies united front to put some pressure in apple not merely devices as this lame article states but in the integrated services that a well put task force could build around. Nokia, Universal, Microsoft's Xbox, Netflix, there are several opportunities for this giants to unite and battle Apple just out of spite of apple's success and to finally take a piece of said success. Can Nokia by itself defeat the iphone? no. But an itunes competitor built around universal and warner music companies, netflix and microsoft's xbox (to battle apple tv and itunes) correctly integrated with a nice google or nokia phone and of course a good user interface and design could bring balance to the market and slow Apple and that could happen in less time than what we can expect of any of these companies in isolation.

    Will Apple come to a situation where you have to Sell? only if the obvious happens as everyone has stated here. But could apple face a force that makes them miss the 300 line or even have trouble maintaining a 200-250 range? yes, it could happen.
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  •  
    Aug 25 04:55 AM
    A year and a half later, we don't see another player getting close to the iPhone. Why? It's hard. Indeed, I explored at least 10 factors that any player hoping to catch the iPhone must have even to pull even in:

    Who can beat iPhone 2.0?
    counternotions.com/200.../
    Reply | Link to Comment
  •  
    Aug 25 07:46 AM
    Innovation such the iPhone is great, but it's not innovation when it doesn't work right... like the global problem of iPhone 3G slooooow speed and dropped calls.
    Reply | Link to Comment
  •  
    Aug 25 08:50 AM
    face it. most of these toys are just high technology looking for a purpose. most of this junk is like daytime tv. the technology is wonderful but the content is garbage. thank god as a young person i didn't walk around all day stoned on music plugged into my ear.
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  •  
    Aug 25 08:56 AM
    Very flawed article. Apple lost the BetaMax vs. VHS wars because of pricing in business. Unfortunate but true. Happens all the time in business.

    You make not mention on the internet that truly was the force behind compatibility making platform independence a reality.

    In business you need to make a product 10 times better than the competition to replace it. Will this happen? maybe someday, but for the foreseeable future there is not a company out there that can come up with a portable OS (like OS X) and package that in a well made device that utilizes ease of use like Apple. Microsoft could do this but it will take them years if they start now.
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  •  
    Aug 25 09:05 AM
    This was a complete waste of my time.
    Reply | Link to Comment
  •  
    Aug 25 10:17 AM
    @Resuna: "It cut 5 years off the performance of your computer just from operating system overhead... "

    I like how you put that: heavy software "cutting years" off of cutting-edge hardware. I think I'll borrow it. : )

    @Been Watching: "... you can see the competiton all scrambling to catchup."

    Think they can cut the mustard?

    Anyway, the author's point seems to boil down to simply "Apple could screw up this success if they fall asleep at the wheel". That seems a pretty obvious point that applies to ANYBODY. It'd be just as meaningful to say that Apple could really skyrocket if it keeps up the good work, while its competitors fall asleep at the wheel.

    But I suppose the author is correct in reminding us that 1) Apple made the above mistake once before; and 2) it's generally the front-runner, not the struggling followers, that gets lazy and slips.

    No harm in reminding us investors of those things - though really, 2) at present seems to be the story that has Microsoft investors crying in their milk.
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  •  
    Aug 25 10:26 AM
    Before Eli Whitney invented the cotton gin it took one person one day to pick one pound of cotton (in the U.S., that one person was most likely an enslaved African or descendant of). After the cotton gin, one person could pick 50 pounds in one day. But Whitney didn't get rich off his invention because, as the author notes, it was copied by many, many others.
    Reply | Link to Comment
  •  
    Aug 25 10:49 AM
    Don't worry Joel. I do own a 2G & 3G iPhone and althought the 2G iPhone was a thing of beauty and solid as a rock the 3G is so full of bugs and instable software it doesn't even work well with its own store (quoted above to be an advantage).

    Apple needs to get off their ass and quick making products and fix the ones they have or they will be one big world wide failure and ruin the Apple name not just in the US but worldwide.

    That's tough to recover from but you'll never get Apple Fans to quit following the Steve Sheep Herd and think of anyone but themselves and forget that the 90% of the world runs on Windows.
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