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Has Apple blown it? Did the company squander the competitive chance of a lifetime?

posted on November 13, 2009 at 8:30 am
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I know Apple (AAPL) is an investor darling trading near an all-time high.

And I know the company’s products have tremendous consumer cache. So much so that the company is able to sell its iPhones and iMacs for prices well above those charged by competitors.

But it still looks to me that Apple has missed its chance. It had a limited window of opportunity when competitors such as Microsoft (MSFT) couldn’t do anything right and it didn’t turn that opening into a big enough share of the personal computer market. It was first to market with a game-changing smart phone but the company has pursued a high-end niche strategy with the iPhone that has left the door wide open for Google (GOOG) to grab for the mass market.

If this is as good as it gets for Apple, the company has no one to blame, finally, but itself. The opportunity was there and Apple didn’t exploit it as ruthlessly and as relentlessly as it needed to.

Here’s my basic problem with Apple’s strategy and execution: The company didn’t kick ‘em hard enough when they were down.

A major competitor, Microsoft, produced a stink bomb of an operating system. Vista was so terrible that 80% of the companies running Microsoft’s aging predecessor operating system Windows XP chose not to upgrade. And while Microsoft was busy issuing embarrassing security patch after security patch, Apple was rolling out elegant version (Leopard) after version (Snow Leopard) of its operating system.

And major PC makers lost their way. Dell (DELL), for example, has bled market share recently. According to market analysts Gartner and IDC, Dell’s share of the personal computer market is down by almost 19% in the last year.

And what happened to Apple’s market share for personal computers while Microsoft was busy shooting itself in both feet and every other appendage it could aim a marketing message at? And while PC makers couldn’t come up with anything more revolutionary to market than the idea that computers could come in colors instead of just Dell gray.

Well, Apple did reverse a decline that had its personal computers headed from niche product to museum curiosity. Yes, Apple has always held that market share didn’t matter as much as profitability but that attitude seemed increasingly like a defensive self-justification as Apple’s market share bottomed near 3%.

Apple’s revival has been remarkable. Today, depending on which market research company you believe Apple has somewhere between 7.6% and 8.7% of the market for personal computers. And the company is either No. 4 behind Acer (ASEIF) or No. 5 behind Toshiba (TOSYY).

No. 4 or No. 5? That’s all that you get from the competitive opportunity of several life times?

Shouldn’t Apple have been more aggressive about changing the game while its opponents were curled into fetal balls? The goal, after all wasn’t ego-gratifying revival meetings of the faithful, but global domination, wasn’t it?

You think I’m kidding? You say Apple didn’t need to wipe the floor with the competition? You say that Steve Jobs didn’t need to turn Microsoft into a Harvard Business School case study in how a company could squander market dominance?

I think you’re dead wrong. Because the counter-offensive is just beginning and it’s going to be fierce.

First, of course, Windows 7 will remove some of the marketing stigma from the PC.

Microsoft and the rest of the PC industry don’t have to convince core Mac enthusiasts to give up their beautiful machines with their great operating system. (Hey, I work on both PCs and Mac and I know—I feel–the difference.) Those folks won’t give up their Macs until Bill Gates pries them from their cold stiff fingers.

But we know from the bad old days that these Mac diehards are only enough to give Apple a 5% or so market share.

 All that Windows 7 has to do is be good enough so that the economics of PC versus Mac purchasing can come into play.

This morning, for example, I got an email from Hewlett-Packard (HPQ) offering an All-in-one PC, the HP Pavilion MS214. It looks exactly like the iconic iMac with the guts of the computer buried in a screen that rests on an elegant metal stand. It’s an effort to duplicate the iMac on every feature but price:  It sells for $599 and the cheapest iMac on the Apple Store web site goes for $1199.

Exactly how bad does Windows 7 have to be before a buyer will overlook that $600 price difference? (For more on the timing of the corporate adoption of Windows 7 see my October 10 post http://jubakpicks.com/2009/10/07/update-microsoft-msft/ . For why I think it’s time to buy Microsoft stock see my July 24 buy http://jubakpicks.com/2009/07/24/buy-microsoft-msft-this-is-as-bad-as-it-gets/ )

The counter-attack in the smart phone space has started too—although this time it’s Google rather than Microsoft that’s leading the charge.

Because Apple decided to sell the iPhone in the United States through just one cellular operator, AT&T (T), it has left the door wide open to a phone that’s not quite as polished in its integration of hardware and software as the iPhone but that is, like Windows 7, good enough.

I’m talking here about phones built on Google’s Android operating system such as Motorola’s (MOT) Droid.

I wouldn’t call this phone an iPhone killer. When I tested the Motorola at my local Verizon (VZ) store in the days after its release, the phone felt like a brick in my hand (that’s not good, in case you were wondering) and the keyboard was close to useless. And also, inexplicably (well, it’s not exactly inexplicable if you’ve followed the self-destruction of Motorola’s once-great cellular phone business), the phone comes with a paltry 256MB of memory available for applications. That means that the phone simply won’t be able to store and run more than a scant fraction of the 10,000 or so applications available for Android phones. (By contrast, the 3G iPhone has 8GB of memory and there are 100,000 or so applications for the iPhone.)

But Apple shouldn’t get too comfortable. The iPhones greatest strength is Apple’s control over the hardware and software that produces what is, for the computer and consumer electronics world, an amazingly seamless integration. That’s also the iPhone’s great weakness. Because Apple controls the software and hardware on the iPhone, that company is the source of all iPhone improvements. If it stumbles, the iPhone stumbles.

Droid phones, in contrast, are built on an open-source platform that means that anyone can build one. So Motorola’s Droid doesn’t carry the Droid banner alone. If you go to the Verizon store, you can also buy an HTC Droid Eris. It feels better in the hand than the Motorola and it has a usable touch screen key board.

The phone isn’t perfect. It’s won’t play your iTunes either and the MP3 player is, well, less than optimal, shall we say. But it’s a reasonable contender. It costs just $199 with a one year contract and $100 rebate. And it works on Verizon’s network (and others) rather than being restricted to the comparatively terrible AT&T network.

Oh, and it has a replaceable battery. Which the iPhone doesn’t. (The Eris certainly isn’t an iPhone killer. It might, however, be good enough and cheap enough to be a Motorola Droid killer.)

And neither phone is the last of the Droid contenders either. Some company will get this right enough to start taking mind share from Apple’s iPhone

Apple hasn’t lost the smart phone battle by any means. But if I were an Apple shareholder right now I’d like to see signs that the company understands that it’s only got a limited chance to crush the competition.

If the iPhone remains restricted to the AT&T network, Verizon will do everything it can to make sure that the Droid grows up to be a solid competitor. Apple could head that off by bringing Verizon into the iPhone game.

Apple could eliminate the silly quirks that have given Droid makers a chance to run the “Droid does/iPhone doesn’t” campaign. Why no replaceable battery on an iPhone? I’m sure Apple has a raft of reasons but in a competitive war you don’t hand an advantage like that to the enemy.

The big problem, however, for Apple shareholders is that any real competition for the iPhone is going to eat into Apple’s high margins. That happens all the time in technology markets and to market leaders. The truly great long-term competitors such as a Toyota Motor (TM) or an Intel (INTC) know that as a product matures you have to take lower margins, build up the efficiency of your operations on the back of volume, and grab market share as hard as you can.

That’s never been Apple’s strategy. It will be interesting, to those of us who don’t own Apple stock anyway, to see if Apple does it differently this time with the iPhone.

Full disclosure: Jim Jubak owns shares of Microsoft in his personal portfolio.

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16 comments

  • lotteollie on 13 November 2009

    Jim: You may be right about the business aspect of Apple, but from my perspective, Apple is doing great. I bought the first Mac that I have ever owned this summer. It’s a iMac. Its fast, never locks up, and I never have a problem with it. My wife, who is just as computer illiterate as I am, wanted a laptop to surf and do some work in from of the TV. I bought her a Macbook for her birthday this week. She knows nothing about computers, but had it up and running on our home network in 5 minutes with no help. Last night she asked me how she could check to find a website that she had visited the day before. Evidence of just how little she knows. BTW…I had to reboot my office PC this morning when I came in.

  • terryw on 13 November 2009

    Hi Jim, I think you meant 8GB, not MB of memory for the iphone. Also Apple has about 100k apps now.

    On a personal note, I really dig Android a lot, it is still not as good as the iphone OS, but it is improving at a much faster pace. I like this article a lot, I love my windows 7 operating system.

  • joaodelima on 13 November 2009

    You guys will disagree, but I don’t think Apple’s computers are that good to start with, and that’s why they can’t gain more market share.
    If you compare a MacBook Pro with a Dell, sure, MACs are super. But the price difference is so large, it renders the comparison unfair. Compare a MackBook Pro to something like a Falcon Northwest PC. All of a sudden the MAC doesn’t look impressive anymore.
    That leaves Apple in a difficult position. Those who can’t spend much can go for a cheap PC; those who can spend a lot can go for a boutique PC (such as Falcon Northwest, Alienware, etc.) and get more memory, processor power, and hard drive capacity. To whom then Apple will appeal? Fashion conscious computer shoppers?

  • Run26.2 on 13 November 2009

    We just bought a laptop to replace one that was stolen a few months ago and getting a Mac was never really a factor. We got a fantastic HP with Windows 7 for what would have been a downpayment on a Mac. The verdict: it’s my wife’s machine and she has not bugged me once with any issues. I had a Mac years ago and loved it, but the price difference is a killer.

    As for a smartphone, there is no AT&T where I live so I’ll be checking out Android on Verizon when I get get a new phone in a year. Give them time to work out the bugs. Plus I actually use my phone to talk, which I understand is not a strong point in the iPhone.

  • mkaz13 on 13 November 2009

    99% of the time I agree with your blogs and I love your stock picks. I’m in the process of reading your book. However, Jim, I think your analysis of Apple is flawed in several important ways. First, the HP comparison to an iMac is apples and oranges. The iMac has twice the processor (1.5 vs. 3.0), its got an AMD processor vs an Intel, twice the memory (4 GB vs. 2 GB), nearly twice the hard drive (500 GB vs. 320 GB). If you customize that HP with those same specs you’ll find that there is very little price differential AND I didn’t even touch on the display size and quality. Second, why in the world would you advocate that highly profitable Apple should follow the same path of destruction as Microsoft, Dell, etc. If you own a highly profitable portion of the market that is defensible and can be expanded, would it not be foolhardy to go out and try to take market share for share’s sake? Next, the comments on Windows 7 sound like they are coming straight from the desk of Steve Balmer, nobody can be sure at this point how good 7 is, and I for one am certainly not going to take Microsoft’s word for it (just trust us this time). Most importantly, long time PC users like myself (I don’t even own an iMac yet, but I do own and iPhone – best single product I have ever owned) are evolving onto the Mac platform. Take one look at iTunes and the apps store and you’ll see that the Google platform and the Droid (what a name) aren’t even going to dent the iPhone dominance. With regards to price on the iPhone…how is $199 pricing the iPhone out of the market for a device with 8GB storage and unbelievable features? You may think, I’m an Apple devotee, but actually I have used PC’s and Microsoft products since the early 90′s. Trust me, if I’m switiching…it’s real trouble for the Microsoft crowd.

  • mkaz13 on 13 November 2009

    99% of the time I agree with your blogs and I love your stock picks. I’m in the process of reading your book. However, Jim, I think your analysis of Apple is flawed in several important ways. First, the HP comparison to an iMac is apples and oranges. The iMac has twice the processor (1.5 vs. 3.0), its got an AMD processor vs an Intel, twice the memory (4 GB vs. 2 GB), nearly twice the hard drive (500 GB vs. 320 GB). If you customize that HP with those same specs you’ll find that there is very little price differential AND I didn’t even touch on the display size and quality. Second, why in the world would you advocate that highly profitable Apple should follow the same path of destruction as Microsoft, Dell, etc. If you own a highly profitable portion of the market that is defensible and can be expanded, would it not be foolhardy to go out and try to take market share for share’s sake? Next, the comments on Windows 7 sound like they are coming straight from the desk of Steve Balmer, nobody can be sure at this point how good 7 is, and I for one am certainly not going to take Microsoft’s word for it (just trust us this time). Most importantly, long time PC users like myself (I don’t even own an iMac yet, but I do own and iPhone – best single product I have ever owned) are evolving onto the Mac platform. Take one look at iTunes and the apps store and you’ll see that the Google platform and the Droid (what a name) aren’t even going to dent the iPhone dominance. With regards to price on the iPhone…how is $199 pricing the iPhone out of the market for a device with 8GB storage and unbelievable features? You may think, I’m an Apple devotee, but actually I have used PC’s and Microsoft products since the early 90′s. Trust me, if I’m switching…it’s real trouble for the Microsoft crowd.

  • ryanpatrik on 13 November 2009

    I love Apple products but I certainly agree with you Jim that they are dropping the ball in the US by not selling IPhones on more networks. Imagine the sales increase just adding Verizon would bring. I suspect this is coming very soon since they are selling on multiple networks in many countries. The price is not much of an issue even if a bean counter would say it is. That point of view misses the reason for the whole phenomenon.

    I would be interested to know just how you would have proposed that they “kill” the PC. Once you take the corporate market out of play (they were never switching) Apple increased their market share dramatically and kept margins high while doing so. Would you propose they become a commodity supplier? Why would you suggest that a very successful company change what it has been doing just to grab a few points of market share? That would be like having Hermes go for the JC Penney crowd.

    That all being said the stock is priced for perfection so i see why it isn’t a Jubak pick. It isn’t a pick of mine either and I have been dead wrong for 100 points.

  • gusspresso24 on 13 November 2009

    Jim, I completely agree. Apple missed out on a huge opportunity. They made huge advances in the mp3 player and smart phone markets, but made stifled improvement in personal computers (when you consider the 80% of corporations that chose not to upgade).

    Enjoying big margins in favor of market share works great while the competition is tripping over themselves, but once they get their shoes tied, Apple could easily face falling margins anyways as their products become less of a premium good.

    What they need to do is make another huge advancement, like they did with the iPhone and iPod. It seems their hope for this is the tablet, but i’m not convinced that it will be the success they need it to be.

  • AndyM789 on 13 November 2009

    I have mixed, but mostly positive, feelings about Apple. Full disclosure: I own shares of AAPL (I picked them up about a year ago just after the bubble burst–at the time I couldn’t see any reason for them to be trading so low except for panic, and the 100% appreciation in the stock price since then seems to have borne that out).

    They have done so many things right in the past decade that it’s hard to fault them for much, but I worry about their bothersome exclusivity with AT&T on the iPhone and what Windows 7 might do to their market share if it turns out that Microsoft has actually produced a good operating system for the first time in ages.

    Nevertheless, I will definitely second mkaz13′s comments about how much more attractive Macs are becoming even to PC diehards. I’m a computer gaming enthusiast who’s been building his PCs out of parts for a solid 15 years now–the very definition of a PC loyalist–and up until a year or two ago I would have said there was no way I’d consider a Mac. But recently, the superior craftsmanship, compatibility, performance, customer service, and aesthetics of Apple’s line of laptops and desktops has become ever more overwhelming, to the point where I would now look exclusively at Apple for laptops and would seriously consider them even for a desktop. Maybe Windows 7 can reverse that and maybe it can’t, but it sure has a lot to prove to me.

    Price is, of course, the wild card. But my attitude here is that it’s not as if Apple is charging more than their competitors for the same quality of product and hoping to make up the difference with their (admittedly top-notch) advertising and marketing. They make higher-end, better-quality products and charge accordingly. There’s nothing wrong with that business model in my mind, not even in this economy. They won’t take over the world that way, but they don’t necessarily need to to continue being very successful, and as other posters have alluded to, it’s not even clear that such a strategy would work out very well for them if they did actually manage to claw some market share away from the others.

  • francolargo on 13 November 2009

    When Jim said “Buy MSFT”, I didn’t even read the article – I ordered the stock first because I had heard favorable pre-release reviews of windows 7. So far, so good. However, when a faulty Microsoft ‘repair tool’ took down my entire boot disk, rage set in and I paid through the nose for a sweet MacPro (I already had a Mac laptop). I’m a relatively capable and disloyal geek with no illusions that OS X is 100% trouble-free… But I believe that Mac computers are for people like me – enough spare change to pay the price premium but NO spare time to mess with vexing system problems. If I had an IT pro to maintain my system plus those of my co-workers, then that person’s salary could be offset by purchasing PC equipment with lower “commodity” pricing. But a computer’s speed and power are only one factor influencing it’s productivity. Now I can run any OS – I have my essential XP programs available on the Mac – and all my work is migrated to a reliable, self-sustaining system.

    What share of the market do I represent? Probably not large. I thought it was fairly well established (by Apple’s decline as MSFT flourished following the heyday of the Apple IIe) that the real value is in the operating system, not in the hardware. Switching to Apple’s OS requires new hardware. If Windows 7 is as much improved as I hear, I don’t see it driving extensive replacement of business-related equipment. Thus, I feel that Apple could cut computer prices to gain market share without it adding significantly to it’s “business-class” clientele.

    On the i-phone too, if software IP is the essential component of value, then perhaps making costly mid-product-cycle hardware changes would not necessarily help maintain dominance. Whereas, increasing access by adding carriers – that seems like a no-brainer.

  • bobisgreen on 13 November 2009

    I read all the comments…agree with some, raise an eyebrow at others…I thought about Jim’s point this summer when I went to NYC for a few days. The Apple store there (just like here in Florida) is lightyears ahead in customer service and the machine and its OS is reliable.

    WHY didn’t Apple take advantage of MSFT’s inferior OS and the clone hardware? Dunno! They missed the boat! My next PC will be an IMAC mainly because of VISTA (yuck)!

  • Jim Jubak on 13 November 2009

    I wrote this piece more in sorrow than anything else. I love my Macs, would love to own an iPhone (but dont want to deal with AT&T’s network) etc. What we’re missing in this discussion is someone speaking for the 800 pound gorilla of the computer market, the corporate customer. From all the numbers I can find Apple hasn’t dented that world at all. That’s where the big volumes are in PCs and that’s where Wintel continues its dominance. All of Apple’s strategy that I can see has ben directed to the individual consumer. And they’ve ben very successful in that part of the market. But I haven’t seen any signs that they atacked the corporate market when there was so much disgust with Vista. I mean when 80% of your customers decide not to upgrade, it’s a big problem/opportunity. Here’s where the high margin strategy hobbled them since yo can’t get in the door EASILY with a high differential on purchase price. But you can get in the door on ease of use, on lower support costs, etc. I’d love to hear from anyone who knows what Apple tried to do in that market. (By the way I’ve owned Apple on and off during its recovery. Just don’t own it at the moment.)

  • co3159 on 14 November 2009

    I’m a 25 year user of PCs and I bought my 1st Mac a year ago. Even though I never had the Vista experience, I would never buy another PC. Yes — never. The differences are that dramatic and well worth the premium price.

  • viwi on 14 November 2009

    I love Apple products. However, it always strikes me that they are not exactly what I want. Software for Mac’s is somewhat limited. Windows is far from being ideal, but if you use it right, i.e. have all the proper anti-virus software, do not continuously install/uninstall new software, it does a good job for you. At least, in more than 15 years I never experienced a crash.

    iPhone is a separate story. It is not a good phone, but a good gadget. I do not need a gadget, I need a good phone, so, after playing with iPhone for a while in a local store, I bought Sony Ericsson phone, which worked for me in the past.

    Sure, Apple has an edge in innovation, but it require Apple to continuously maintain this leadership through heavy investment into R&D, which results in higher prices and lower profit margin. As a result, if someone sees that Apple came up with something worthy, in less than 6 months you see the marked loaded with copycats and clones.

    To make a long story short, I am trying to stay out of buying Apple. It is OK to buy it on dips, but buying it when it goes up seems to be unjustified.

  • josola on 15 November 2009

    I used to run a big network a decade ago(in a media company) base in the old MAC 9.0 OS. And it was too painful to move to a different OS (Windows NT in that time) when Apple almost disappeared. My lesson (business lesson) is that you don’t make that mistake twice (using something so closed). Yet I’m still a fan of Apple products but not of the stock.
    Today they seem to make the same mistake Some analysts said that the price of AAPL stock already includes the growth in China; in where btw the sales of the iphone had been in the order of a few thousands in a market that have millions of new users per week (a disappointment).
    I differ with Mr. Jubak with the exclusive approach for the Iphone. At that monent it appears that Verizon rejected the deal. So it had sense to have an exclusive deal when no one knew how that market was going to develop. But I agree that it will be a strategic mistake to renew such as exclusive deal.
    Most people don’t want to pay for excellent products (mp3 is the perfect example of low but acceptable sound quality) and that happens in computers specially. Otherwise no one would be buying those clunky and slow netbooks.
    Microsoft will come back with something decent. It’s a monster that can wait. And like Mr Jubak says google has a very decent mobile OS that I see eroding the Iphone.
    Apple is amazing but I wonder why to use a big cat name for an OS given the future that big cats have in our planet.

  • grape crusher on 7 May 2010

    2 years ago we did not have an apple product in our household, now we have 2 i phones, a mac book and an i pad. When I went to the apple store the other day in a shopping mall, most stores where half empty. The apple store was packed, a 15 year old boy was buying an I phone with his parents and a 75 year old woman was taking lessons how to use a Mac book. If that is not enough reason to buy apple shares, I do not know what else is there. Please let me know if there are any other companies out there right now.

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