Continued from an earlier post, which tries to explain why Apple is Apple, a cult brand, a maverick, one of the highest market cap compnaies in the world and a huge money minting machine. It may have detractors against its “closed”/”walled garden approach” but the bottomline is that with 3% of market share by volume, Apple contributes 48% of the smartphone profits.
3.Economies of Scale
The lean portfolio with only a handful of products, each selling in great quantity allows Apple to buy components in massive quantities.Except for iPhone 4, all iPhones and iPod touch use the same display for 3 years now. They have 5 notebooks and 3 of them all use the same 13-inch display. Something like 75% of the CPU’s they have used in the past 5 years are Intel Core 2 Duo, and the rest were Xeon, with the exception of the recently added i series. Similarly, they use the same OS X core operating system on all of their devices. The kernel in iPhone 4 on an A4 chip is the same kernel as Mac Pro on 12 core Xeon. When they added Exchange to iOS, it showed up in Mac OS in the next release because they had actually added it to OS X, which is under both iOS and Mac OS. That builds huge economies of scale for Apple reducing the cost overheads of spares and components.
Apple had only used one iPhone display for 3 release of its iPhones, and they used it again in iPod touch. They probably bought 100 million of that exact same display, and they are still buying and using them right now in the low-end iPhone and the iPod touch. They paid much less per phone for the display than what the display cost on any other phone, which typically sell less than a million devices each. The 90 Android phones are each a custom job, much more expensive, much less profitable.
Henry Ford was once quoted that if he had heard his consumers, he would possibly never have made a car. He would have built faster horses instead.
Apple doesnot possibly look at the MBA-style consumer approach methodologies in terms of determining its products. Apple’s understanding of the “need” bolstered with great judgement of world class design, starts with no consumer particularly.Add to that,state of the art software, OS and iTunes make it an undefeatable combination when it comes to PROFITS.It moves through the cycle of enthusiast, tech geek, prosumer, maven route before massifying itself into mass consumer usage.
5.Absorbing Profits from multi consumer segments
Apple has two other iOS devices, the iPod Touch (due for a refresh this September) and the iPad, that are absorbing profits from other segments of consumer electronics; music, casual gaming, and soon, photography, video, and in the not too distant future, near field wireless. all making platforms for advertisers or hardware makers or wireless carriers instead of making the best consumer product. Apple thus is leveraging the same platforms for accessing different consumer segments and usages. What makes this special is the Apple “way and design” which helps redefine the markets, consumers and product segments.
Google Music was announced in May 2010 and it is expected to be up and running by the end of this year. As always, Google finds it looking into the eye of Apple Inc. with its iPods and iTunes dominating digital music space in US, accounting for 28% of all music purchased by US consumers in Q1,2010. Currently, Apple holds more consumer credit cards than any other company besides Amazon. Google Checkout in comparison is not put to pace.
In order to stand up to the Apple iTunes, iPhone and iPod, Google will need to look at the drawbacks of Apple as a music platform and must position itself as an alternative to the Apple Music platform. A few pointers to Google to get a march ahead of Apple in the digital music space:
1.Leverage Cloud Computing
Making an iTunes clone is one thing, making an iTunes alternative is completely another. Google with its expertise in cloud computing has the best opportunity to be the iTunes alternative. This is especially true in face of the trend where Smartphones are becoming primary storage devices. Even then, music storage on phones is not a realistic and sustainable alternative. Google must focus on cloud storage, which users will sync/access to music files.
2. Streaming Media
Streaming media synched to the cloud is the future of music.Music companies like Rdio, Spotify and Rhapsody already offer subscription based services for music on Mobile. Google’s opportunity would be to create a hybrid service that offers synching, streaming and purchase of music. That is where Google Checkout checks in.
3.Cross Platform Integration
While Apple specializes in selling all inclusive content packages, Google’s USP of being “Open” can help them make a music platform which is cross platforms. The acquisition of Simplify Media by Google in May is a good measure in this direction. Google already has plans to make their Google music available across a range of devices through the Android platform. The next frontier is to make Google Music available on all platforms whether Google or not.
4.Leverage vendors and music companies currently not on iTunes platform
Getting a sign-on on the Google platform with music labels and companies will allow Google to access popular content that is still not available in the iTunes store (eg. Beatles). Many such blank spaces exist where iTunes has not been able to establish themselves. Music will be a key factor in smartphone sales success, but with 75 to 85% of the catalogues still untouched by iTunes, there’s plenty of room for Google to step in.
Thus the positioning of Google Music is thus not just an iTunes+, that is open across platform hosts more labels and has new cloud based services and streaming that leverages Google’s “Open Technology”
Apple Inc., the company that restructured the music industry around its iTunes service, is exploring an overhaul of the way it sells and stores music that is aimed at extending its influence to the Web.
The key vehicle for the move is Apple’s newly acquired music-streaming service La La Media Inc. for which Apple paid $85 million. As part of the move, Lala executives have been given key positions helping shape music strategy for the iTunes Store.
Where Apple’s iTunes requires users to download music onto a specific computer, Lala.com lets users buy and listen to music through a Web browser, meaning its customers can access purchases from anywhere, as long as they are connected to the Internet. Apple is considering adopting that same model for songs sold on iTunes, a change that would give consumers more ways to access and manage their iTunes purchases—and wouldn’t require them to download Apple’s software or their purchases. This new business model extends Apple’s grip on the music business, giving it the ability to sell music through search engines and other Web sites and broaden its reach beyond people who come to its virtual store. For consumers, such changes could make it far easier to manage and access large libraries of music, which need to be stored, maintained and backed up on computer hard drives and portable devices.
Record company executives said that they are optimistic about the prospect of consumers being able to buy music from more Web sites, but cautious about any development that would add to Apple’s already significant power. Apple, surpassed Wal-Mart Stores Inc. last year as the biggest music seller, and will generate about $2 billion in iTunes revenue this year, estimates Piper Jaffray & Co. That’s about 20% higher than last year, the brokerage firm estimates, but growth has slowed over the past several years as most people now own iPods or iPhones and it is adding fewer new users.ITunes is also facing pressure from competing services that allow users to listen to “streaming” music either cheaply or free on computers or portable, Internet-connected devices like the iPhone or iPod touch. Streaming has been at the heart of Lala’s strategy for the past two years, in the form of what the site calls “Web songs,” which cost 10 cents and are accessed via a Web browser.
The proposed changes would represent a fundamental redefinition of what it means to own a song, movie or other piece of media—shifting the emphasis from possession of a physical disc or digital file to the right to access content.Certain legal issues remain hazy: If music becomes a virtual product, it isn’t clear how Apple might be able to guarantee a buyer would retain access to a song in perpetuity if, for instance, a new owner gained control of a record label’s catalog and changed the terms of its deal with the retailer.
Lala has partnerships that allow it to sell songs from links embedded on sites as major as Google Inc. and as specialized as the indie-music site Pitchfork Media. Adopting that strategy would represent a major departure for Apple, which has always relied on what is known as a walled-garden approach in which its machines run on proprietary software. But that closed-system approach has limited its sales reach to people who deliberately log in to its online store.
Apple has revisited its iTunes strategy from time to time and had discussed the impact of streaming music services like Lala and Pandora Inc. in the past, but it believed that people want to own their music on hardware. This is the first time, Apple has set its sights on streaming music from the cloud.
The shift could reopen an uncomfortable topic between Apple and the music industry. Record-label executives were relieved in 2003 when Apple launched what was then called the iTunes Music Store, which appeared to be a virtual lifeline in a growing sea of illegally downloaded songs. But they have since also become frustrated that the service’s dominance of the market has made it into a gatekeeper with what they view as undue sway. In addition to selling music, Lala’s software also scans a user’s existing music library and matches its contents with songs on its own servers, then gives the user access to that music via a Web browser. That approach, known in technology circles as cloud computing, could also be part of a revamped, Web-based iTunes, according to the people with knowledge of the talks.It is also possible that Apple would use Lala’s streaming technology as the basis for a subscription service, for which users would pay a flat rate in exchange for unlimited access to music. Such offerings already exist but have never gained much traction with users, mainly because most don’t work with iPods or iPhones.
Heres a YouTube video of the Lala music streaming on the iPhone
Beating the likes of Google, Nokia, RIM and Verizon, Apple has already taken the honours in the Apps store roll outs. It has also sold 1.5 million mobile applications for its iPhone and is counting more. While consumers find easy to buy apps by using the familiar iTunes interface; for apps publishers, the Apps stores provide the most efficient way to sell as operation and distribution costs are nil and the developer can afford to focus his resources in promoting his product on the Apps store.
The SDK 3 platform from Apple is also gaining more acceptance by more developers over other platforms for developing apps. To put it concisely, the competitors are unable to create a world that revolves around their products, a trick that Apple has mastered well.
The only other vendor that understands branding at that level is Nokia but then it is caught up in its own Smartphone problems and the Ovi Store has not had a great start. The other company RIM, continues to focus on the physical device at the expense of apps driven excitement.
One of the general principles of advertising is not to mention your competitor by name in your ads. That limits the field of your offering and also gives the feeling tht you are acknowledging the competitor as a benchmark (to Consumers/in products) or a threat (to yourself). This is especialy true for Market leaders.It is in this context that Microsoft’s Lauren ad has raised a few eye brows. After all, Microsoft retains a whopping 90% market share in the OS markets world over.It shows a young woman, Lauren shopping for a under $1000 laptop with a 17 inch screen and mentions Mac by name and feaatures the Mac Store. The ad is essentially about Bargain hunting (a reference to recessionary times) and comes up with a $699 price tag for the 17 inch Hewlett Packard laptop that Lauren wants. Watch the ad here.
The swipe at Apple may look like a reaction to losses registered in numbers of Windows users who have switched away from cheap PCs to Macs, and tiny losses in market share to Mac! However, it has more to do with other aspects in which Microsoft and Apple compete in the world markets. The ad is probably a reaction to the following that Apple has been trouncing Microsoft at:
1. The Music Space (with iTunes and iPods)
2. The Smartphone space
3. The Apps store space
4. Apple’s positioning campaign redefining PCs and Macs and adding the “cool” quotient. (View here)
It starts in the Music space, where Zune (Microsoft’s answer to the iPod) has made no headway in gaining market share from the iPod. Zune features down in the matching the “sexy” iPod looks and iPod trounces it when it is combined with the iTunes. (Read the comparison here)
Microsoft’s famous forbearance “errors” plagues it in the smartphone space as well. When Apple announced the iPhone in January 2007, Microsoft CEO Steve Ballmer infamously dismissed the iPhone as too expensive. to quote Steve Ballmer in the April 2007, USA Today interview, ““There’s no chance that the iPhone is going to get any significant market share”. “No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would to have 2 percent or 3 percent, which is what Apple might get.”As it has turned out in the 2 years since, Apple has come from 0 to 10.4% in smartphone OS space, where as Microsoft has been at the 11.8 – 12.4% for sometime now. Covered in a previous blog: http://technologyandtelecom.blogspot.com/2009/03/mobile-operating-systems-by-market.html
To complement its smartphone growth and popularity, Apple already has the first and currently most popular (and “profitable”???) business in distribution of applications world over. This is something that Microsoft has not ventured in though one may have expected it to be a pioneer in this field given its technology advantage. http://technologyandtelecom.blogspot.com/2009/03/apple-software-services-as.html
Apart from stiff competition, the popularity of the iPhone presents another problem for Microsoft: like the iPod, it’s introducing Apple technology to millions of Windows users. Among the factors in the rise in the Mac’s market share, the iPod “halo effect” cannot just be ruled out. Positioning oneself as a cool technology provider versus, Microsoft’s “straight jacketed, pin robbed, stiff and official” is where Apple is also making astatement with consumers. In face of that, “Lauren” could get nastier at taking swipes at Apple! Steve Balmer is already at it talking tough about overpriced Macs! (So he’s exploiting the bad economy with an ad like “Lauren” to depict Macs as an impractical choice. )
Cost advantage may be good speaking point in these recessionary times, but with Apple’s kind of brand equity building up steadily, one wonders if Microsoft is really the cocky confident it once was.