Why Cannibalization is Good for Apple

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, I had a friend tell me how stupid Barnes and Noble (NYSE: BKS) is being for liquidating books at certain locations and filling the shelves with their Nook e-reader.  His general thought was that Barnes and Noble is aiding in the death of their business.  Interestingly, people are saying similar things about Apple’s (NASDAQ: AAPL) iPad mini.  The mini will likely take sales from the regular iPad, and at a lower profit per unit; but this is not a problem, just a defensive move in business strategy.  Jobs said, “If you don’t cannibalize yourself, someone else will.”

Apple has had a history of cannibalizing itself.  They cannibalized the product that helped revolutionize the music industry: the classic iPod. Apple introduced the mini iPod, the Nano, the Shuffle, and the Touch, which all took sales away from the classic iPod.  Bad move?  Quite the opposite.  Even though the mini, the Shuffle, and the Nano sold at lower price points, overall iPod sales spiked. 

Then the iPhone came out in June 2007 and lead to the decline of the iPod devices.  The iPhone made iPods redundant for many users. Of course, the iPhone today is Apple’s product with the highest sales (almost 27 million iPhones sold in Q4 2012 compared to 5.3 million iPods).  When the iPad came out in 2010, it took consumers away from the Macbooks.  Again, this product was a huge success.  14 million iPads were sold in Q4 2012, which is up 26% from Q4 2011.  Imagine if Apple held on to the classic iPod and Macbook and didn’t innovate because they were too afraid of eating away sales.

The iPad Mini is a way to fend off the competitors offering tablets at a lower cost.  According to a study by Strategy Analytics, the iPad still dominates the tablet market; however, the iPad’s market share is down from last year. In Q3 2011, Apple owned 64.5% of the tablet market; but in Q3 2012, they were down to 56.7%.  The tablets running on Google’s (NASDAQ: GOOG) Andriod software are picking up the market share lost by Apple, RIMM, and Microsoft. The Android units have similar features to the iPad, but are generally smaller and less expensive.

Amazon’s (NASDAQ: AMZN) Kindle Fire HD is one of the Android-based tablets and has exploded on the market.  Forrester Research estimates that Amazon has shipped 7 million Kindle Fires in the last year.  The Fire is smaller and only costs $159 (compared to the iPad price of $499).  The iPad mini is about the same size as the Kindle Fire HD and will be closer to the lower price.  Yes, the iPad mini will still cost $130 more than the Kindle Fire, but given the extra value due to integration with other Apple products and software, and the added prestige of an Apple product, I believe consumers will look at both devices when looking for a lower cost tablet.  The iPad mini will also fight against the lower cost Nexus tablets.

For the future, the iPad mini will eat away at some iPad sales, but could help Apple regain ground in the tablet market.  This is extremely important for Apple since the tablet market is their largest area of growth.  Like with Barnes and Noble, Apple needs to sacrifice some sales to create a better future for the company. 

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mthiessen has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. 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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