“Size is the enemy of growth. It is one of the unwritten laws of business, a matter of simple percentages. After all, when a company has $1 billion in yearly sales, an extra $1 billion doubles its size. Add $1 billion in new business to a $10 billion-a-year company, and it amounts to just 10 percent growth. The size-growth tradeoff seems inevitable, an inescapable force like gravity,” Steve Lohr reports for The New York Times. “Try telling that to Apple, the corporate giant that two weeks ago reported a 71 percent jump in quarterly sales. Apple generates revenue at the rate of $100 billion a year.”
“The software and services that work on Apple’s hit products are accelerating its extraordinary expansion,” Lohr reports. “Apple provides the underlying technology and marketplace: iTunes software and the iTunes Store for managing, downloading and buying music and media; iPhone and iPad software for creating applications; and the App Store for sampling and buying them.”
Lohr reports, “The more people buy iPhones and iPads, the more software developers and media companies want to write applications for them, as various as games and digital magazines. And consumers are more likely to buy iPhones and iPads when more entertainment and information applications are available on them. The combination of hardware, software and services is what corporate executives, economists and analysts call a platform. Successful technology platforms sustain and reinforce growth. And this self-reinforcing cycle is known as a network effect. It helps the platform owner and raises a barrier to competitors.”
Read more in the full article here.
Apple still has a lot of market share to get (look at what Nokia still has) and a lot of Halo Effect to expand sales of all devices for years. Lots of time to continue expanding growth. Long AAPL!
“It helps the platform owner and raises a barrier to competitors.”
Oh yeah!
Casual to the most obvious observer.
Apple has all cylinders firing and it has just started !!!
The secret weapon, quicktime, was at the center of a pivotal moment in history. Known as the “you want us to kill the baby” moment. Once M$ lost that crucial battle, Apple began a systematic takeover of the windoze OS. It began with quicktime, followed by iTunes and most importantly – bonjour.
Apple supplanted the m$: media layer with quicktime, apple’s own file system with iTunes and Bonjour to replace the sad m$ networking system.
Basically Apple pwned m$ and there was nothing they could do.
Now the constrictor has been tightening the coils ever so slowly. So. Very. Slowly. The time to plan an escape from the final, fatal suffocating squeeze has long, long ago passed.
It’s like watching NatGeo.
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But will Apple able to produce enough resources to keep up with the growing demand of their revolutionary products?
You better believe it!
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“Size is the enemy of growth.” The percentages nonsense he mentioned isn’t the reason, the reason is that each brand has its own market, and the market itself doesn’t grow infinitely, so as more competitors enter the market, (which they will) growth is capped. Not many companies have the technical versatility (hardware/software) that Apple has, to be able to jump into new markets every year.
If a company makes car tires, and is established with a strong brandname (Michelin), there’s only so many ‘new’ markets they can get into.
The problem with the ‘percentages’ argument is one of real world logic (common sense): if a company has revenues of 10 million in year one and 20 million in year two, it’s just undergone a MASSIVE growth spurt; tons of new customers, and sales channels, and tons of new products. That wasn’t just a 10 million dollar increase, but a DOUBLING of everything.
Five years later, it’s just as hard to DOUBLE your revenues, but an increase of 10 million is easy. Obviously.
Eg. It’s f*cking hard to double your revenues, no matter how big or small you are. The opening hypothetical is effectively useless.
What the analysts don’t realize it that they start product development years beforehand.
This mean that the next generation of products are in the pipeline.
Every other manufacturer reacts to new products whilst Apple develop the next generation.
The reason for Apple’s growth is that they (almost always) push into a new market with the intent to define or RE-define it. That’s why Apple has such strong growth… even when they are NOT the “first mover,” they still attain the first mover advantage. Apple NEVER uses the “copy existing popular product and compete based on pricing and volume” strategy, which is basically what everyone else does.
With iPod, Apple was not “first” with digital music players, but Apple was “very early” and defined that market. Apple might was well have been first. Everyone else played catch up, and then mostly gave up.
With iPhone, Apple was somewhat “late” to smartphones (after RIM, Microsoft, Palm, and Nokia). However, Apple redefined smartphone design with iPhone, first with the multi-touch interface and then with the App Store. Therefore, Apple attained that first mover advantage and made the existing players play catch up.
With iPad, the situation is more like the iPod case, but it is also like the iPhone case. This is amazing, because Windows-based tablet computers have existed for years; there were a few models more than ten years ago. Apple redefined “table computer” with iPad. Yet, Apple might as well have invented the concept and (either way) Apple again has the first mover advantage.
Note: The only major (recent) Apple product not following this strategy is Apple TV. It’s still innovative (and successful), but Apple has no first mover advantage there. That’s why Apple is still calling it a “hobby.” No doubt, there is some future plan for Apple TV.
When you have “first mover advantage,” you get Apple’s growth because you have both high volume and profit margin. When you play “catch-up,” volume and profit margin are both much lower.
“And this self-reinforcing cycle is known as a network effect.”
Sounds more like the Perfect Storm to me.
Trees don’t grow to the sky they say in investing. So Apple cannot double or triple again, right?
Wrong. Look at the headroom left in terms of Market share in the various arenas the company competes. Then there are the new markets the platforms imply, such as replacing credit card companies. We still have a long way up.
@ dijonaise
I believe the exact phrase MS used to Apple was “knife the baby”.
This was a big part of Avie Tevanian’s testimony against MS in the DOJ’s anti-trust suit.
They didn’t knife it, and the rest is history.
iPad = Phase 1 of 4 of Product Cycle ……
iPhone is in Phase 2 or Product Cycle …..
Apple TV has not made it to Phase 1, YET ….
As all of us here at MDN have been saying for years – tipping point.
Apple doesn’t just have a “platform,” it has a symbiotic ecosystem of interlinked hardware and software platforms that, in turn, connect to external platforms, such as television, video content, etc.
Long term Apple users saw this coming in the early 2000s after the Mac OS X, the iPod, and iTunes were released. The components were there for everyone to see. But the trolls were vocal in their derision then, as they are now. I’m thinking that 2011 just might be the year that shuts many of them up.
Forget all that useless platform stuff. Steve Jobs just announced he wasn’t feeling very well when he got up this morning. Shareholders are in a panic dumping shares and the result just slashed another $30 and $20 billion in market cap from Apple stock.
iTunes and platforms be damned. Wall Street realizes none of that platform stuff works properly without Steve Jobs sitting behind his desk saying things like “amazing” and “awesome”. Apple may be firing on all cylinders, but take away Steve Jobs “gas” and it quickly stops running. Apple is the only company in the world that requires the CEO be present to provide value to the company and keep it in motion.
@ KingMel
Good points.
Apple have evolved inthe last 13 years to be truly spectacular. I would say that the following were critical to that success:
1. The iMac – Back in 1997 Apple turned the PC world on its head with attractive and functional PCs. It also proved to Apple that design is important to them.
2. OSX – from the very beginning this possesses the capacity to be developed and evolved quickly. Now the backbone of every iOS and OSX device it has been critical to provide the support for new technologies in Apple devices.
3. iPod – Apple demonstrated that they could turn their expertise to an CE device.
4. iTunes – created a way for Apple to be visible to millions of PC users by providing a cross platform experience. Note that iPod sales took off when iTunes became available of windows machines.
5. Intel Macs – the foresight of developing an X86 OSX in parallel with the PPC versions allowed Apple to quickly transition to Intel machines once it was really obvious PPC chips were holding them back. Note again that Mac sales really took off after this.
All of this was achieved through years of planning and development. No other CE or PC company spends that long to bring products to market.
Excellent article. As a business major, the author makes a true realistic approach toward Apple’s platform strategy.
And I have mastered Objective C.
But I’m just onecleveranimal.
Ampar? Welcome back buddy….
Hey Ampar, I was just thinking how I don’t post here much anymore and then I thought of you.
Awwwwww
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Not clever enough to get your post…
Apple is a reaction to Microsoft the way that Marx wrote his communist manifesto as a reaction to capitalism.
Would apple be as good today if m$oft had been weak and the market had been fragmented?
Jobs drive to beat the idiots at M$oft should never be underestimated.
Sorry, Just another idiot anal—yst.
“SIZE is the enemy of growth. It is one of the unwritten laws of business, a matter of simple percentages. After all, when a company has $1 billion in yearly sales, an extra $1 billion doubles its size. Add $1 billion in new business to a $10 billion-a-year company, and it amounts to just 10 percent growth. The size-growth tradeoff seems inevitable, an inescapable force like gravity.”
Only to an idiot. If Apple owns 70 % of the world market for mp3 players and the market shrinks 3% per year….. it still owns 70 %. PERIOD. Its not the end of the world. Then you add iPhones and iPads to the number of mp3 players and suddenly Apple is growing again. Just a stupid lack of really knowing what one is talking about.
Sorry for the ramble, but these people that write articles and just repeat others dumb ramblings “just do not get it”. Actually it scares me as to how many people do not get it…
Just a thought,
en
@Ampar,
Don’t you mean oneCleverAnimal?
I wonder if the Beaver was one CleaverAnimal.
This animal is analyzing trees but misses the forest. Apple is not building platforms (trees), it’s building a digital ecosystem, a living forest, where one tree is inherently dependent on the other for seeding, for survival and for growth. When all are in place the healthy eco-forest will explode with growth in all of it’s “trees,” the “platform” denizens of the forest, crowding out the “weedy” and “parasitic” platforms like Windows and Android that don’t adapt to tie into the synergistic Apple Eco-forest!
This is Steve Jobs’ long term vision. Macs, iPhone, iPods, iPads, Apple TV, AirTunes, now AirPlay, the Server Farms, Ping, AirPort, FaceTime between iPhones, iPod touches, and Macs, face recognition software in iPhoto, and soon to be revealed new products are all part of this eco-system, super platform strategy.
It’s why the other competitors don’t get it. To really mix up my metaphores in this post, business has been said to be war (but then Nature has always been at war with itself, so I guess it’s OK). They are fighting a WW II business war while Steve Jobs and Apple are fighting a business war with WW III tactics!
The competitors seem to think that deploying a few ultra modern “weapon systems” using the techniques that won the last business wars is enough. That’s what they do by tossing out Zunes, and a Windows7 phone, or even Androids and Google Television. Apple knows better… Without the flanking columns of the other “Divisions” closing on the sides and supporting from the rear, those “attacks” will fall far short of winning their battles much less the “war.”
It must just be me, but that article started out promising and just fizzled at the end — jumped off a cliff.
@ Swordmaker
Sunday is supposed to be a day of rest; well played!
I like KingMel’s and Swordmaker’s emphasis on the ‘ecosystem’ that Apple is building among and around its products: Not only does each improvement in each component of the system attract additional users, but it also creates new profits for Apple. And as users invest in the system, they become less and less likely to leave it.
Economists use another term to describe the same phenomenon. It was mentioned in the original NYTimes article: network economies.
In discussing factors that increase the price of a stock, more important than profits is the DURABILITY of those profits: how long will they last? Warren Buffett used the term ‘economic moat’ to describe the ability of a company to defend its profits against outside competitors and new technologies. (The term was raised to greater prominence by Morningstar.com, a provider of investment information and analysis.) A company with a wide moat has longer-lasting profits, and its stock is worth more … far more … than when its profits are perceived as temporary.
It’s important to go beyond claiming that Apple has a broad moat and understand the factors responsible for creating it. Experts emphasize five key factors:
1- Large market share. Definitely true for iPod, iPad, iPhone, apps and music at the iTunes store. Its share in the smartphone market is likely to grow rapidly in 2011 due both to the Verizon iPhone, the phone’s growing popularity overseas (where about 2/3rds of its sales are made) and the release of iPhone5 in about June 2011. The iPhone’s heavy bandwidth requirements means that as carriers introduce G4 service over the next two or three years, iPhone demand will increase more rapidly than demand for competing products.
2- Low cost producer. Apple purchases flash memory, monitors and processors in very large quantities and receives major discounts from vendors. For example, competitors that manufacture tablets in smaller quantities would have to price their products about $100 higher than Apple, even if their products had the same specifications as the iPad.
3- Government licenses secure their position. This includes patents, copyrights and trademarks. Apple has literally hundreds of patents protecting its mobile products … unlike Google, creator of the Android operating system for iPhone and aspiring tablet competitors. According to an extensive search, Apple was granted about the same number of patents in 2010 that Google has obtained throughout its history. Meanwhile, Google’s Android (the principal competitor to Apple’s iOS operating system) is facing serious lawsuits in connection with its violation of patents by other tech companies — most notably Oracle.
http://fosspatents.blogspot.com/2011/01/google-is-patently-too-weak-to-protect.html
4- High customer switching costs. iPhone customers under contract to phone carriers would be charged high fees to adopt alternative phones, and the switch may be complicated further by rollover minutes, family plans and corporate accounts that lock them into current arrangements. Meanwhile customers would lose their investment in (and have to spend potentially hundreds of dollars acquiring) apps, music and video content obtained from iTunes if they switch to competing phones.
5- Network economies. As more customers adopt iPhones, iPads (etc.), software developers and peripheral/accessory manufacturers gravitate to the platform … which increases the appeal of Apple products and attracts more customers. (See the NYT article for further discussion.)
Last week I conducted an informal survey in a class of about 100 college economics students. How many of you own one or more Apple products, I asked? Not every hand went up, but about three-quarters of them did. If Apple continues on its current path, those students and many others like them will be Apple customers for years to come. And what is true of college students is true — though typically to a lesser degree — for many other customer cohorts around the world.
The NYTimes article does not impact Apple’s moat, but it may have a large impact on the price of Apple share prices if it causes investors to realize that Apple’s profits and rapid growth rate are more durable than the company is currently being credited for.
The perception many investors hold about Apple was largely formed during the years when the Mac was its only product. In that setting, the company nearly went bankrupt competing against another company (MicroSoft) that enjoyed its own wide moat. Investors still have questions about Apple’s staying power, based on numerous real — though I believe incorrectly interpreted — concerns.
In the meanwhile, the gap between Apple’s share price and its price after its advantages are fully realized is significant, and offers investors opportunities for substantial gains.
Have to agree with Bazza about that one. The writer made many fine points and then just trails off.
ElderNorm, come on! Having 70% of a market that isn’t growing is exactly what the author was illustrating. Apple’s magic is finding niches that have the potential to become categories. What has baffled and astounded wall street is the way they repeat this.
That’s why the AppleTV is a hobby and most assuredly a phase 1 product. TV is a huge catagory that Apple only sees how to find a niche in. Replacing the settop box is unlikely. Replacing the DVR? The settop box makers already proved they have the advantage to steal that market from TiVo. Leaving them as a niche player in a category they created and still offer the superior product in.
And coming late and redefining the category doesn’t transform one into the first mover. In another era Apple was the first mover in PC’s and lost their advantage. In the modern age Apple looks around to find where the tech fails to meet the potential of a category. They then R&D it beyond imagination while patiently pushing and waiting for the hardware to reach a level that allows them to apply superior design and engineering to explode the niche into a category.
Does anyone else remember the collective response when Jobs after claiming they where about to introduce a world changing product took the stage and showed us just another mp3 player. Even most Apple fans thought it was hubris. The iPhone announcement was a bit warmer from fans but the industry only looked at what was missing. Even this article implies that maybe the iPhone was an accident as no SDK was available at launch. For the iPad even many believers went along with the view that tablets are such a small niche that even with a 70% domination like in iPods Apple might sell a couple million a year.
Apple is destroying conventional business wisdom, which is what this author seemed to have started writing about before losing focus. Even in a mature and saturated shrinking mp3 player market Apple maintains iPod revenue by transitioning users to newer more expensive models. The iPhone captures more revenue than Nokia. With the iPad’s much anticipated entery into an existing market crowded by dozens of preannounced competitors a year later stands virtually alone.
Can Apple grow to nearly 100 billion in sales this year? Most assuredly it can. But to keep abreast of this pace in 2013 the numbers become astronomical. We start looking at 100 billion in new sales as a slowdown. This is why Apple is unlikely to ever obtain a P/E ratio of 30 again. Yet companies with far less going for them command P/E’s twice that.
For us longterm investors even small gains can grant us another 100% gain on our investment. Will Apple triple from here and become a trillion dollar company. I fully expect they will. Can they grow 10 fold from here? Given enough time sure but given the examples it is hard to imagine.
As a long time stock holder I’m thrilled by their performance. Do I think they offer a better than average upside for a place in ones core portfolio, sure. Is it where I’d look to invest for my next 10 bagger, no.
And here comes the flame bait. Dividends. Apple could pay 3% of revenue in dividends without hurting their security as an enterprise. Of course. Am I thrilled with how the team is managing the company. Who isn’t? Okay we’re not count Steve Ballmer. Do I think they are managing share holder value sitting on that much cash? Not knowing their longterm statergy I can’t fully answer that question. Might they have a very good use for that money that they just need another 20 or even 50 billion to exicute? Not likely. Money is so cheap to borrow that if they see an opportunity that they aren’t acting for want of cash I’d be shocked. At this point a healthy dividend would only slow the rate of accumulation. At the same time it could drive the stock price much higher. Offering a dividend widens the market of investors without increasing supply. Result, higher price. After all it is a public company and there is a price to pay for access to capital and liquidity. I know this course of reasoning upsets many on this board. What will be the aurgument in 2012 when the cash exceeds 100 billion?
I await your slings and arrows.
A related analysis of Apple as a platform company from Jan 10, 2011:
“Despite what you think, Apple is a platform company”