Sunday, September 1, 2013

How do you like them apples?!

One of the more unfortunate perceptions in the investment community that's often perpetuated by the media is that Apple is being out-innovated; more to the point, many believe that the company no longer innovates at all.  Here's the reality... Innovation, as often suggested by those with a very short attention span, is NOT making phones in different sizes or colors.  Henry Ford didn't invent the automobile, but he developed the assembly line and transformed an industry.  That is why he's considered one of our greatest innovators.  In contrast, whoever decided that consumers would buy automobiles in different colors and sizes isn't considered to be an innovator and for that matter, is barely remembered.

Samsung has taken Apple's lead and been more willing to adapt it's copy of the iPhone for the masses to move product.  They are playing a volume game, but it will NOT and CANNOT win the race in the long run.  Samsung builds a product that is dependent on the charity of another corporation, Google.  Their open-source Operating System (OS) is the heart of the Samsung phone and tablet.  Should Google decide not to continue its' free support of the Android OS, Samsung will be in trouble... Have you ever taken a look at or used the OS for Samsung's televisions or DVD players? It's terrible. It isn't functional, attractive and barely useful.  In contrast Apple products are not only attractive hardware, but the software that powers it's hardware is very attractive & highly functional.  Whether you like Apple products or not, it's clear that they are easy to use and the ecosystem that accompanies these products is very sticky.  Samsung doesn't have the same kind of sticky ecosystem and as a result, it's not nearly as profitable per unit sold.

Apple has created, at least, four new markets in the last 6 years through innovation: iPod & iTunes (digital music market), iPhone (SmartPhone market), App Store (app market), iPad (tablet market).  Keep in mind that we're not suggesting that Apple invented the aforementioned.... Rather, like Ford, we're saying that they innovated & made these devices infinitely more accessible & attractive to the masses thereby creating markets that previously hadn't existed.  Clearly, Sony created digital music players before Apple, but they were unable to create a market because they couldn't put together a package or ecosystem that resonated with consumers.  Apple cracked the code & did it three more times in a relatively short period.  Innovation isn't easy.... It takes time; many companies will not transform their industries three or even four times in their existence.  We'll see whether Apple can continue to innovate, but it won't be because Samsung can make a copy in different colors, shapes and sizes.

It will be because Apple doesn't come up with another market to transform.  The timeline on this is more like 1 - 3 years; it's not yesterday or tomorrow, as some have suggested.  Innovation takes time and our immediate gratification, Twitter culture lacks patience... We imagine that the innovations in the previous paragraph were in the works for several years before Apple shared them with us, as consumers; the same is probably true for their next set of innovations.  Curious about what those innovations might be? Take a look at some of the items on what seems like a laundry list of patents filed and obtained by the company, on a weekly basis....

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