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What drives Apple's success?
Today, at a market capitalization of about $560 billion, Apple is the highest valued company in the world. But what are the true reasons behind the sudden rise of Apple?
Before we begin, to avoid being overrun by the Apple brigade, let me state this – does Apple make great products? Absolutely. Does Apple make transcendent products that blow everything else out of the water? Absolutely not. Apple’s products are great, but limited in their own ways.
Now that we’ve got that out of the way, let’s dive in and have a look at the top eight reasons that drive Apple’s success. Some of these factors have always been Apple strong suite, while the rest are specific to the iPhone & iPad.
What Apple Has Always Done
8) Ecosystem Lock-in & a Captive Market
When I talk about an “ecosystem lock-in”, I’m not talking about the App Store and app purchases, although that is certainly one of the examples. Apple has always been about proprietary technology, as opposed to promoting cross-platform compatibility. Apple’s products have worked best with other Apple products. Traditionally, this has been one biggest advantages and disadvantages of using Apple products, as it has caused Apple to either lock-in or alienate first time buyers, with very few instances in between. There are numerous examples of this strategy for users of the Mac, the iPod, the iPhone, or the iPad. So many Apple users keep buying more and more Apple products to make their life easier.
7) The Apple Cult
Ah, the dreaded Apple fanboy cult! Diehard Apple users are notoriously vocal about the superiority of their platform of choice. So vocal, in fact, that research shows Apple triggers a religious reaction in its fans’ brains. Some researchers have even categorized this as a form of the Stockholm Syndrome. While that may be a bit extreme, many Apple fans do exhibit the “If Apple says I don’t need something, then I don’t need it” behavioral pattern. This cult following of Apple started long before the days of the iPhone, a time during which Apple was seen as the “little guy” being pushed around by the big bully (Microsoft). While Apple is no longer even close to being called the “little guy”, research shows that the fanboy culture has remained. Interestingly, this culture seems to be prevalent within Apple as well, as seen by their numerous lawsuits – this also ties in with point 5. After the launch of the iPod and the iPhone (Apple’s first mainstream “hits”), this fanboy culture had a profound impact on the media’s perception, and hence the average consumers’ as well, of Apple products.
6) Focus on Developed Markets
The US market has traditionally been Apple’s stronghold. In Q2 2012, nearly 34% of Apple’s revenue came from the US market, with another 22% from Europe. Focusing on these markets with the launches of the iPhone and the iPad was a great (and obvious) move as purchasing power and the strength of the Apple brand were stronger. Today, Apple’s market share in these regions is far higher than its global market share, indicating its strength in these regions.
However, the long-term growth in the consumer technology sector is going to be driven by the Asia Pacific region, which was responsible for about 26% of Apple’s revenue in the quarter. Even though Apple’s revenue growth from this geographic area is strong (a sign of how fast this market is growing), Apple has a minimal market share in this region, which poses a long-term risk.
5) Marketing and Apple’s “Reality Distortion Field”
This is where Apple’s true genius lies. Apple is probably the best consumer marketing company in the world right now and it seems like they can make their consumers believe practically anything. How?
(i) Advertising and Launch Videos – Apple has always been the first to pat its own back, but its product launch videos and ads always project a generation-changing product. For example, in the iPhone 4S launch video, you’d frequently come across terms like “ground breaking” and “revolutionary”, when at the heart of it, all they’ve done is upgrade the processor/camera and made a previously available iPhone app (Siri) proprietary to the 4S.
(ii) User Experience – Another huge outcome of Apple’s marketing prowess is the propagation of the idea that Apple offers a “superior user experience”. A user experience is a subjective term that differs for every consumer, and every operating system has its own unique advantages and disadvantages. The fact that 70% of iPhone and Android users retain their platform shows that consumers inherently stick to the “user experience” they are comfortable with, unless another platform offers significantly more advantages (read: Blackberry/Symbian users).
(iii) Reality Distortion Field – This really ties into the above two points, but it’s so pervasive that I felt it deserves its own space. Apple has been so successful with its marketing efforts that most consumers who buy an Apple product automatically believe that it is the best product on the market, without even considering the competition. This experiment by Gizmodo truly highlights just how strong this effect is.
Factors Specific To The iPhone & iPad
4) Distribution Strategy
Apple’s company owned retail stores have been a huge hit, with long lines outside each store at every product launch. However, this itself has been a reason for Apple’s success and not necessarily a product of it. Apple could just as easily move the majority of its sales online. But the long lines outside a store and sell-outs at a store are a huge boost to the desirability of a product. It’s human nature to be curious about something that you can’t get (at least right away).
Even in countries like India, where Apple isn’t exactly a mainstream brand, a similar strategy is at work. Since Apple does not have stores in India, and cannot create huge lines based on its popularity, it delays and limits shipments to force more sell-outs. This is something I have seen first-hand.
3) Pricing Strategy
Apple has always positioned itself at the high-end of the market, and its pricing strategy was one reason it lost the PC battle to Windows. But in order to go mainstream, the price points had to be appealing to the masses. In the case of the iPod, it was a relatively low value product, so pricing wasn’t a major factor to most consumers. But with the launch and growing popularity of the iPhone, Apple was able to extract massive subsidies from carriers on the promise of data usage revenue. This comparatively low price, spurred even more demand from consumers while maintaining Apple’s margins. Considering the fact that the iPhone is currently responsible for 60% of Apple’s revenues, this was one of the primary factors in its success.
Apple masterfully sequenced and timed the initial product launches of the iPhone and the iPad. Granted, iOS was more touch-optimized as compared to its competitors at the time (Windows/Windows Mobile) for those product categories, but the timing of the launch played a larger part in their success.
(i) iPhone – The iPod was a product that went viral primarily due to its form factor. But touchscreen phones (even capacitive ones) were already present in the market before the iPhone, with numerous models available as early as 2002. Apple launched the iPhone at a point where innovation was practically dead in the mobile phone industry. If the iPhone had launched in around 2005, it would have been overcome by the Blackberry revolution, as QWERTY keyboards were in vogue. Additionally, launching the iPhone after it had already hit a home run with the iPod, brought about huge consumer and media interest.
(ii) iPad – Tablets, again, were nothing new to the technology enthusiast. Microsoft entered this market in 2002, with tablets from multiple manufacturers, running Windows, which consumers never found appealing. And again, the iPad was launched at a time when innovation in the PC industry had crawled to a halt and right after the iPhone had reached mass consumer appeal, far greater than anything the iPod could have hoped for. If the iPad had been launched before the iPhone or at the same time as the iPhone, it would not have seen the level of immediate market acceptance that it did.
1) Revenue Concentration in High Growth Industries
All the reasons we’ve seen so far explain why Apple’s products have been successful, but none of them answers the question, “Why is Apple the most highly valued company in the world?”.
(i) Market dominance vs. High growth markets – The answer to that question is simple – Apple derives 80% of its revenues from the iPhone and the iPad, i.e. from two of the fastest growing industries in the world today. While, when you look at Apple’s dominance, it is most dominant in the music player segment, with the iPod owning a 78% market share. But even while its market presence in the smartphone and tablet segment is lower, they are higher growth and higher value markets.
(ii) Comparison with Competitors – When you compare Apple’s situation to other companies in these industries, the situation is different.
(a) Industry Focus – Most of Apple’s competitors are diversified into low growth and low margin industries. For example, Samsung is present in displays, semiconductors, electronics, etc.
(b) Market Segment Focus – Another factor is that Apple only focuses on the high end of the market, while its competitors are present across price points. Purchasing decisions are made first by platform and then by manufacturers (Think about it, you’ve heard about the Mac vs. PC debate and the Dell vs. HP debate, have you ever heard a Mac vs. Dell/HP debate?). Therefore, at the high end, Apple’s competitors need to compete with Apple and among themselves as well. This is the reason why, in order to drive higher volumes and profits, they need to compete at the mid-segment and low end as well, which is similar to the situation in the PC market as well.
(c) The “Profit Share” Fallacy – This is slightly off-topic, but I feel compelled to mention it because most people seem to talk about it without truly understanding what it means. The market segment focus (b), mentioned above, is also one reason why the “profit share” argument makes no sense. Apple’s “profit share” is an outcome of greater competition among its competitors (and partly driven by Google’s business model) and not necessarily an indication of Apple’s dominance. Firms in an industry do not compete for a limited pool of profits, they compete for market share in a finite market.
In contrast to popular opinion, Apple’s success is driven less by the company’s products and more by the company’s marketing and business strategies. Most other oft-quoted reasons for Apple’s success are a by-product of one or a combination of the above factors.