The Apple store in Boston, high end shopping district
The Apple Store in high end Ginza, Tokyo
This focus on lifestyle and culture has allowed Apple to develop and maintain a literally cult-like following along the lines of other lifestyle icons such as Gucci, Louis Vuiton, Coco Chanel, Prada, etc. This has also enabled the company to command premium prices (and margins) for what use to be considered commodity products. Surely, very few other computer companies have aftermarket vendors who attempt to, much less profit from, hawking diamond encrusted cases, Gold and platinum protectors or rare wood enamels for their phones and media players. Apple has had these offerings since the debut of its iPhone in 2007 from a surprisingly large number of vendors.
The lifestyle component of Apples business model cannot be overemphasized, yet it is a component that is literally missed or dismissed by a very large number of sell side financial analysts and technology consultants. It is what allows Apple to sell at industry breaking margins, what allows them to produce an upgrade cycle YEARLY and actually convince their customers to bite nearly every time, and what will probably insulate them in some form or fashion as they are outdone in the technology and performance race with Google/Android and Microsoft (see below). Apple is currently a revenue and profit powerhouse, and though they are redefining many of the markets they are playing in, there are big players in those markets that are currently offering technically superior products – primarily, the smartphone space. Despite that superiority, Apple is still thriving. The pretty pictures above offer a clue as to why.
Macintosh computers, and to a much greater extent the iPod, iPhone, iPad have all literally redefined the markets they are in.
The iPod is currently both the market leader (by a very wide margin) and the de facto standard in media players, coming from literally zero market share less than a decade ago as it snatched the entire market from the then market leader, Sony and their dated Walkman products. The ability of the iPod touch to literally serve as functional portable computer with a tightly integrated app store has literally revolutionized the industry, the 3rd time Apple has accomplished such in as many years - Simply an amazing feat.
The iPhone redefined the smart phone segment created by IBM in 1992 and commercialized by Nokia, RIM and Microsoft in the 2000 – 2002 range. Although only three years old and possessing only 15% of total smart phone market share (as compared to Symbian’s 44%), Apple has grown faster and at higher average price points, and with more brand recognition and loyalty that ALL of its competitors (save Android, which has pulled the lead for the last two quarters). It has also done so with a totally vertically integrated channel. Apple controls and owns the hardware, OS and application distribution channels, wholly. They also have revenue sharing and partial control over the actual telecomm portion of the puzzle as well. As far as I know, this is a first in the smart phone world.
During the last two years, the revenue shares from the sale of desktops and notebooks have declined primarily owing to increase in share of iPhone, which have registered an impressive growth during the period
As you can see from the graphics above, Apple and Google are the minority but are rapidly taking market share from the established companies – Nokia/Symbian, RIM and Microsoft. Apple is growing quickly, but Android is growing quicker, albeit off of a smaller installed base.
According to NPD Group, unit sales for Android OS smartphones ranked second among all smartphone OS handsets sold in the U.S. in the first quarter of 2010. BlackBerry OS and iOS ranked first and third respectively. A Nielsen report for the same quarter placed Android in fourth place with 9% of the market.
Apple has redefined the tablet space, a space that was created by Microsoft 10 years ago but never executed properly. While there are companies with tablet offerings, it is fair to say that Apple currently has no viable competitors in this space, although several companies are gunning for pole position with Android OS and Windows Mobile/Embedded/7 offerings. To date, all other comparable offerings of significance are vaporware, as Apple literally ships millions of iPads per month, with a launch of just a few months ago. See “There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All” and "The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift” for cursory product comparisons.
The Company’s flagship products are already doing well and are poised on a high growth trajectory in the near-to-medium term. The new products from the Company may have received mixed views from the technical analysts, but the initial response from the customers in terms of the pre-orders secured indicates a warm reception. We believe that after overcoming the initial hiccups and stiff competition from players like Google, the Company will be able to churn a significant portion of revenue from the new products such as iPad and iPhone in the short to medium-term. It Is the medium to long term where Apple will find stiffer headwinds in agile competitors with rapidly developing technology such as Google, et. al.
Next, we will review the business model of Apple and define exactly how it makes its money.