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Apple is the most valuable company, a status which it achieved first in August 2011 but was quickly surpassed by Exxon Mobile, again. Since then Apple has become even more valuable and managed to take the pole position for the near future. It grew approximately 100% since last year and is now worth a staggering USD 560bn. And it still has a lot going for it. However, I also think there are some major risks which are too often overlooked.
Arguably, Apple still produces the best or at least one of the very best smart phones in the world. Gobal smart phone penetration is still merely 28% which leaves plenty of room to grow.
Source: It’s still a feature phone world – Techcrunch
While the market is starting to get saturated in the US, there is still good growth potential in Europe. The emerging markets are just starting to adopt the next generation mobile technology and offer even more exciting opportunities.
Apple is arguably the most innovative company of the last decade. Part of their magic comes from transferring of product management approaches from the IT sector to the consumer electronics sector: Apple had to learn the hard way during the early nineties that the computer industry is an incredibly competitive environment where strong network effects often prevail. It lost the operating system war against Microsoft and became a niche supplier for the creative industry.
Apple applied its learnings about platforms and ecosystems to the consumer electronics market. A market where replacement cycles are often between 2 years phones and 10 years for home stereo equipment. And even in those two years innovation is of the incremental sort and by no means disruptive.
Here Apple, which is used to product cycles in the IT of often only 6 months, and where concepts like continuous deployment are all the rave, had an easy play against slow moving giants like Sony (iPod vs MiniDisc players) or Nokia (iOS vs Symbian).
And there is still ample room for more products: The iPad contributes approximately 20% to revenues and is a product line which has not existed just 2 years ago. Or iTV…
From a financial perspective, Apple is quite strong as well: They are highly profitable, making approximately USD 25bn revenues a quarter. They have USD 100bn in the bank which allows them to take long term bets and make acquisitions if needed. And most interestingly they are even fairly priced at around 17 P/E for the last 12 months.
While you can’t copy Apple’s product design and marketing genius, competitors which are equally dynamic have entered into the market of transforming consumer electronics. Apple is no longer fighting Nokia in the Smartphone sector but Google which knows how to address a vertically integrated company: with an open eco system and platform approach. While it is more complicated to coordinate a network of independent companies, you can clearly see how the advantage of Apple’s products over the competitors is shrinking. And you can even see how the competitors are ever faster at adapting the next product category: It took 5 or 6 years to catch up with the iPod, 3 to 4 years to catch up with the iPhone and I would expect that we will see tablets which are comparable to the iPad coming on the market within this year.
To successfully address the growth potential in the emerging markets, Apple will have to launch devices which cost considerably less than USD 700 for a phone. This is probably even valid for the remainders of the US and European markets. The untapped market potential most likely belongs to the late majority and laggard market segments. These customers buy a device because they have to and do it for purely pragmatic reasons.
Now Apple’s organizational set-up does not lend itself too well for churning out a wide variety of products. It automatically means you can pay less attention to the launch of a single product and ultimately, that’s what they excel at. So this market dynamic is actually more in favor of Google’s ecosystem approach.
The last decade brought us a mature and diversified web services market. This initially helped to make smartphones possible because you did not need to store all of Google Maps locally. You just used the power of the cloud.
Now that the cloud is a mature and diverse eco system, there is much less value in designing a product end to end. Cloud services enable you to switch a device such as a tablet, smartphone or PC without the need to re-install or configure any software. As long as the operating system gets the infrastructure layer right like good battery life, good look and feel and reliable connectivity it doesn’t really matter that much whether I am running iOS, Android or Windows Mobile.
Apple’s lock-in in that regard is vanishing fast. Some web services like Spotify are even better than Apple’s iPod App on the iPhone in the meantime.
Apple is so big in the meantime, that portfolio managers are starting to take a look at the US stock market with shares excluding Apple. Heck, Apple’s worth 1% of equities world wide:
See also: iRational – The Economist
In my eyes, this means two things:
There will be incredible pressure to find market opportunities which are big enough to move the needle: if Apple want’s to grow revenues by 30% (they have done 50% – 70% historically), they need to create USD 20bn in additional sales. This will become even harder in the coming years.
People who are in the first group above will probably have made a nice return and cash in if the run is becoming more difficult. People in the second group actually should never have invested in the first place and will run to the exit when things get difficult.
Finally, out of a pure investment perspective: What’s the upside?
It would be a hell of a feat to be the company which gets to USD 1 trillion market capitalization first. So that’s 2x if everything works out great.
I would strongly argue, that e.g. Salesforce can become the next SAP or Oracle. Now compare the upside of Salesforce which has a market cap of USD 21bn and could grow – if everything works out – to USD 80 – 140 bn (SAP and Oracle’s market cap, respectively).
Apple’s done it – they are legend. But I’m not convinced it’s a good investment.
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I came across this great presentation from comScore this week which shows how fundamentally social changed the web experience in little more than 5 or 6 years:
This brings up the question: what are the consequences? One is that Google is in deep trouble if you ask me. Search on the web is quickly loosing relevance and the leading networks such as Facebook and Twitter are not giving their valuable user data away for free.
So the post PC area seems to bring another seismic shift in the internet technology stack. Following the first shake out 15 years ago on the protocol layer when FTP, Usenet, and before that Gopher lost out against Email and HTTP. It seems that we are full circle and a proliferation of APIs (the modern equivalent to a protocol) spawns a multitude of awesome, innovative web-services which bring a quantum leap in what a “web page” can do. And social is just the tip of the spear.
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There is always a lot of buzz around innovative businesses on the web. Various investors and startups prefer different variations of models:
A business in its entirety is more complex, though, and there is good literature on how to assess and decompose business models. Alexander Osterwalder’s Business Modell Generation for example is in one of the best recent books on this topic.
In a nutshell the book argues, that you can look at a business as a combination of the following components:
The difficult part is often the value proposition. From my experience, consumer businesses usually cater to at least one but usually a combination of the following use cases:
Discovery helps to find something. This is usually achieved in two ways:
Transaction means to exchange goods or services e.g. through e-Commerce stores or market places. Also I would put payment providers into this category. Examples are Amazon, Ebay or Paypal for the respective sub-segments
Here the focus is to recommend further products, provide re-targeting ads for aborted shopping sessions and generally customer care.
Written content is provided in the form of news sites and blogs. But are also use cases for (streaming) media, such as Spotify or Netflix and crowd sourcing content platforms such as Soundcloud or Youtube
These are the traditional p2p file sharing networks started by Napster in the late 90s or Bittorrent. In my eyes more modern forms of this are social networks such as Facebook or Pinterest where you share status updates or other interesting things found on the web.
Interestingly, when you look at most businesses they combine several of the use cases.
A P2P / sharing use case for example gets more interesting when you also have content and methods for discovery. Another example would be content which can be helped to provide information around products like the reviews of products on Amazon.
Most great startups that we admire really nailed one of these use cases and combine it with several other ones where they either partner with the best solution out there or achieve similar functionality to other sites without being extremely superior. The reason for this is that you simply can’t do everything in an excellent way. My favorite example for a failed attempt to do everything is when Apple tried to introduce Ping as a music social network as opposed to Spotify which clearly differentiated on superior content and chose to partner with the leading social network Facebook.
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Some of the most interesting businesses such as Facebook, Twitter or Pinterest are based on communities. Obviously they are very attractive because they
So far so easy.
There is an important twist which make the most successful services so sticky and addicting. Interaction is
a) frequent
b) outcome is unclear
The frequency of interaction helps to ideally become a habit like checking emails or Facebook. The very best companies even become a verb. Think about statements like “I’ll google that later” or “Let’s skype”.
Interestingly, the underlying requirement is that the outcome of using the service is unclear. Consumers want to be surprised and discover something cool, fun or useful. Take pictures from a friends vacation for example, or a cool party that is planned for the weekend. Basically anything qualifies which is relevant to the user but what the user couldn’t predict before he opened the service and used it.
Another good example which illustrates this point is an Excel spreadsheet with your business plan. The outcome is clear (i.e. the calculations haven’t changed) vs the stock market or online news page where the outcome of opening the website is not clear. Which one do you check more often?
Lesson 1: Unexpected content must be relevant and to be that it must be within certain parameters. With Facebook you would expect an update from your friends vs. Linkedin where you would rather expect some information regarding your business contacts.
Lesson 2: This drives frequent visits and increases the likeliness that the service becomes a habit.
Lesson 3: The parameters need to be established over time and can’t be all planned upfront. The community needs to agree on a set of rules. The biggest danger here is that the community grows too fast in the early days and is not homogenous enough to really build out a core group which adheres to these rules. Or in Crossing the Chasm terms: with communities the early majority needs the guidance by the early adopters. The chasm still exists because the early majority are also pragmatists. For them the service or product is the combination of technical features and the community that already uses it.
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