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Saturday, April 06, 2013, 05:01 am PT (08:01 am ET)

Editorial: Apple's market disruption savvy is bad news for Android

There's more than one way to disrupt a market's status quo, and all forms of disruption aren't equally valuable, as indicated by the value created by Apple's iPhone compared to Google's Android platform.

Market Disruption

Source: Intercom


Is Google disrupting Apple's disruption?



Every startup and business initiative likes to describe itself as being "disruptive," that is, an interrupting force that changes the prevailing nature of a given industry, shifting the balance of power and the identity of those making the most money.

Apple's iPhone has, since its debut in 2007, had a spectacularly disruptive effect on not only the smartphone market, but has also disrupted the revenues of parallel standalone devices, ranging from personal cameras and camcorders to dedicated game consoles and GPS products.

Particularly since 2010, observers who formerly dismissed and underestimated the impact of the iPhone have now jumped to the conclusion that Google's Android will, is, or perhaps already has had a similarly disruptive effect on Apple's future prospects, acting as a disruptor of Apple's disruption.

However, as noted in a report by the developers of Intercom, there's more than one type of disruption, and all forms of disruption aren't equally valuable, important, or sustainable.

Differentiating disruption



One form of disruption identified in the report is "new market disruption," which "competes against non-consumption." Essentially, this means bringing to market a new product that finds a new class of customers that weren't really being served by existing products.

In parallel, the report also describes the disruption of "sustaining technology," which it says involves "bringing a better product into an established market," where customers pay more to trade up to a premium product.

A third type of disruption is "low end distribution," which "addresses over-served customers with a low cost business model." In this form of disruption, customers who can get by with a cheaper alternative trade down to this new product to save money.

Apple has launched a series of products fitting all of these descriptions, creating entirely new markets that have also had a disruptive effect on existing industries, both with premium hardware and with lower cost software features that have eroded (or in some cases shattered) the profits supporting preexisting products.

Examples of different types of disruption



The iPod created a new volume of demand for premium music players, for example, one that really didn't exist before.

It initially appealed to the "most demanding customers," but newer, cheaper versions of iPod also undercut the low end of the market, reducing any pricing umbrella for Apple's competitors.

Together, those factors have enabled Apple to own the top, the middle and the bottom of the MP3 player business, and create the largest ecosystem of supporting content sales and related services around it with iTunes. Apple's global rollout of the iPhone hasn't yet addressed the low end of the market in the way the iPod mini and nano did.

The iPhone has also been disruptive on many levels. It initially introduced high-end smartphones to the mainstream to a new class of users. It also replaced existing leaders in the smartphone market (Nokia's Symbian, Palm, Microsoft's Windows Mobile and RIM's BlackBerry) with a better product.

However, Apple's global rollout of the iPhone hasn't yet addressed the low end of the market in the way the iPod mini and nano did.

Apple's cheapest iPhones are simply its older generations, and in this arena, Android licensees (along with other low end phones like select BlackBerry models and Nokia's S40-based Asha line of entry level phones) have taken more global market share, particularly in developing markets.

Grabbing the low end is easier, but not as valuable



While offering cheaper, low end smartphones is often also described as "disruption," the value of this "low end distribution" is clearly not as great as Apple's high end disruption, as evidenced by the fact that Apple earns so much more than the rest of the mobile industry combined.

At the same time, despite having ignored the bottom of the mobile phone market Apple has still managed to retain iPod-style ecosystem dominance over mobile apps and the usage stats that drive supporting accessory sales and specialty markets such as government, education and enterprise.

Taking over the low end of a market is a lot easier to do than attracting premium sales, as Apple demonstrated when it rapidly gobbled up the flash-based MP3 market with the iPod mini, in contrast to struggling efforts by the higher end Microsoft Zune and Samsung Galaxy Player to make any dent in Apple's premium iPod touch business.

Samsung is incessantly credited with "disrupting" the advance of Apple's iPhone and taking more market share via volume sales of lower end phone models. However, Apple could quite easily take the "market share trophy" simply by producing lots of low profit, low end phones and dumping them on the market.

However, doing that would make Apple much less profitable. Instead, Apple has targeted premium profitability, a strategy that has served it well over the past decade.

Samsung, Motorola, LG and other key Android licensees have also made shipping premium, higher end phones a priority. But as with the history of the iPod (mirrored in the PC world as well), Apple's competitors have found it a lot more difficult to take share in the lucrative high end than compete for the bottom.

This reality, which isn't really controversial at all, makes it particularly curious why the market is so enamored with smartphone market share (particularly when it comes through low value sales) rather than sustainable profitability.

It's as if everyone believes that the market for smartphones is going to work out completely different than the market for iPods and Macs and iPads, even though none of the available evidence (including profitability, ecosystem support, user preference and satisfaction) supports that idea.

Low end disruption isn't just less valuable, it's less sustainable



The vast resources at Apple's disposal make it obvious that, given the choice between earning profits and saturating the market with "device shipments" to gain market share, Apple is explicitly choosing to make money rather than to just set temporary sales records for the likes of IDC and Gartner.

Apple has the billions needed to manufacture profitless millions of iPhone 3GS units it could shove off the back end of cargo planes over India, Brazil, Africa and other regions where it would do little to threaten its existing iPhone sales, if the company simply wanted bragging rights to "market share shipments."

On top of that, in addition to being less profitable to aim for the bottom, such low end disruption is harder to sustain, particularly if the only factor in such disruption is low price. Just ask the world's former producers of netbooks (or cheap PCs of any form factor, for that matter). It's hard to survive in the cutthroat world at the bottom.

Flipping out of business



One example of the temporary nature of low end disruption cited in the report is Cisco's $590 million acquisition of Flip, which it described as once being the "darling of the camera industry" because its portable camcorders were a cheap, lower end alternative to more expensive camcorders, and subsequently appealed to lots of customers with basic video needs.

Unfortunately for Cisco, another low end disruption was also occurring: Apple's iPhone went from having no ability to record video to being a very competitive option for uses with simple needs. While even less powerful than some models of the Flip, smartphone camcorders were vastly more convenient because they didn't involve carrying another device.

Cisco's hopes to perpetuate Flip's success at tapping the bottom of the camcorder market collapsed because they were undermined by the ubiquity of even lower end disruption at the hands of smartphone video recording features.


Source: Flickr.com/cameras


Apple rapidly shifted from paying little attention to the original iPhone's camera to being the runaway market leader among cameras represented on sites like Flickr simply by incrementally improving the iPhone's camera and software.