As Apple’s growth has slowed and its stock has crashed, die-hard Apple fans have started defending the company based on the quality of its products.
Apple isn’t selling a cheaper iPhone, Apple fans explain, because Apple doesn’t want to sell one. Apple doesn’t like selling “cheap plastic crap.” Apple doesn’t want to make “phones for the masses.” Apple just makes products for people who like (and are willing to pay for) the finer things in life–like BMW.
The trouble with this argument is that it ignores two things:
- First, the market for BMWs (and BMW-like smartphones) is small and mature. If all Apple really wants to do is “make smartphones for people who drive BMWs,” Apple probably won’t grow much (and is probably already much too big).
- Second, this “premium product and premium price” strategy is a big departure from the strategy that recently made Apple the most profitable and valuable company in the world.
On this latter point, recall the difference between Apple’s pricing strategy in the current Apple era and its pricing strategy in the 1990s.
In the 1990s, Apple made computers that were arguably superior to Windows-based IBM PCs, but they were also priced higher. Apple fans took pride in this: Shelling out for a Mac meant that you were a person of means and taste, not someone ready to settle for the plebeian tools of the proletariat.
Alas, it turned out that the number of these well-heeled aesthete Mac buyers was too small to make Apple anything but a niche player. And as the decade progressed, Apple was increasingly marginalized until, in the late 1990s, it nearly went bankrupt.
To Apple’s great credit, however, it learned from this mistake.
This time around, when Apple introduced the iPhone and iPad, it made sure that it was not only the quality leader but also the price leader.
The subsidized price of the iPhone, for example, quickly settled at $199, and the phone remained cheaper than all high-end alternatives until Apple’s competitors finally realised they had no choice but to match the $199 price point. And after that, the iPhone’s quality edge, combined with its price parity, allowed it to continue to be the world’s best-selling phone.
When Apple launched the iPad, meanwhile, it mimicked this pricing strategy. For a couple of years, the iPad was not only the best tablet on the market, it was also the cheapest. For the average consumer, it made no sense to even consider buying a non-Apple tablet: The product would not only be worse–you would also have to pay more for it.
In other words, in the early years of both the iPhone and iPad, Apple was not positioned as the company that sold “premium-products-at-a-premium-price.”
It was positioned as the company that sold “premium-products-at-the-same-or-lower-prices.”
That’s excellent positioning!
And it is the positioning that made Apple the world’s most profitable and valuable company.
To use the car analogy, Apple was selling BMWs for the price of Fords. And you don’t have to be George Soros to see that BMW would sell a heck of a lot more cars–and make a heck of a lot more money–if it could sell BMWs for the price of Fords.
But BMW can’t do that.
And now, Apple can’t (or won’t) anymore, either.
In the past 18 months, Apple’s market positioning has changed in a subtle but profound way. This is not the company’s “fault,” per se–the strength and aggressiveness of Apple’s competitors had a lot to do with it–but it is a reality that Apple now has to deal with.
First, at the high end of the phone market, Apple’s competitors have caught up with the iPhone. Samsung, HTC, Google, and even BlackBerry are all making phones that are basically on a par with the iPhone 5 (and some people consider some of them to be superior). Also, developed markets like the U.S. and Europe have matured, and the rapid smartphone growth has shifted to emerging markets. In developed markets, which often have carrier subsidies, a $400-$600 price point for a phone is workable. In emerging markets, without subsidies, this price point is simply out of reach of most consumers.
In the tablet market, meanwhile, Apple was radically undercut on price by Google, Amazon, and other small-tablet manufacturers. When Apple finally responded with a small tablet of its own–the iPad Mini–Apple chose to sell it at a price point that was considerably higher than Amazon’s Kindle and Google’s Nexus 7. Apple also made compromises in the Mini that some Apple devotees found disappointing, namely using a lower-resolution screen.
The upshot is that, except in emerging markets, Apple is NOT BMW.
Apple did not get to where it is today by selling the best product at the highest price.
Apple got to where it is today by selling the best product at the same or lower prices.
In other words, it got to where it is today by offering mass-market consumers excellent products at an affordable and highly competitive price.
Unfortunately, now, Apple’s products are no longer obviously superior to common alternatives. And some of them–namely, the iPad Mini–are now priced higher than common alternatives.
In short, the only markets in which Apple is positioned like “BMW” are emerging markets. And there are not many people in emerging markets who can afford to buy BMWs, which is why Apple is getting clobbered.
So what will happen if Apple maintains its current market positioning?
If Apple remains “BMW” in emerging markets, selling premium products at premium prices, it will continue to get clobbered in terms of market share.
Because the mobile game is a platform game, this matters: The less market share Apple has, the less relevant and popular it will be as a development platform. The more Apple will run the risk of being a niche “also-ran” like it was in the early 1990s. And Apple will also continue to miss out on the explosive growth that is catapulting the growth of Samsung and other mobile manufacturers in these markets.
In developed markets, meanwhile, if Apple stays at price- and quality- parity with other leading vendors, one of two things will happen:
Either the ~$199 subsidized price point for top-of-the-line phones will remain the same, and Apple will continue to take a strong share and continue to pile up cash on its balance sheet without growing much.
OR, more likely,
Someone who makes a smartphone that is basically as good as the iPhone–or at least “good enough”–will radically undercut the iPhone on price.
That’s what tends to happen in consumer technology markets. And Apple’s massive profit margin leaves it highly exposed to this kind of competition.
If a high-end smartphone market radically undercuts the iPhone on price, Apple will either be forced to sit and watch as it loses sales to the cheaper competitor… or match the competitor’s price.
SEE ALSO: The Bull Case For Apple
Disclosure: Last week, when Apple’s stock crashed to a new low of $390, I bought some. I think stock-picking is an idiotic strategy for individual investors, and I almost never do it. But, sometimes, for fun, I put my money where my mouth is. You can read about the logic behind my Apple purchase here.