Apple's brave old world of cannibalization

Apple's brave old world of cannibalization

Summary: There's no pleasing the analysts or their followers; they all want Apple to follow the competitors into a headlong dive to the bottom of a commodity market. One where there's no quality, nothing special, and little profit.

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Apple on Wednesday reported its fiscal first-quarter financial results: Sales of 48 million iPhones (a record), 23 million iPads (a record), only 4 million Macs (constraints on new models a problem), and 13 million iPods (who expects this line to keep growing?). And this is a company that's a failure?

The financial analysts are never made happy. They want Apple to emulate the past history of the PC market: A dive to the bottom with commodity products with little extra cost and little innovation.

There's a bit of irony when some of the very things that Apple is being beaten up for come from its boldness. Apple doesn't just disrupt other platforms but it has little fear in cannibalizing its own successful product lines.

Tim Cook, Apple CEO, described the philosophy in the conference call:

In terms of cannibalization, I see cannibalization as a huge opportunity for us. One, our base philosophy is to never fear cannibalization. If we do, someone else will cannibalize it. We know that iPhone has cannibalized some iPod business, we know iPad will cannibalize some Mac, that doesn't worry us.

On iPad in particular, we have the mother of all opportunities because the Windows market is much, much larger than the Mac market. It is clear that it is already cannibalizing some. I believe the tablet market will be larger than the PC market at some point, and I still believe that.

The iPad Mini could have been a much lesser machine if Apple wanted to protect the iPad. Or the same difference with the iPad to the MacBook. But, no. Cannibalization was accepted. Apple is taking a long view.

A different tack towards cannibalization was taken back in the 1990s. Avoiding cannibalization created chaos in Apple's product lines. There were competing divisions developing lines with different architectures, and marketing groups that would compete for segments. The teams would work against each other, limiting the growth of some systems in a market segment or limiting hardware capabilities to fit a crazy, grand strategic positioning matrix. There were dozens of SKUs.

All of this went out the window with the takeover by Steve Jobs in 1998 and the many corporate restructurings that followed. He focused the many lines into four targeted machines: A professional desktop and laptop; and a consumer desktop and laptop. And there was little worry about cannibalization, not because there wasn't any. There were times when the performance or features overlapped.

Today, the Apple top brass say the company continues to be dedicated to quality, which has been the brand value.

The most important thing to Apple is to make the best products in the world that enrich customers' lives. That's our high-order bit. That means that we aren't interested in revenue for revenue's sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that's not what we're here for. We want to make only the best products.

And so what does that mean for market share? I think we've had a great track record here on iPod, doing different products at different price points, and getting a reasonable share for doing that. I wouldn't view those things as mutually exclusive as some might. But the high-order bit is making a great product that enriches customers' lives and so that's what we're focused on.

So, here's a company with multiple product lines that are growing. Its customers value and appreciate their hardware purchases. The software and content purchased in the company store is considered a continuing investment in the platform.

Doomed. Obviously.

Topics: Apple, Hardware, iPhone, iPad, Laptops

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11 comments
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  • We should all be so "unfortunate"

    Apple's quarter was primarily impacted by the inability to manufacture enough products to meet demand, not by a lack of demand.

    Ask Motorola Mobility if they'd like to have that problem.

    (re)start the Apple Death Watch, they're going down in flames. They'll never survive with 30% margins, all those Android manufacturers with their < 8% margins are going to crush Apple....
    vaporland
    • +1

      Rather than focus on Apple, I wonder why analysts are not looking at Motorola Mobility/Google/Android phones and tablets . . . you know, the ones that don't exist even though Google has owned Motorola for 10 months.
      Wakemewhentrollsgone
      • Exactly. And yet ...

        ... despite the fact that Google didn't meet any financial expectations and actuals were off nearly across the board, it's stock jumped 40 pts. Go figure.

        I'm not knocking Google. I'm knocking our ridiculous know-nothing stock analysts. They think they know how to run businesses, so when they don't hear what they want to hear, they slam a company that turned in record sales and impressive growth because they don't conform to the under-performing norm.

        No wonder the economy is so screwed up. They don't know a good thing when they see it!
        imalugnut
  • Apple suffers from the ultimate Achilles heel

    Steady revolutionary (!) innovation (iPad, iPhone, RetinaDisplay) is not feasible. No person and no company can achieve that.
    Apple had a few home-runs over the last years making it the most successful consumer electronics company. But it seems that with the upcoming of Android based devices Apples success story has come to an end. Additionally we don't know yet how successful Microsofts devices will become.
    And it seems as if the stock market has already taken that into account -> Smart Money sometimes is indeed smart.

    But as is proofen by many tech companies, even with rather little innovation one can make a good living.
    EnticingHavoc
    • I agree, but ...

      You're right: it's ludicrous to think that any company (or individual) could continually revolutionize markets and deliver home run after home run. That's not a realistic expectation.

      However, just because Apple isn't making the majority of "smartphones" (by volume) doesn't mean they have a problem: Apple has roughly 15% of the smartphone market (I forget the exact figure, but it's around there, plus or minus a point or 2), yet they bring home roughly 70% of the revenue from that market ... and they can't keep up with demand.

      Sure, Apple's iDevices may be pricier than the competition, but they also enjoy a much higher perceived quality and value, at least in terms of build quality and ease-of-use. (I'm happy to grant all the Android fans that Android is more customizable and works better for lots of techies.)

      And just because the stock market doesn't think Apple's results are phenomenal doesn't mean they aren't. Stock analysts know stocks -- they don't necessarily know how to run the world's most valuable corporation. If they did, they wouldn't be working for someone else, they'd be running their own corporation and it'd be the most valuable business in the world instead.
      imalugnut
  • The competition does not sleep

    Whats next for apple?
    I like the current product line , we are upgrading our old cell phones to iphones as blackberry was not an option for the last 8 months.
    I picked up 6 ipads in the past 6 months. But......
    If blackberry hits a home run next week i may flip the rest of my 40 older cell phones over to it
    As three of our iphones lost data last month or failed for no obvious reason.
    I also need tablets/netbooks to run MS programs, thus not all business will go to apple.

    The competition seems to be on the move...
    rclaw001
  • Apple propaganda

    This is a great piece of Apple apologetics and defense, based on seriously flawed arguments.
    Tim Acheson
    • Which arguments are flawed? And how?

      I don't mean to this to be wise, but what arguments are flawed? and how are they flawed? Seriously. I just don't understand.

      As a lay person, I find it hard to imagine how having the world's most valuable corporation turn in results that show 18% growth, record sales in two out of three product lines, and $16 BILLION growth of its money in the bank (to $134 Billion) in a quarter that was 1 week shorter than last year could possibly be taken as signs of failure. Obviously, I don't know what the stock markets are all about or how to play them, so it's probably a good thing that I don't.

      But if you can explain how all this is flawed, I would appreciate it, because maybe it would help me understand it better.

      While you're at it: can you explain to me why I should blindly follow the advice/guidance of some analyst at some company? I mean, if he (or she) was so smart, wouldn't they be running a company like Apple instead of commenting about it from the cheap seats? Again, I don't get how they can possibly be so smart that they know how to run Apple yet still work for someone else.
      imalugnut
    • Please

      Dude you are one of the biggest Apple Haters on this site - so most thinking people take your comments with that in mind. But tell ya what Tim go ahead and expand on your post and tell us WHY you feel that this is "Apple propoganda" and what "flawed arguments" it's based on.
      athynz
  • Cheap heap

    Whatever Apple does by way of cheaper products, it will continue to recycle them. See http://www.apple.com/recycling. What's Google's accountability, as Android phone/tablets get cheaper and cheaper, to seeing that the WALL-E mountains of these devices, run on an engine Google designed, deployed, and profited from, are also recycled? What will its free OS costs us?
    Steve Nagel
  • Bad Article that Glosses Over Inconvienent Truths

    "Apple on Wednesday reported its fiscal first-quarter financial results: Sales of 48 million iPhones (a record), 23 million iPads (a record), only 4 million Macs (constraints on new models a problem), and 13 million iPods (who expects this line to keep growing?). And this is a company that's a failure?"

    Well, you can't use that flawed logic to understand Investor concerns. It's not about revenue, or units sold per se, it's about margins needed to make said revenue. It was reported that margin dropped significantly to the still enviable 37% but down almost 6%, yoy. What is the breakdown of iPhones / iPads? Was it the iPhone 5 or the highly affordable iPhone 4s? Was it the iPad 4 or the iPad 2 or the iPad mini? In the latter case, the margins are much smaller than the former. Apple was smart enough to disguise such a breakdown, but investors are in general very sharp and know that the older generation hardware was clearly selling in larger proportion than the latest generation hardware. Which means that consumers are increasingly refusing to pay for the "latest" greatest technology and instead for the higher value items. If this trend continues, the bottom WILL fall out because Apple will no longer be able to command a premium on their products AND expect them to sell.
    ramueller11