Apple Death Knell #54: iPhone Doomed to Niche Status

Hey kids, guess what time it is!? It’s time for another entry to our Apple Death Knell Counter! Death Knell #54 comes to us courtesy of Fabrice Grinda, the CEO of OLX, who tells us in a piece for BusinessInsider that Apple’s iPhone is doomed to a niche status because the company is stupidly following its Whole Widget obsession, repeating the same mistake it made with the Mac back in the 1980s.

Citing a number of charts and statistics that show Google’s Android growing faster than Apple’s iPhone, Mr. Grinda says that Google is going to pull a Microsoft on Apple in the smartphone market, relegating the iPhone to irrelevancy.

Never mind that the Mac itself has been outgrowing the the PC platform for the last several years, and that Apple dominates the high-end profitable portion of the computer market. Never mind that Apple’s iPod, which also used the company’s Whole Widget model, dominated (and still dominates) the digital devices market.

Oh yeah, and Apple’s iTunes — part and parcel of the Whole Widget vertical integration of Apple’s ecosystem — dominates online music sales.

Yes, it’s obvious that we should ignore all of the other factors that brought Apple and its Mac platform to its knees in the 90s, and blame all of the company’s problems two decades ago on only one thing, using a proprietary OS on proprietary hardware, and conclude that the same approach for smartphone will inevitably lead to niche irrelevancy.

Wrote Mr. Grinda:

In 1984, when Apple introduced the Mac in 1984, it was revolutionary. It was elegant, simple to use, had the first mass market mouse and graphical interface and became a huge success. Apple seemed destined for greatness. However, Steve Jobs’ vertical integration driven by his desire to only have beautiful machines and software limited both innovation and the availability of software. On the DOS, then Windows side, the constant competition between PC makers, processor makers, and software developers, while less elegant and functional at the beginning, given enough time led to a plethora of offerings and innovation that not only copied many of the Mac’s best features but extended them. The competition also drove prices much below Mac prices. The combination of faster PCs with more software at lower prices eventually completely marginalized the Macintosh.

Again, never mind that in today’s world Macs are growing in popularity, even while PCs get cheaper and cheaper and cheaper, making today’s pricing disparity even more marked than in the early and mid 1990s when the Mac truly was marginalized (though it was also still a functional platform). For instance, in the retail space today Apple sells a staggering 91% of computers priced more than $1,000 [Corrected for clarity, as noted in the comments below - Editor].

In addition, despite the fact that almost 30 years of experience with Microsoft’s open licensing model has led to sea of mediocrity in hardware and software that leaves the Mac standing head, shoulders, and most of an upper torso above the Windows world, we must conclude that Google’s open licensing model for Android will overcome Apple’s early lead in the user experience for the iPhone.

Today, few people will argue that Windows and PC hardware has caught up to the experience of the Mac (our own John Martellaro shows us that Microsoft has narrowed the gap, but the gap still exists), but Mr. Grinda offers the notion that Android’s diversity will naturally (and even easily) result in that platform surpassing the user experience of the iPhone.

To me there is a massive disconnect in looking to the Windows world and finding proof that Android will even come close to the iPhone in terms of the user experience. It just doesn’t bear even the shallowest efforts at scrutiny.

Be that as it may, Mr. Grinda wrote:

Android, with its relative openness, seems to be playing the role Windows played for the Mac. We are already seeing a plethora of Android phones which cover all segments of the market – from the very low end to the very high end. There are phones with keyboards or without, Amoled screens, huge screens, small screens… There is already seems to be an Android phone for every taste and the choice is only going to get larger.

Even when it comes to apps, an area Apple has a massive lead in, Mr. Grinda says that it is obvious that Android will eventually have more apps, this despite the fact that the vast majority of money in the app world, a vastly disproportionate amount of money, is flowing to the iPhone market.

Argued Mr. Grinda:

If it’s the diversity of apps that matters, the relative openness of Android will mean that there will eventually be many more apps for Android phones than for Apple given its desire to only have “pretty” and “elegant” apps. This will only get worse as Android’s market share will increasingly exceed Apple’s and many developers will first build for Android and the guarantee of appearing in the Android App Store versus taking a risk with Apple’s fickle App Store approval process. More developers are already developing for Android than the iPhone and the number of Android apps is rapidly approaching the number of iPhone apps.

Since when is having 70,000 Android apps compared to more than 250,000 iPhone apps “rapidly approaching” the number of iPhone apps? I’ll personally argue that what the data shows is that Apple’s App Store and the willingness of Apple’s iPhone users to actually pay for things that give them value will mean that even if Android grows to be four times the size of Apple’s iPhone platform that there will still be more iOS apps because that’s where the money will be. iTunes App Store > Android Marketplace FTW.

For sure, Mr. Grinda acknowledges that Apple’s iPhone will remain a profitable niche, a concession that might have disqualified him from inclusion in the ADKC were it not for the way he concludes that said niche status means that Apple will somehow have lost:

None of this will matter in the short run. Globally increasing smart phone sales and extending sales to new carriers will buoy growth for some time to come, especially since Apple still has a better phone and better apps. However, this growth will belie the fact that Apple is losing market share rapidly to Android. Fast forward 5 to 10 years and it’s not hard to imagine seeing Apple with a small (but probably very profitable) share of the smartphone market. It will be a niche player in the market it revolutionized and could have dominated. History seems bound to repeat itself!

[…]Steve Jobs seems to be repeating the same mistake all over again. The elegant integration between the iPhone, iTunes and the App Store is definitely a current source of comparative advantage. It is easier to offer a better user experience at the beginning when you limit the form factor and completely control the hardware and software. The iPhone 4 is clearly the best smartphone on the market. The apps in the Apple App Store are clearly the best apps on the market.

However, Apple’s insistence on having a single form factor, on being a premium player at a premium price point (to carriers at least), and its arbitrary decisions with regards to what apps make it in the App Store will eventually make Apple a niche player. Even if Apple keeps innovating and has the best phone on the market, it won’t matter. [Orignal emphasis]

He falls into the trap that so many people seem to fall in (or at least used to fall in), and that’s the notion that you must be the biggest player in an industry to have won. That trap comes from misinterpreting more than 30 years of personal computing history, most of which saw Microsoft as the the mighty dragon that raked in most of the industry’s profits with its insatiable claws.

Today, however, even the stock market sees the value in Apple’s Whole Widget approach, and that’s why Apple is second only to Exxon Mobil in market cap, ahead of #3 Microsoft; and this quarter I think we’ll see Apple surpass Microsoft in sales (though probably not in profits).

Apple is a tiny (but growing) player in computers, but they’re making far more money on sales of Macs than companies that pump out gagillions of cheap PCs. Apple is a tiny player in cell phones, but is making a huge portion of the profits in cell phones, and they don’t even make a cell phone, they make a device that competes in a niche of the overall cell phone market, a smartphone.

There are more Blackberrys and Nokia smartphones in use around the planet, and very soon there will no doubt be more Android models in use than iPhones, but Apple has more apps, and it will still be Apple raking in the profits, and it will still be Apple that controls the direction of the industry. From that standpoint, Apple will continue to dominate the smartphone market no matter its marketshare.

To be clear, I am not saying that Android won’t outgrow Apple. I’ve already said that it’s only a matter of time before it does. I am saying, however, that it doesn’t matter. Android can get as big as it wants to and it’s still never going to be much more than “kind of like an iPhone.” Apple’s Whole Widget approach will allow the iPhone to stay out in front of the competition for as long as smartphones matter as a category.