Apple - Outwitting Competitors Through Deep Analysis

| Analysis

Apple is beating up on the competition and revenues are soaring. With that, it’s all too easy to assume that Apple’s success is simply due to the appeal of its products. There may be, however, another overlooked factor, and that is the seemingly brilliant, deep business analysis that allows Apple to outwit the competition.

Sometimes I think that Apple has a supercomputer in some secret complex that completely models the consumer electronics market. Imagine for a minute a digital simulation that has all the elements of the market place: customer usage patterns, the price elasticity of products, component part prices and extrapolation for the future, the average broadband speeds by region, the pricing of the competition’s products, how long people keep their phones, how they use their Macs (from the Snow Leopard feedback system), inventory levels and so on. Roll in Apple’s expenses for OPEX and R&D.

Los Alamos supercomputerLos Alamos Blue Mountain Supercomputer facility

It would be like a giant, exquisitely complex Numbers spreadsheet. You push a little here and see what pops out there. It would, of course, be written by a Stanford Ph.D. who is an expert in business analysis plus a team of computer scientists. Such a simulation would allow Apple executives to ask interesting questions:

  • What happens if we contract for two year’s worth of NAND flash memory instead of each quarter?
  • What happens to iTunes sales if we lower the price of Lion from $129 to $29?
  • How will the utilization of iCloud change as storage in the iPhone goes from 32 GB to 64 GB? And beyond?

These may seem like impossible questions to ask, but it’s not even as hard as what IBM did with Watson. If the simulation is properly constructed, Apple can better figure out how to spend money to make more money. That’s always a major dilemma for any corporation’s executives. It could account for Apple’s fantastic rise to a US$100B company.

Or forget that. It could just all be in Mr. Jobs’s brain.

Steve Jobs

Outwitting the Competition

Not only are Apple’s products so well designed that people stand in line for them, but as a keen observer of the company, I get the feeling that Apple beats up on the competition in subtle ways. Here are just a few examples:

1. Know thy customers. Apple started opening its retail stores at a time when Gateway was closing its stores. So analysts concluded that Apple’s stores would also fail. What they neglected to consider was that PC customers weren’t hungry for anything better. They knew the pickle they were in with Windows, but relented that they were locked into Windows for the sake of compatibility with work and friends.

Apple customers, however, were very hungry. They wanted to be able to just connect a camera to a computer and have it painlessly import photos. They wanted a better way of life on the Internet. And, with some expendable income, they were looking for some excitement and jazz and special attention when they had problems. It’s the same feeling you get when you walk into a Lexus or BMW dealership. Apple understood that and so the Apple retail stores flourished, earning billions in new revenue for Apple. The retail sales business is all about understanding your customers, not just opening a store front for me-too products.

2. Cleverly leveraging infrastructure. The Wall Street Journal (subscription may be required) had a fabulous story yesterday abut how Apple leverages NAND flash to its iCloud advantage while the competition shoots its own cloud in the foot with poorly thought out practices. Here’s the key quote: “Apple is effectively making a bet on the falling cost of flash memory, while the Google and Amazon efforts expose consumers to the rising cost of Internet bandwidth.” In other words, the competition depends on streaming to access music just as ISPs start to add caps and extra usage charges. Apple’s iCloud only syncs via store and forward and exploits falling NAND flash prices to seduce customers into buying more music and storing it locally, syncing it everywhere. It seems the competition just doesn’t think of these things.

Chess

3. Commodity parts lockout. There’s a reason Apple has accumulated so much cash on hand. It’s not to foolishly buy a failing company. Rather Apple uses that cash to squeeze the competition out of the commodity parts market. To do that, Apple pays cash for long term contracts and goes to the front of the production line. Not only does Apple do that with displays and memory bit also Lithium-Polymer batteries. The net result is that Apple, by integrating the software and hardware, sells better products at lower prices. The competition is outwitted by Apple’s non-monopoly monopoly.

4. Reinventing and disrupting. Prior to January 2007, the major wireless carriers thought they were in the telephone business. They were wrong. They’d nickel and dime customers with text charges while not providing them a way to have a full Internet experience or manage their camera phone photos. The carriers wanted to soak customers while preserving their wireless capacity.

What Apple realized was that the carriers really needed to be in the smartphone business, but they didn’t invest in the software expertise to do that. So Apple did it for them. Now, Motorola, RIM, and Nokia are all suffering because they weren’t really software companies in the days when it’s important for software to breathe life into the hardware. Recently, a senior RIM executive verified exactly that. Finally, these phone makers sucked up to the carriers in mindless competition. Except it was the wrong competition to be in.

5. Astute Observation. Apple realized that the unit of currency in music was the song. We don’t listen to albums, we listen to songs one at a time. We don’t have many favorite albums because extra, dud songs are thrown in for padding. We love songs. Customers knew this, but the Labels wouldn’t cater to the customer, so Apple did. Buy understanding the social demands of its customers, Apple cut through the greed of the labels and laid the foundation for all other music services. But Apple go there first, and iTunes remains the premiere way to buy and listen to music. Now Apple is rich and the Labels are in financial shambles.

6. Relentless Self Competition. Most companies are loathe to do this because they don’t have the money to invest in new projects (or supercomputers). They don’t have the money because they’re too busy cutting prices, competing in a downward spiral with the opposition. Apple, on the other hand, uses its premium products to finance progress, relentlessly moving forward. That appeals to tech savvy customers and fuels sales. You may be annoyed by how fast Apple has gone from DVI to DisplayPort to Thunderbolt, but face it, Apple customers pay good money to move into the future briskly. Even if they have to stand in line to do it.

Apple also understands how to keep prices low on key products, like OS X, iPads and free iPhone 3GSs in order to fuel the sales of apps, music, books — which gives them a 30 percent cut.  No doubt the reduced price for FCP X was designed to sell more Macs. You don’t need a supercomputer to see how free genius bar services and a $29 upgrade to Lion and free upgrades to iOS will fill Apple’s coffers with yet more billions of dollars as customers use Apple’s infrastructure to buy other products.

It’s All About Smart

When one looks at the competition, we see executives who don’t have much engineering experience. They pad their own pockets and throw unfinished products onto the market that have poor user experiences. Apple, on the other hand, works smart. They build premium products so they can finance more premium products that customers love. They buy up commodity parts with their cash and starve the competition. They understand how customers need to use the cloud and how the cloud integrates to the current storage technology. They’ve invested in a great family of OSes so they can integrate to the hardware smoothly and deliver a great user experience. In essence, Apple has a great feel for shrewd, deep business practices that make them ever more money while the competition just sighs and throws out token competition.

Whether it’s a supercomputer or the mind of Steve Jobs behind the scenes — or both — we love Apple for it.

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38 Comments Leave Your Own

domsin

Bravo, John.  One of your best columns.

But, as an AAPL investor, it matters a lot whether its a supercomputer or Steve Jobs underlying Apple’s success!  If the former, Apple will continue to do well when Steve is no longer at the helm.  If the latter, Steve’s health and continued service is critical to the Company’s future success. 

I tend to believe its more likely to be Steve’s brain….

Lee Dronick

But, as an AAPL investor, it matters a lot whether its a supercomputer or Steve Jobs underlying Apple?s success!? If the former, Apple will continue to do well when Steve is no longer at the helm.? If the latter, Steve?s health and continued service is critical to the Company?s future success.?

Hopefully Steve Jobs, and Apple, has groomed his replacement.

Lancashire-Witch

“......but it?s not even as hard as what IBM did with Watson.”

or even what Watson did with IBM!

Great stuff, John.

brett_x

My biggest hope for Apple is that they can apply #4 to the cable industry. The cable providers are high on themselves and seem to think that charging more and more is an endless gravy train.

jimothy

This reminds me of a bit of Apple folklore.

When Seymour Cray (founder of Cray Research) heard that Apple had bought a Cray supercomputer to design the next Macintosh, Cray commented that he had bough a Mac to design the next Cray.

vpndev

But the carriers are STILL in the telephone business, despite Apple leading the way with smartphones. They are STILL nickel-and-diming customers with text charges, and STILL applying surcharges for photos/MMS and the like.

AT&T STILL refuses to unlock iPhones (and ONLY iPhones) that are out of contract. Both AT&T and Verizon charge the same rates even when the subsidy/contract period is finished.

The carriers wanted to soak the customers AND THEY STILL DO.

And ... I have to believe that Apple is really unhappy about this and looking for a way to put an end to it. I certainly hope they do - they’ll have my support.

geoduck

Very insightful.

Umm…
You’re not going to get in trouble of that photo of the server room at Los Alamos are you? I mean they’ve gotten all wakko about pix of DOD facilities in the last few years….

Nemo

Dear vpndev and bret_x:  To play the carriers’ game require a nationwide physical wired and wireless network and radio spectrum.  That radio spectrum is tremendously expensive, and the carriers have already bid for it and own it, so there is none left for a competing, new network from, let’s say, Apple or Google.  The physical network is also vastly and prohibitively expensive.  So, though I am sure that Apple, Google, and others would like to be independent of the carriers, the vast and prohibitive expense of duplicating any carrier’s network, precludes even Apple with its wealth from venturing to duplicate any carrier’s network.  Such as effort would require a bet the company strategy, and Apple would almost certainly lose that bet.

Also, having a carrier division would establish a destructive internal conflict inside of Apple:  The carrier division would, as current carriers, want and need to extract the maximum fees from customers, if only to pay for the tremendous investment involved in creating it, while the consumer electronic division would be focused on providing great products that devalued all carriers’ networks, including Apple’s own division, by transforming carries’ networks into dumb-pipe that are only common carriers for bits.  That internal conflict would destroy Apple, as either the consumer divisions won, imperiling the vast investment involved in creating the carrier division, or the carrier division wins out forcing the consumer divisions to make products that enhanced the earnings of the carrier division at the expense of making products that sacrificed a great user’s experience to protecting the carrier division’s profits.

So given the current state of the art, Apple taking on the carriers by offering a competing network is a no go.  Right now, Apple is limited to making great products, each of which has a great ecosystem of services and apps, that can function and has features independent of the carriers’ networks, but we all still must pay the carriers to connect and transmit.

farmboy

Really good analysis. Wish I’d have been smart enough to put together that perspective. Jealous.

vpndev

Sorry Nemo - I wasn’t suggesting that Apple should take on the carriers head-to-head. I agree that doing so would cause many problems.

But I think that Apple is trying to do things that lessen the carrier-stranglehold. A no-contract phone is a start, albeit a small one since T-Mobile’s system isn’t fully compatible. A GSM+CDMA phone would be a bigger step if you could get prepaid data as well as voice. As far as I know, AT&T doesn’t offer this even for international visitors with unlocked phones.

Apple’s business is to sell phones and, unfortunately, AT&T’s greed is hindering that.

Nemo

Dear vpndev:  I think that we are in accord that Apple is limited to doing what it can do by making great mobile products with features and services that benefit its customers/users, as much as it can do so independent of the carriers, but inside of those limits, with the exception of how Apple approves certain apps for the App Store, I think Apple is doing at least a good job.

Lee Dronick

You?re not going to get in trouble of that photo of the server room at Los Alamos are you? I mean they?ve gotten all wakko about pix of DOD facilities in the last few years?.

That could be stock photography of a generic server room for all I know.

aardman

Mr. M you’re on a roll.  I’ve been a serious Apple watcher since about ‘03 and I wholeheartedly concur with your observations. 

Just before visiting your page, I had also just read the open letter to RIM and just finished watching the ‘97 keynote that the anonymous letter writer cited.  There are many interesting things to draw from the keynote that helps you understand what Apple is all about today, but I will just focus on one thing: The part where Steve Jobs himself mentioned what I think is another thing that Apple does better than anyone else.  “It’s all about managing complexity”, he pronounced.

Not to put myself at the same lofty level as him, but I always believed that the enemy of high technology is complexity, and this is where Microsoft (Windows Media Center anyone?), Google (Wave perhaps?), and Facebook (care to fine tune your privacy settings?) just stumble.

And it’s not just that Apple keeps things simple.  It’s that they have very strict requirements when it comes to ‘designing’ an Apple product’s learning entry point.  Call it users’ learning curve management.  New product categories always come out really easy to operate, as in 5-year old easy.  Then they add on more features and functions as newer models come out.  So there’s no shock to the system for existing users AND for users who get the product much later in its life cycle, there is already a vast existing pool of users who can help the newbie ease into the iDevice.  The really amazing thing is that Apple products can acquire very sophisticated and complex functions and yet it never gets intimidatingly complex for nongeeks.

Gareth Harris

Well said, John. I agree that the point is to become proactive rather than reactive.  As the saying goes - if you are large enough, you can make your own weather.  Cash becomes a tool for making your own weather. I am reminded of the old racing saying: “Speed costs money. How fast do you want to go?”

doneck

You?re not going to get in trouble of that photo of the server room at Los Alamos are you? I mean they?ve gotten all wakko about pix of DOD facilities in the last few years?.

FWIW, Los Alamos is DOE, not DOD.

nytesky

I don’t think you give enough credit to Tim Cook. He is the production and inventory management guru of Apple.

getaneditor

“appelas”?

geoduck

FWIW, Los Alamos is DOE, not DOD.

Ah yes, that’s right. It gets confusing because all week the news has been talking about how the “wildfires are threatening Americas bomb factory at Los Alamos”.

John Martellaro

getaneditor:  I tpye soo fast, sometimse my fngigers get in the wy.

getaneditor

getaneditor:? I tpye soo fast, sometimse my fngigers get in the wy.

That’s not an excuse.  Unfortunately I see mistakes like this in real newspapers too sometimes nowadays.  Still, it’s FAR less often than I see on the web.

Are you a journalist or not?  If you are, you should learn to speak/write English appropriately.

Nemo

Dear Getaneditor:  Lighten up.  You aren’t anybody’s school-ma’m.  I am sure that John’s infelicities of style were inadvertent.  But if you really need to correct the spelling and grammar of folks who aren’t making normal errors in the course of being human, you can agree to do volunteer teaching at many of our fine penal institutions or at one of our inner city high schools.  There the help is much needed and, unlike here, will be much appreciated.

Lee Dronick

Are you a journalist or not?? If you are, you should learn to speak/write English appropriately.

Not to be a pedant, but shouldn’t that be “speak and write properly”

stens

There should be a comma following “Unfortunately”. “FAR” should be italicized, not capitalized.  Also, to paraphrase Steve Martin, “newspapers too sometimes nowadays” is an interesting word usement he has structured.

Good article, John, and relatively well-written.

Nemo

Sir Harry:  As long as we are going to school, let me see if I can improve on Getaneditor’s prose:

“That’s not an excuse.  Unfortunately, [Getaneditor forgot the comma.] I occasionally see mistakes like this in newspapers [Better diction, corrected the poor sentence structure, and eliminated the unnecessary “real newspapers.”].  Still, it is far [“Far” should not be capitalized.] less often than the errors of style [We need a noun or pronoun] that [Getaneditor forgot the relative pronoun “that.”] I see on the Web [Web, I think, is a proper noun and, as such, should be capitalized.].

Are you a journalist [The “or not” is redundant]? If you are, you should learn to write and speak English properly [Sir Harry’s “properly” or “correctly” is better diction.].”

Perhaps, Getaneditor needs some remedial instruction before we send him to prison to tutor inmates or poor students.

Nemo

John:  Getaneditor’s pretentious pedantry aside—and baseless pretensions at that—you and I are getting long in the tooth.  When I’ve stopped making sense, please let me know.  I shall do the same for you, but, so far, you are hanging in there pretty good.  But if we hang on too long, you know that Jeff and Bryan will show no mercy in making fun of us.

geoduck

Absolutely perfect grammar is flat and uninteresting. Style is the result of deviations from perfect grammar. John, I like your style.

Lee Dronick

We all make mistakes, in writing and in other things we do. I try my best to be a good writer and I am always trying to improve, to that end I like Lynn Truss? book Eats, Shoots & Leaves: The Zero Tolerance Approach to Punctuation. Sometimes I will make a spelling or grammatical mistake in wordplay, but that is poetic license.

“The only good way to learn about writing is to read good writing,”
Chief Justice John Roberts.

See this story about The Supreme Court and writing.

http://www.npr.org/2011/06/13/137036622/skip-the-legalese-and-keep-it-short-justices-say

Nemo

Dear Geoduck:  I’ll take issue with you in limited way.  The degree of deviance from standard English depends on the time, place, and purpose.  If you have a brief before the U.S. Supreme Court or if you are Ruskin, Lincoln, or Gibbon, correct standard English is usually called for, but if you are Samuel Clemens, a.k.a Mark Twain, and your purpose is Huckelberry Finn, then good grammar is Huck’s grammar, which on most occasions would be bad grammar, but not for Huckelberry Finn.  Standard English grants plenty of room for personal style, but perfection, which is what Getaneditor was going for in his most imperfect way, is neither necessary, nor is it possible or appropriate for speaking or writing.

And Sir Harry, thanks for the reference to what the Chief Justice had to say about good writing.

iJack

FWIW, Los Alamos is DOE, not DOD.

Yes.  And FWIW, the DoE is a far, far scarier place than the DoD ever was.  Brrrr.

barryotoole

“getaneditor:? I tpye soo fast, sometimse my fngigers get in the wy.”

spellchecker, John?

N8nnc

Or as I’m fond of typing, “spielchucker”

John - insightful as usual. FWIW, I thought your prose & editing was fine;-) but I do agree that I’m seeing a lot more errors in print now than I recall. So am I becoming more sensitive as I age, or is the editing that sloppy or lacking?

Lee Dronick

I do agree that I?m seeing a lot more errors in print now than I recall. So am I becoming more sensitive as I age, or is the editing that sloppy or lacking?


It is adult onset Getoffmylawn Syndrome and I too am a sufferer. smile

I think a big part of it is the 24 hour news cycle where getting the story out quickly is very important. If a spelling or grammatical error slips through then that is okay if means you got the scoop. That being said, The MacObserver writers do a pretty good job with spelling and grammar as do most of the commenters.

If I want to make comment longer than a line or two then I usually compose it in TextEdit. Then I copy and paste it into the comment box where I may see an error that I will correct. I did that with this comment.

If I am working a long document then I have a few tricks I have learned. However, I must qualify them by saying I certainly am not a perfect writer.

1. Read it backwards, this usually catches homophone errors that a spelling checker will pass.

2. Change the typeface. This may result in seeing a grammatical error.

Before I close I would like to include a quotation that I feel is appropriate

?When our spelling is perfect, it’s invisible. But when it’s flawed, it prompts strong negative associations.?
Marilyn vos Savant

wab95

John et al:

I don’t know what is more entertaining, the original article or the gratis grammar lessons that follow. Good stuff all around.

As for the competition, concur with the all of the above, particularly the Stanford grad somewhere in the mix.

I think an appropriate analogy for Apple as a corporation, as well as its CEO (and his lieutenants) is that of an explorer or pioneer. In comparison, other companies are like the settlers who follow in the wake of the explorer.

There is one essential skill that all successful explorers, bar none, must have; the ability to take a bead on their present location and set that bearing in context with where they are trying to go. Without that skill, the explorer fails, and either retreats or dies. Apple are masters at knowing where they are, and where in the tech landscape they are trying to go.

More importantly, like all pioneers, they have a vision of the possible, which is what drives them into such high-risk, and potentially hostile territory - and more than a vision, an organised strategy for making it so.

barryotoole

“I don?t know what is more entertaining, the original article or the gratis grammar lessons that follow.”

I agree, wab95.

However, I must say that while we expect writers for newspapers and magazines to use good English, we overlook this quality on the Internet weblogs. Readers who point out a mistake are hounded in the comment section.

No wonder the authors and editors of a blog don’t get any respect as serious journalists, even though many, like John, should be considered as reputable ‘investigative’ reporters.

Yes, there is a ‘Wild West’ feeling on the Internet, but this medium is maturing. As more publications become predominantly online, I fear that even well respected blogs will be seen as rags.

I would hasten to add that good language is hard to find even in popular American print media. One has to rely on foreign publications, like The Economist, to really enjoy a read.

But that should not be an excuse; two wrongs do not make a right. With ‘spellchecking’ and other grammatical software abound, there is no reason to make these simple mistakes. Unless we just don’t care.

N8nNC

I have hopes for semantic spelling and grammar checkers, but I also wonder if they could “clean up” writing well enough that an idiot could write passable prose (and my sincerest apologies to the clinical idiots).  I am more troubled by the fact that absent spellchecking is an indication of absent proofreading.  To paraphrase Twain’s admonition “better to not post and be thought a fool, than post without proofreading and remove all doubt”.

Lee Dronick

Dragging the writing subthread on a little longer I just read this in The San Diego City Beat free weekly

“Ryan Bradford is a writer. The problem, he says, is that these days, most writing gigs are for websites that call stories ?content,? and search-engine optimization?not creativity, or even quality?is the goal.”

The also have a website http://www.sdcitybeat.com/sandiego/m/#_Article I don’t know how well that link will work, it seems wonky, look for the story The Mailman Meme in the Arts & Culture section at San Diego City Beat

Lee Dronick

Uh oh! I hope my last post didn’t mess things up. Entering code from an iPad is a pain and we can no longer edit our posts

doneck

To paraphrase Twain?s admonition ?better to not post and be thought a fool, than post without proofreading and remove all doubt?.

Back in Twain’s day, it was unacceptable to split an infinitive, so If you choose to paraphrase Twain on a point of writing, please use ?not to post? rather than ?to not post.?  (Note the period before the close quotation mark.  That is the accepted American style.  The logical British style reverses the order.)  By the way, is ?nit-picking? hyphenated?

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