How Apple Avoids Cannibalization
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL) has never been afraid of cannibalization, the company´s culture is about permanent innovation and trying to be on the vanguard of cutting edge technologies and product quality. The contagion effect that the Apple user experience provides and the benefits of product integration through platforms like iCloud mean that Apple is one of the few special companies that doesn't need to worry about the cannibalization effect, and this provides extraordinary growth opportunities for the company and its investors.
Most companies usually face a hard choice when trying to decide if launching new products or expanding store presence makes sense. When the penetration rate is quite high, new stores – or products - usually mean reduced sales per square foot at existing ones, or reduced revenues from the previously launched products.
When Starbucks (NASDAQ: SBUX) decides to open new stores near existing ones, that move can be a double edged sword, since it will probably increase total sales for Starbucks coffee but it may also reduce sales per square foot, and hence store profitability. During 2008 and 2009, for example, Starbucks had to announce the closure of 900 stores since the economic crisis was showing that the company´s expansion had gone too far in certain US locations and those stores were dragging down the company´s profitability.
We can say that sales of iPhones have evidently cannibalized the iPod, and that is clearly shown in the company´s financial statements. Customers who were using an iPod during their subway commute to work, for example, don´t need a new iPod once they have an iPhone in their pocket, which can also be used as a music player.
But the iPhone is a technologically superior product in comparison to the iPod, and has also been a huge boost for Apple´s sales and earnings, so Apple investors don´t have much to regret about its cannibalization effects.
Many analysts had valid concerns about the effect that the iPad could have on Mac sales, but in that case the worries turned out to be absolutely unjustified.
The iPad has been a tremendous success so far, but Mac sales have been outperforming sales of Windows operated PCs for a wide margin in the last months. In fact, the most likely explanation for this phenomenon is that not only the iPad didn´t cannibalize Mac computers, but the new tablet even provided a powerful tailwind for Mac sales.
The fact that Apple seems to be immune to the cannibalization effect could be based on three specific driving forces, all of them related to the company´s quality standards and integrated product approach.
First of all, if the new products are superior to the existing ones, the company should be able to translate that technological superiority into higher sales and profits over the middle and long term. The situation can be a bit complicated sometimes, the the competitive landscape in smartphones can be very different to the one existing in digital music players for example, and that can mean some hurdles when trying to extract more benefits in that business.
There can be some pricing pressures when competing with the average quality smartphone in a market in which other companies have similar products. But when a company like Apple changes the highest quality music player for the highest quality smartphone – which includes a music player – pricing should not be an issue as long as costs remain reasonable.
Apple introduced the iPhone which was the clear leader in terms of quality and was also supported but a very powerful brand. The company added value for consumers and this added value translated into higher profits for investors.
There is also an important particularity in Apple and its corporate culture which focuses on extraordinary designs and a unique user experience. Once consumers experiment the pleasure of using an iPad, for example, they are more likely to choose a Mac over a Windows PC when buying their next computer.
It can be complicated to convince clients to buy a more expensive computer when they are not experts in technology and don´t have many sophisticated needs in that respect. But once you get a chance to use and feel an Apple product, you can get a more specific idea about what that premium quality means, at least from an experimental level. From this perspective, sales of Mac may very well have been pushed and not cannibalized by sales of products like iPad or iPhone.
Another driving force can be the power of Apple´s ecosystem, and its integration via the iCloud service. iCloud provides the possibility to store songs, pictures, eBooks, emails, calendars and contacts in the cloud and access them when needed. This is obviously a very comfortable and useful service, and it makes it more likely to keep purchasing Apple products once the user is familiarized with iCloud and its advantages.
As long as Apple keeps its advantage in terms of product quality and integration via iCloud, the cannibalization effect doesn´t seem to be a reason for concern for its investors. Once again, Apple is redefining the business dynamics by which most companies operate.
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