In stock analyst parlance, companies worth investing in have a "wide moat". This term was coined by Ben Graham in "The Intelligent Investor" and is favored by Warren Buffett, and others who pride themselves on making good stock analysis. It is the measure of how difficult it is for other companies to compete against the leading player in the same space.
I recently read a stock commentary on Apple where the analyst asserted that Apple's moat was iOS. He asserted that the iOS operating system platform, now shared across Apple desktop computers, Apple phones and the iPad tablet was the source of a widening moat that would make Apple more difficult to compete against.
I had a front row seat for the toolkit wars of UNIX, and the platform wars of Apple vs. Microsoft, as well as the platform wars of UNIX/Linux vs. Microsoft and Palm OS vs. Windows Mobile. Commentators asserted the importance of platform and predicted various things, like the obliteration of Apple by Microsoft, the impossibility of toppling the powerful UNIX workstation with a lowly PC, etc..
As a software engineer, proud of my contributions, and wedded to my favorite platforms, I had long hoped that platform did indeed matter. Time and time again I had to admit that platform was eclipsed by "Value Proposition". Value Proposition boils down to "Why would someone spend money on that?"
I always say that Microsoft beat Apple in the early platform wars because people didn't see the value of spending more for Apple when the Microsoft offerings seemed just as good.
Today, lots of people are watching the smartphone space and wondering who will become the dominant player. The smartphone market has made many turns in a short span of years. Blackberry initially dominated with unique functionality. Palm's functionality and usability made an impact but was then eclipsed by Microsoft's "Windows on your Phone" paradigm. Surprising to me as a past observer of the Microsoft Desktop systematically outselling the Macintosh Desktop, the iPhone changed the rules for what people considered an acceptable smartphone.
I think that the iPhone's usability was important, but I think the major factor was COOLNESS.
The impact of branding, the name, logo, ideas and feelings associated with a product is hard to measure but so important that there are laws about how companies account for it. Sometimes the cool factor, the desirability of a product, dominates how its position plays out in the marketplace.
In the early days of the iPhone, I would ask my friends about about their iPhone experience. The dialog invariably went something like this:
Me: How do you like your iPhone?
Them: I LOVE my iPhone!
Me: What about making calls on it?
Them: Yea, the network is flaky, and I lose calls all the time, but I LOVE my iPhone!
It's supposed to be a phone, but the one thing you most want to do with a phone doesn't quite work. Even so, the iPhone evoked strong feelings of desire and value in its owners and would-be owners.
Can we generalize from the iPhone to the broader smartphone market?
We've seen several surprising events take place in the smartphone market since the iPhone:
Nokia's Symbian offering has tanked and it seems that the whole company is at risk now. They shifted away from their Linux/Meego offering to invest in a Windows 7 mobile offering. I think this decision was a fear-driven blind run in totally the wrong direction. Yes, Nokia's smartphone desirability has evaporated. But don't dive into an investment in the other
Microsoft's Kin was released and then shut down. Here, I think Clayton Christiansen's The Innovator's Dilemma
provides insight: The Kin was a radical new approach to cell phone as social network, but the marketplace didn't understand its value. It needed to be treated like a disruptive technology, not yet fully understood, but capable of changing the world if managed flexibly. Microsoft with the Kin, like Apple with the Newton, tried to release too radical a product with the expectation it would sell well enough to improve the corporate bottom line. Popular opinion for both will always be, "The product failed." Actually, the approach failed, and the consequences will not be felt by Microsoft for a very long time. They had a chance to own the social network smartphone market, and mis-read the situation.
Android, a Linux-based phone, friendly for tinkering has garnered a HUGE market share. Why did Linux come in third behind Microsoft's #1 and Apple's #2 on the desktop, but in the smartphone marketplace of Q4 2010, Android is #1 and growing, displacing the shrinking Blackberry and Symbian market shares as well as handily beating the iPhone and Windows Mobile shares? (Source, Wikipedia: Smartphone, Market Share
I think the answer comes down to branding and product concept: how a majority of smartphone owners and potential owners perceive their desires about their phones.
Microsoft's phone is a "computer in your hand". It seems like every successive generation of Windows Mobile is about that. Wake up, Microsoft! People don't want a phone that is a computer!
Apple led the way by introducing "a phone you could do cool things with". It's not a computer! You don't go to a menu and issue commands. You touch the thing you want to do.
Blackberry understood the importance of giving people "a phone you do important things with", but they lost sight of what customers considered important. Even if they come up with a product that does more of what people care about, the entrenched branding of iPhone and Android may make the sell too difficult.
Symbian, and Palm/HP WebOS are now trying to survive in a crowded marketplace of "cool things you can do with your phone". Unfortunately, the only way to win here is to give people more cool things to do than the entrenched leaders, Apple and Android. Good luck!
Going forward, I believe the smartphone market will be a two horse race: Apple and Android competing for mindshare around, "Cool things you can do on your phone."
I believe that Apple has learned a crucial lesson from the first MacOS vs. Windows platform war. The Apple value proposition is, "What we sell is beautiful, works for you, and costs the SAME as the clunky contenders from other sources." That last point is crucial. Perhaps there's a rigorous review, but in rough terms it seems like the buy decision between two similar products boils down to:
- Is one a lot better than the other?
- Is one lot cheaper than the other?
- Do a lot more of my friends own one than the other?
Better vs. cheaper vs. familiar. Like rock/paper/scissors, there's a balance among these three. If the product costs the same, and acts the same, you buy the one everyone else has. (Except when you decide to "make a statement", but we're analyzing mass markets, not niche markets here.)
Having watched various platform-based approaches to product fail, I feel pretty comfortable with this rule of thumb:
To trump the familiar, you have to be ten times better, or cost half as much.
Awareness of the inertia of the familiar is key! In an emerging market, definable as, "no ubiquitous player yet". It's between better and cheaper. The balance here is weird. Sometimes something needs only be a little cheaper to win and become the ubiquitous one. The crucial point for Apple is that they now make the extremely powerful statement: "Ours is better but it does not cost more."
I believe Apple's moat is the growing familiarity by the marketplace with the ideas:
- A new Apple product is worth a try.
- Apple products are beautiful.
- Apple products work, and do useful things for me.
- Apple products cost the same as their inferior competitors.
To cross this moat, competing products need to be as good or better than Apple at being beautiful and working. And they need to be cheaper.
Apple has a moat, but it is not iOS.