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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



Apple is also adept at low end disruption



While Apple hasn't yet decisively jumped into the low end of the smartphone pool with a cheap iPhone offering, it has ruthlessly undercut the bottom out of a variety of other markets, in some cases without even giving the appearance of trying.

In addition to Flip, the report drew particular attention to the collapse of GPS makers Garmin and TomTom, both of which saw their value evaporate once Apple's Maps app appeared. It didn't matter that Maps was less powerful than an standalone GPS.


Source: Google Finance


"In September 2007," the report noted, "[Garmin and TomTom] were worth a combined 38 billion dollars. A mere 12 months later, they weren’t even worth 8. What happened? The iPhone. A 38 billion dollar industry loses 3/4 of its market cap in a year because someone decide to add a maps app to the home screen."

Apple's iPhone has similarly eviscerated a series of other once important markets, including handheld video games. That's something Apple clearly didn't set out to do, but it happened anyway. And again, it occured without regard for the fact that dedicated games were more powerful and compelling than most iOS games.

It's worth noting that while the iPhone quickly sucked the life out of the older Nintendo DS and Sony PSP platforms that arrived a few years before it, new generations of those devices haven't had much success in winning back sales.

Clearly, it's much easier for a premium device to cut the bottom out of competitors' higher end offerings than it is for specialty, premium devices to compete against a device that serves as a hybrid disruptor, adept at both premium upselling and low end disruption at the same time.

Low end disruption is not disrupting Apple



At the same time, cheaper low end disruption by Android handsets hasn't had any discernible impact on Apple's App Store leadership. The only real software exclusive Android has cornered the market on is malware.

Google's platform hosts 97 percent of the discovered signatures of circulating mobile malware, according to McAfee. Google's platform hosts 97 percent of the discovered signatures of circulating mobile malware.

Outside of malware, the edge in market share claimed by the world's various Android licensees as a collective has not achieved the critical mass needed to blunt the development of iOS software or restrict the availability of sources of media content the way that Microsoft's overwhelming dominance in PC market share with Windows once had on the Mac platform.

In fact, the reality that Apple battled the Mac OS X platform back into relevance against the ubiquity of Windows PCs, starting with a market share around 2 percent and making gains in excess of ten percent of the current market tells you something about the weakness of the threat Android poses to iOS going forward: Apple remained highly profitable even with minority Mac market share; the majority of Android licensees are not, despite their collectively dominant share.

Low end disruption by iPad



Additionally, while Apple kept the Mac a healthy platform in the face of overwhelming low end disruption by budget PCs and netbooks, it was also able to rapidly slash the bottom of the PC market wide open with the release of the iPad three years ago.

iPad sales have, like the iPhone and iPod before it, competed as both high end premium alternatives that are attractive to "the most demanding customers" while at the same time offering software functionality that serves as low end disruptors.

Of particular interest to the enterprise, for example, is the fact that the iPad is cheaper to administer and maintain than more complex PC alternatives such as notebooks, netbooks, slate devices or Microsoft's curious Surface.

The iPad effectively delivers the utility of the PC in providing simple features (browsing the web, accessing email, consulting web services and corporate data) without the complexity or expense of maintaining a Windows desktop.

Despite two years of monumental efforts by the combined resources of Apple's global competitors, nobody has delivered a tablet that has challenged Apple's position. There are cheaper tablets, but they aren't gaining traction in high value markets, and they aren't sold at a sustainable profit because Apple's iPad prices are too competitive.

Apple will continue to disrupt smartphone sales



That fact should provide some clue to the future of the mobile industry as two situations continue to occur: first, Apple continues to gain ground in carrier distribution.

A major reason why Apple has less market share among smartphones than in music players and tablets is simply due to the fact that Apple has historically had far fewer points of distribution than the entrenched mobile manufacturers that existed before the iPhone.

That's not the case in the non-phone world, where Apple has stronger distribution for its computers, tablets and music players than most of its competitors, a fact that's reflected in its stronger sales.

Note too that in addition to carrier availability, rival smartphones have been losing exclusive features to the iPhone at a rapid pace: camcorder features, MMS, multicore chips, LTE and so on with each new iPhone generation. Yet as Apple's phone gets stronger and the competition loses ground, critics wail about it "not being able to keep up," pure flawgic.

A second shift that appears certain to occur sooner than later is that Apple will increasingly begin to aggressively address the low end of the smartphone market.

Apple hasn't entirely ignored this segment; each new iPhone release has been accompanied by lower cost versions of previous generations, reaching the point where the company finally began offering a "free with contract" iPhone for the first time just a year and a half ago.

Analysts who are banging the drum that Apple desperately needs a cheap iPhone are forgetting that the company has been working in that direction for a long time.

More importantly, it's not a goal that needs to be reached in an emergency, because taking the low end is quite easy for anyone who already has the top of the market under control, as Apple demonstrated with the iPod and again with iPad.

When Apple failed at distruption: a lesson for Android



There's one further example of the difficulty of disrupting from the bottom: it comes from Apple itself.

When the company tried to break into the enterprise server and storage market with the 2005 Xserve and Xserve RAID, it attempted to leverage its Mac OS X Server platform to deliver equipment that could rival the higher end offerings of rack mounted server room equipment.

Apple hoped to undercut established PC server vendors, including Dell and HP, by offering a server package that delivered comparable hardware with vastly cheaper software than Windows Server, resulting in a much lower price overall.

Mac OS X Server licensing


Apple's OS X Server software was essentially free with new hardware (just like Android!), compared with Microsoft's per-user licensed services that, in effect, amounted to greater expense for enterprise users than the server hardware itself.

Xserve RAID also attempted to undercut alternative Network Attached Storage devices by offering cheaper disk subsystems, providing comparable utility at much lower prices (just like Android!)

Apple's Xserve never established much of a market for itself, in part because the company lacked the hands on support services that enterprise-savvy vendors like Dell provided to their satisfied customers (just like Android!).

XServe RAID was canceled even earlier because the NAS market wasn't at all impressed by lower prices; they preferred the assurance of acquiring drives rated for true enterprise duty, rather than the consumer-class disks Apple was trying to sell them as cheaper and "good enough."

The logic supporting Android's eventual domination of smartphones through cheaper, lower end hardware paired with with less friendly end user support and less sophisticated, but much cheaper software is soundly refuted by the results of Apple's own failed attempts to enter the server room through the bottom of the market.

Apple hasn't repeated the same mistake in any of its other hardware categories. Conversely, there aren't any Android licensees that are successfully rivaling Apple on the high end. That draws a very close parallel between Android's future prospects and Apple's singular high profile failure to disrupt a major new market over the past decade.