The Apple Dilemma: Marketshare or Margins

Steve Jobs famously got Apple back on track by reducing the number of products Apple had down to a reasonable number in order to create product excellence.

Focus, focus, focus.

Excellence, excellence, excellence.

That's why it's was a huge, huge deal when Apple finally -- after Steve Jobs fought against it -- launched the iPad Mini. The press and consumers went crazy for this product when Amazon had had the Kindle Fire out for 13 months and Google had had the Nexus 7 out for five. It was a big deal not because of the product itself, but because the app ecosystem was finally freed to embrace a new footprint.

Steve was right about focus while simultaneously wrong about the smaller tablet footprint -- long live cognitive dissonance and a tolerance for ambiguity!

He made a judgement call: focus 100% of our effort on making one killer tablet that explodes in the market because it's "That. F#@!ing. Good!"

Adding the Mini takes 25-50% of our effort away from that goal so let's be the best, not the broadest.

Anyone who has a Mini and a full-sized iPad knows that the Mini is the better product -- hands down. Everyone with a Mini tosses their larger iPad. The extra screen real estate simply doesn't trump the extra portability.  

Apple's "fewer SKUs and better products" philosophy has made them the best, but the world is quickly moving to "more SKUs and equally good products."

This week someone handed me a BlackBerry 10. It's basically as good as the iPhone 5, in fact some would argue the finish feels better in your hand.

Anyone who has used the Microsoft Surface will tell you that while the Microsoft app store is far behind Apple's, the interface and the hardware are as good or better.

Finally, a bunch of dorky friends of mine have been praising the Samsung Galaxy Note 2, an absurdly large smartphone (or tiny version of the iPad mini). After lunch with David Eun of Samsung at CES I said screw it, I'll buy that really dorky looking phone.

Now I love it.

When reaching for my iPad Mini, iPhone or Note, I most frequently reach for the Note.

Oh yeah, Android isn't a complete utter disaster any more! It actually works fairly well -- not iOS well -- but 85% as good. Yes, Android is exactly 85% as good as iOS--I've tested it.

Surprisingly, I haven't found an app that I love on iOS missing from the Google Play store. Compare that to last year or the year before! The Android app ecosystem has caught up *if* I'm correct in thinking that 90% of app minutes are aggregated into the top 50% of the store and not the long tail.  

Let's break it all down:

-- Microsoft has caught up on interface and hardware but is behind on apps
-- Google's Android has closed in on interface, exceeds Apple on hardware and is even on apps.
-- RIMM has caught up on hardware, almost caught up on interface and is way, way behind on apps.
-- Samsung has blown past Apple on hardware and uses Android, so it's caught up on apps and 85% there on operating system/interface.

Bottom line: Apple is no longer lapping folks. It's a tight pack with Apple leading the way.

[ Side note: Flipping to the laptop and desktop market, the coolest hardware coming out is clearly made for Windows 8. From huge 27" monitors you can pick up from your desk and put on coffee tables to play board games, to rotatable and flippable laptop monitors. However, the desktop and laptop market is less important today, so let's shelve it and stay focused on mobile. It's just another signal that Apple is no longer lapping everyone -- it's an actual race. ]

The reality distortion field has dissipated, and Apple no longer has Jobs's wild Jedi mind tricks to convince everyone that less is much more. At the same time, competitors are investing tens of billions to kill Apple.

I'm having a hard time coming up with a metaphor for this. Maybe you can come up with one based on the following fact:

→ Every single person is targeting Apple's biggest weakness: its religious focus on fewer products.

What does this mean? First, Apple will have far fewer failures in the market. Everyone will win, so it will look like Apple's winning!

Second, competitors will suffer countless losses, in fact many more losses than wins.

However, in aggregate, Apple's top five competitors will try 20 products each (or 100 shots) in 2013 and Apple will launch, what, 10 products?

Apple will shoot 10 for 10 I predict. Its worst-selling products are still magical -- Apple is that good!

Its competitors (RIMM, Samsung, Microsoft, Lenovo, Acer, Google, etc) will fail 80% of the time.

This means Apple will have 10 great products in the market, and its competitors will have 20.

[ Note: Those numbers are estimates to make a point. No one knows exactly how many mobile products will flood the market. ]

It's just math.

To recap:

1. Android is actually a good product today -- not great -- but very good.
2. RIMM has caught up to Apple's 2012 product line and is as good as Android (perhaps better for business).
3. Microsoft has a better interface and is bold enough to make more product.

Conclusion: Apple needs to radically change its philosophy facing this new scenario.

Here are the four things Apple needs to consider (I would hate to have to make any of these decisions):

a) Cut margins to build market share. No more 50%+ margins for Apple. Nope, it's time to focus on getting more customers into the ecosystem and making app developers more money. This means the iPad Mini drops to $249 and the iPhone 5S goes well below $500 (like $350-$400).

b) Add three new phones in 2013: one with a keyboard, one that's super cheap, one with a huge screen and of course the expected 5S. Just like Mercedes and BMW added cheaper cars to fight off Lexus and Audi sucking up the 20-something market (and making them loyal for life). People at Mercedes and BMW must have been very upset about creating ~$30k cars, no?

c) Build cross-platform software: Apple needs to buy Twitter, Evernote, Voxer and Dropbox, and have a massive cross-platform offering. It needs to jumpstart its ailing built-in Apps like Mail (not even close to Gmail), calendar, stocks and messenger.  Enough of this dividend and $100B war chest nonsense: overpay for 10 companies and find your YouTube or Android like Google did.

d) License iOS to 3rd-party hardware makers: This is radical, but I would anoint Samsung as your top partner and get Samsung to give you $50 for every smartphone sold with iOS. Can you imagine a Note or Galaxy with iOS on it? How about a Samsung TV with iOS? Apple needs to at least *consider* getting its operating system being everywhere like Google and Microsoft do.

That last part will probably never happen, but I think market share is Apple's biggest problem, and Google and Microsoft are exploiting it. RIMM will obviously give its OS away for free later this year -- it has to.

Apple doesn't have the corner on innovation, and it doesn't have the halo anymore. Does this mean it will fail? No.

Does this mean its stock will tank? No.

If Apple takes none of my advice, it will still be the most profitable company in our industry for some time to come, but its current plan means it ultimately loses big time to Samsung+Google, and thousands of smaller cuts from Microsoft and RIMM.

Apple needs to forget about dividends, its stock price and the outdated "less is more" philosophy and focus on one thing: marketshare.

Marketshare iced it for over a decade last time around (e.g., vs. Microsoft on the desktop, when Apple didn't have the "software"(aka Apps) to compete), and while I don't think it will be as brutal this time around, it is going to be harder and harder to hold on.

Remember: What got you here isn't always what will get you there.

best @jason