Apple’s Impending Break with the Past

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When Apple (NASDAQ: AAPL) rolls out the iPad Mini this month, as almost everyone expects, the product will represent Apple management’s first significant departure from the guidance of Steve Jobs.  It was Jobs, after all, who declared during the quarterly financial conference call in October 2010 that tablets with 7+ inch screens were “tweeners” that were too small to make satisfactory tablets but too large to be conveniently portable.  He predicted they would be “DOA.”  The forthcoming miniPad is reported to have a screen size in the 7-8 inch range, but the mini represents more than a break with Jobs’ predilections for the screen size in tablets.  In fact, it marks a dramatic course change in business strategy for Apple, the first such change since Tim Cook became CEO. 

When Jobs was at the helm, he evinced no concern about market share whatsoever for either iPhone or iPad, declaring that he simply wanted to build the best possible device.  This seems like noble sentiment, but it always left me vaguely uncomfortable.  Is there really such a thing as a best possible device in objective terms?  And even if there is, does every consumer want or need the best possible device?  Gradually, I’ve come to believe that the answer to both questions is no, and that Tim Cook and company have reached a similar conclusion. 

Not that Apple management have publicly acknowledged this.  The phrase “we just want to build the best device” has become an oft-repeated mantra during Apple financial conference calls, usually in response to inquiries regarding diversifying either the iPad or iPhone product lines.  However, starting with the April 2012 earnings call, Cook began to equivocate with respect to a low-cost iPad, admitting interest in devices at around the $200 price point. 

He could hardly do otherwise, given the modest success of the Kindle Fire and Apple’s own experience selling clearance-priced iPad 2s.  Another indicator of the change in business strategy has been Cook’s frank acknowledgement that, yes, he really does care about market share, something he has been very up front about, even before becoming official CEO. 

How best to preserve or increase market share, especially for iOS devices, may be open to debate, but the need to do so probably is not.  As a report released in August by IDC showed, Apple’s worldwide iPhone market share declined in calendar Q2 2012 to 16.9% from 18.8% in the same quarter a year ago, while Android’s share reached 68.1% in Q2 2012, up from 46.9% a year ago.  Meanwhile RIM’s Blackberry and Nokia’s Symbian suffered steep declines, as the charts below show.

<img src="/media/images/user_14227/mobileos2011_large.png" />
<img src="/media/images/user_14227/mobileos2012_large.png" />

The fates of RIM and Nokia demonstrate the danger of precipitous market share decline.  A management shake up and rumors of a potential sale haunt RIM, while Nokia has been forced into a partnership with Microsoft, for good or ill. 

Further decline of smartphone market share is likely to be arrested or even reversed by the iPhone 5 in the near term, but this still leaves open the question of strategy going forward.  There’s something to be said for the “just build the best device” approach.  This is all about maintaining organizational focus, something Jobs was very keen on, and very good at.  But Apple has been doing this, and doing it well, and it hasn’t been enough to hold Android in check. 

Of course, this just goes back to the issue of what constitutes “best” and whether all consumers want “best”.  What consumers really want, if it’s possible to generalize at all, is variety and choice, something the Android ecosystem offers much more of.  I see this as the principal way iOS is disadvantaged in the market share battle.

The obvious solution for Apple would appear to be greater product diversification, especially at the low price end, for both iPad and iPhone.  That Apple management have been long in reaching this conclusion is as much due to the enduring influence of Steve Jobs as it is to the natural organizational inertia that accompanies great success.  I still find it odd that it has taken so long, however, since proof of the benefits of product diversification has existed within Apple for some time. 

The iPod line does not consist of merely a single Golden iPod that Apple offers as the “best possible iPod," nor does Apple try to offer last year’s iPod as the only low cost alternative to its “best.”  The iPod is available in three distinct designs and price ranges, all of them current (excluding the Classic). The iPod has been very successful at fending off challenges from many quarters, and according to Apple, iPod maintained a 70% market share, as of theJanuary 2012 earnings call. 

The miniPad is, in a very real sense, a trial balloon, that Apple management will watch very closely.  If the miniPad does well, it will open the way for diversification of the iPhone product line, something I consider long overdue.  What constitutes doing well needs to be taken in context.  The miniPad isn’t a breakthrough product, but is by its very nature derivative.  It’s not meant to be a new product category, but fill a gap in an existing product category at Apple.  There’s probably no large pent up demand for the mini, and so there won’t be large lines for it or 5 million sales in the first weekend.  Inevitably, it will to some degree cannibalize iPad sales.  These factors will cause some pundits to declare the miniPad “disappointing” and Apple “on the decline” because it hasn’t introduced a truly original product. 

My criteria for the success of the miniPad are more realistic.  I expect it to sell between 10-20 million units in the final quarter of 2012, while other iOS device categories post substantial percentage gains compared to a year ago.  As such, miniPad will be clearly accretive to iOS sales and revenue, which is all Apple needs. 

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Fool blogger Mark Hibben has a position in Apple mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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