Apple - Outwitting Competitors Through Deep 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.


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.