Where Apple is Most Exposed: Page 2

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iPod/iPhone: These aren’t keystone products either but they now form the engine underneath Apple’s profitability.

With around 80 percent market share, Apple dominates the related segment. In the case of loss of market leadership these products would severely impact iTunes but wouldn’t necessarily kill it if Apple retained the Mac platform. The Mac platform would likely continue with relatively minor damage (mostly resulting from lower store traffic).

The iPod is at risk of market saturation and being replaced by smart phones. The iPhone is a solid hedge against both problems and has the potential to exceed – once it becomes a line of products – the installed base enjoyed by the iPod line significantly.

Exposures revolve around a much more robust and powerful set of competitors for the iPhone than ever existed for the iPod. And the control that carriers and corporate buyers have over this segment is greater than Apple’s, which both reduce Apple’s control significantly (absolute in the iPod segment) as the market transitions. Currently, Apple is at moderate risk in this area as a result, largely due to an anticipated reduction in control as opposed to an anticipated decline in market share, but one is likely to follow the other in either direction.

iTunes: This is a keystone product but only with regard to the iPod/iPhone. Were it to drop precipitously it would also likely have a severe impact on these related hardware lines. It’s also dominant in the segment, but with under 80 percent share if you factor in Microsoft’s Player, Real Networks and Yahoo properties, this product is at significant risk largely resulting from an industry move to non-DRM music.

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Currently most iTunes customers are locked into the service by the music they have purchased through it. Removing the DRM will increasingly break that lock. But this won’t happen overnight unless subscription services take off, which has suddenly become very likely. Amazon’s movie into digital music is creating a significant risk to iTunes. They have recently surged to No. 2, as they are dominant in their online retail segment since they are the largest and most powerful on-line retailer in the U.S.

However, the biggest risk is an effort by Time Warner to make all music available to all Cable users as part of their cable subscription for a $5 monthly additional charge. This has broad implications for everyone in this segment but, because Apple is dominant, they face the greatest displacement risk.

Apple Fans: These people, who are significant in number, help create an environment where it is very difficult to be critical of Apple. They actively sell Apple products while generating little or no cost to the company.

As the book I referenced in the opening paragraph points out, these people are closer to political or religious fanatics and relatively unique (Linux/Open Source Fans are similar). Were they to switch alliances the overall damage to Apple would be significant. Apple’s products might survive, and might even improve because they would have to, but they would likely lose substantial market share until Apple was able to replace their services by paid marketing and sales employees who would probably be less efficient.

This group has survived some incredibly hard times for the company in the 90s and there is no imagined external threat that will likely dislocate them. However, Apple’s success is diluting them significantly while focusing more writers on their unusual behavior. A significant trigger event, like the initial departure of Steve Jobs or an obvious betrayal by Apple, could force them to think different, resulting in significant damage to the firm. On this last, the surprise switch to Intel by Apple was arguably a major betrayal and they survived that. So I truly doubt they are at much risk unless Steve Jobs departs.


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Tags: Windows, software, iPhone, Mac, steve jobs


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