Why Everyone Wants to Be Like Apple
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Google (NASDAQ: GOOG) announced the newest in its line of Chromebooks last week – The Pixel. Unlike previously released models, the Pixel is a high-end premium product priced at the upper end of the spectrum, and the first uniquely branded by Google. The departure is the next step for Google as it continues its foray into selling hardware to complement its internet services.
It’s a pattern we’ve seen from numerous software and internet service companies in recent years – creating complementary hardware – and while it may prove successful for some, it points directly to the power of one company’s business model: Apple (NASDAQ: AAPL).
Nobody does Apple better than Apple
Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Google have all started making more hardware in recent years. While each has had successes (e.g. Kindle) and failures (e.g. Microsoft’s Kin), none of them quite compare to the astounding run Apple has had, particularly in the last decade.
It’s interesting that all of these companies want to make products like Apple’s – phones, tablets, notebook computers – but none of them actually make new products the way Apple does. It’s more of a copycat culture where Apple creates a new innovative product, and companies pounce on it to try and capture part of the market Apple just made. We’ve seen this pattern time and time again, according to venture capitalist Marc Andreeson, who expects it to continue with Apple’s next product innovation.
While consumers and investors complain about Apple’s recent lack of innovation, nobody seems to care about Microsoft’s, or Google’s, or Amazon’s relative inability to do so. These are software and service companies after all; nobody expects new exciting hardware from them. So why, then, do they insist on competing with Apple and other hardware makers?
Follow the money
Horace Dediu of Asymco.com points out that despite Google’s dominance in the non-iPhone smartphone market, Samsung, the largest producer of Android phones, is actually seeing a greater benefit. In fact, with the rise in popularity of Android OS, Samsung has seen its growth in operating income from mobile drastically outperform all of Google’s operations combined.
That’s not to say Google’s strategy has not been successful. Who can argue with a nearly 50% market share in mobile? However, Dediu points out, “Although all companies are growing, the value, as defined by the buyer, resides in the whole product.” This is how Apple has grown in the last decade. They offer the whole product – the hardware, the software, and the service – and they profit at every point.
Look at iTunes - the biggest indicator of the companies growing ecosystem. With over half a billion iTunes accounts, Apple simply creates new hardware to serve that growing market of users, or adapts the software and service to complement its hardware better. This vertical integration’s led to the rising popularity of Apple products as one product purchase leads to the next.
Apple-ization: Offering the whole product
Google’s Pixel is the first real step by the company to profit from its hardware. While previous iterations of the Chromebook have always partnered with a hardware producer and sold at low-to-no-margin prices, the Pixel is different. Priced at $1,299, and produced independently, Google clearly intends to profit from the sale of hardware.
Microsoft, too, is starting to produce hardware with the idea of profiting directly from its sale. While it’s had a lot of success with the Xbox 360, the gaming device typically sells at very low margins relying on software sales and subscription services to generate profit.
Last fall, the company released the Surface to complement the new Windows 8 software. A premium priced tablet with an OS seemingly designed specifically for the product, the Surface is a clear attempt by Microsoft at becoming more Apple-y.
Amazon, for its part, is staying the course selling high-margin razor blades (eBooks) for its low-margin razors (Kindles). But the effect of Apple is still seen in the company as the Kindle evolved from a simple e-ink reader to a full-fledged tablet computer. Amazon has modified the open-source Android OS so heavily that it nearly resembles an OS of its creation.
Buying the best
Each of these companies is trying to become as vertically integrated as Apple. Is it just now that they realize big profits reside in generating an ecosystem that fuels the sale of all of their products? For all the hard work these companies put into their software and services, the hardware makers are seeing most of the benefits.
Only time will tell if the new premium hardware products from Google and Microsoft will pay off, or if Amazon will ever start chasing profits. However, there’s one company that’s already proven it knows how to harness the power of a vertically integrated hardware business model, one that’s capable of hardware innovation, and that’s the company that I want to own.
adamlevy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!