Apple Is An Ecosystem Company

Posted: Jun 3 2014, 2:16pm CDT | by , Updated: Jun 3 2014, 2:20pm CDT, in News | Apple

 

Apple is An Ecosystem Company
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There seems to be an ongoing debate among pundits on whether Apple is a hardware or a software company.

Apple critics like to portray it as a hardware company and how its competitive advantage is built on shaky ground, as there will always be a new gadget that a competitor develops which could be more desirable than what Apple’s currently got.

As the years have rolled on however, it’s clear that Apple’s competitive advantage isn’t built on its hardware or its software.  Apple’s greatest competitive advantage is its ecosystem.

In yesterday’s Wall Street Journal’s Heard on the Street column, Dan Gallagher says:

…for all the focus on software in Monday’s opening keynote, Apple remains a hardware firm, using software and content to push sales of high-end devices at high margins. And with new designs like a large-screen iPhone and maybe a smartwatch expected in coming months, the question is how to maintain those margins.

This is standard fodder for folks who are bearish about Apple.  They point out – correctly – that Apple pins 60% of its revenues and likely a far higher percentage of profits on its iPhone.  When iPhone sales slow down, as they did a year or so ago, Apple’s stock weakened.  When iPhone sales surprised to the upside, as they did in the recent April earnings report, Apple’s stock jumped.

The bears say that high margin hardware sales don’t last forever.  Indeed, virtually every single successful hardware company has eventually dropped the ball with a dud new product and they get lapped by their competitors and left in the dust.

How will Apple avoid this fate, they ask.

While it’s certainly true that Apple needs to continue to build exceptional products, the bearish argument overlooks Apple’s primary source of competitive advantage these days: its ecosystem.

Apple has been able to maintain consistent profitability in an industry where almost everyone else is unprofitable.  I think it’s more to do with the Apple ecosystem than anything else.

As time goes on, Apple continues to give more and more benefits to its users who choose to buy Apple accessories with their core iPhone (and, yes, your Mac has now become an accessory to your iPhone).

During yesterday’s Worldwide Developer Conference keynote, almost every new feature announcement discussed increasing value to users who used multiple Apple products:

- Family sharing makes it easier to share iTunes content among 6 family members sharing the same credit card across devices

- iCloud Drive allows for every photo to be shared across all your Apple devices

- When you edit one photo on an Apple device, it updates across all devices

- You can accept a call on your iPhone when working on your Mac

- You can start an email or text on your iPad or iPhone and then finish it on your Mac

- iMessage has increased its functionality to keep everyone on its platform instead of straying to another

The features go on and on.

While the critics might call it a walled garden approach, Apple looks at it as adding so much massive value to its users that there’s no reason to use any other products.

So when the Journal asks how will Apple be able to maintain its margins, it’s not through the next big hardware toy – whether that’s a smartwatch or a new iPhone – but through how much new value is Apple bringing to its ecosystem.

This change in perspective completely reframes how you look at the sustainability of Apple’s competitive advantage.

Yesterday’s keynote delivered a lot of value to the Apple faithful.  It’s not clear to me how pairing an Acer Android tablet with an HTC Android phone will enhance my life, but I can see how having an iPad and iPhone makes things easier for me.

Apple’s lead in the post-PC era is much stronger than most critics assume.

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