Recently, I made a bet with a good friend (who is currently a CFO of a retail giant in China) on whether Apple needs market share to be successful. Our bet set the timeline about two years from now and the thesis is that Apple does not need market share to have high profit margins against the android operating system onslaught from Google and their original equipment manufacturers (OEMs) and user adoption & retention. Obviously, you know which side I am from. Some analysts often drew their arguments that Apple needs market share to succeed based on the personal computers (PCs) and browser wars from 1980s to 2000s. I am going to draw on the metaphor on why the market share argument do not work in our world today and Apple should be Louis Vuitton and not Zara to be successful.
Since the death of Steve Jobs, Apple’s influential founder, everyone (whether you are an analyst, pundit, observer and customer) asks the following questions:
- Can Apple continue to innovate against itself?
- Can Apple stop Google’s Android onslaught in market share for emerging markets?
- Can Apple stay on top of the game?
Most market analysts and pundits take the market share argument and argue that Android’s rising market share will eventually lead Apple towards its downfall. They drew their arguments from history, mainly on the story on how Microsoft crushed Apple in the PCs era. Even if Google drew the model from Microsoft for the Android mobile operating system, the circumstances are pretty different. First of all, the business model is different. Microsoft made its money through licensing their operating system and applications to users with a cost. Google, on the other hand, earned their revenues through online advertising either through mobile or web and gave the operating system for free (except that they can get paid by large OEMs when they need support and help with the software). If Google is bent on market share, it would not bother to build Google apps such as GMail, Maps and Google Plus for iOS. The reason is simple: Google’s business is predicated on access and their distribution is really through software and not hardware. The OEMs such as HTC, LG and Samsung need to distinguish themselves against each other and hence they have to work on both hardware and software to a small degree at the same time.
The market share argument fails if Apple operates differently from her competitors. Currently, Apple is starting to take away market share back from Google. Of course, the war stretches across different fronts and the most pressing one is the emerging markets (China and India). I have an argument to why Apple does not need market share to win this war and Jon Gruber argued it in a similar way on their current strategy for China. They are making the exact right move to why Nokia and Blackberry fail to grapple as well. My thesis is simple: Apple should become be a Louis Vuitton and not Zara, i.e. Apple should evolve to become a high end consumer brand and as a result, they do not need to fight for market share and be a profitable company.
Here is the problem which most multi-national corporations encounter in expanding their growth overseas. They encounter local or regional clones who come up with similar products but differentiate themselves at a cheaper price. Yes, Android has the larger market share but user conversion (for example, driving up e-commerce purchases via mobile phones or tablets), retention and usage are nowhere compared to Apple. Samsung survived the iPhone onslaught by cloning Apple by adopting Android along with other OEMs (HTC, LG and Google Nexus devices), while Blackberry and Nokia both fell to their demise within a few years.
The mobile phone market is currently in the phase of commoditization. If Apple follows what every pundit and analyst says about the need to gain market share, they will be fighting a lost cause. The only way out is to establish themselves as a brand like a Louis Vuitton and not a Zara. I will take the metaphor further. There can be faked LV products out there, but essentially as an emerging market progresses, the middle class will aspire themselves towards owning a real LV product i.e. an upper class brand in analogy. Apple is essentially moving itself upstream and become an aspirational brand for emerging markets. If it stayed in the market share battle, they have to slash their own cash cows and constantly fighting their competitors on price sensitivities. The analogy goes in the way that Zara has to continuously made pricing adjustments against similar mass consumer brands like Uniqlo and H&M. At the same time, going for market share by giving up on pricing de-values their innovation along the way, whether incremental or disruptive. Yes, there exist people who like the mass market products like Zara, but ultimately, if you ask them about the brand they aspire to, it’s still Louis Vuitton (Prada or Gucci or any high end brand you can think of). So, market share does not have a place in Apple’s business strategy, but brand awareness and mind share are. The highest retail profit per square foot used to be Tiffany and Co, before Apple, which is an aspirational brand for women who want their men to buy it from. Yes, Tiffany is overpriced but the brand value persists, and that’s what I believe that the market share argument fails from the Android faithful. That strategy works for Microsoft in the PC era because we have never seen a consumer electronic brand move towards an aspirational or high end brand strategy. That’s the reason why Google’s only move is not just distribute Android freely but also in their competitor’s environment so that their business model can work.
To end, I narrate a tale about a prediction that I made two years ago in China when I was sitting in my friend’s car towards the Beijing International Airport after attending TechCrunch Disrupt. Yes, he’s the same friend who I made the bet with. I explained the mobile phones market then in China by telling him that there was the MediaTek feature phones & soon to come Android low end phones which will knock out Nokia’s Symbian and high end smartphones like Apple which took the high end market. I made a prediction that a middle market solution should turn up in the market and it’s probably going to be Android with a strong software services backend where they monetize and followed the same line as the Samsung Galaxy series. Guess what, two years later today, he told me that I got it right because Xiaomi turned up and is successful in the Chinese market. So, I seed another prediction that Apple’s eventual evolution is to become a Luis Vuitton and not Zara because that’s the only way to win the smartphone battle without going for market share or price differentiation.