Has Apple Changed the Rules?

 In Analysis, Mobile, PC
Many competitors would like to cut Apple down to size.

Many competitors would like to cut Apple down to size.

MARCH 12, 2013 • Sometimes life just isn’t fair. You can work and study hard, make the best grades and be praised for all your efforts.  But then some glib, fast-talking upstart with no experience or credentials sweeps in to take your place. That is how it must seem to many of the competitors in the consumer technology space that have seen once struggling PC manufacturer Apple Inc. become a powerhouse in every category in which they compete.

In recent articles DFC has discussed the new order of hardware manufacturers that are looking to provide an ecosystem in which to deliver consumer entertainment products and services.  With its strength across mobile and PC platforms, strong brand and highly profitable business model, Apple has emerged in the past few years as the dominant player in the new order. This is a far cry from where Apple was at the turn of the century when they were basically a niche PC provider. In the 1990s, Apple even tried to enter the video game market with the ill-fated Pippin entertainment system.

Today everyone is trying to figure out how to compete with Apple.  It all changed when Apple got a lock on the music industry by dominating the MP3 audio playing device category.  From that point Apple was able to leverage their OS to mobile devices.  By using China as a low cost production center Apple also became much more price friendly then they were back in the days when the expensive Power Mac line dominated their business.

The good news for the competition is that Apple should provide a nice target to try and sell against.  Apple has many potential weaknesses that could be exploited.  The problem is that the competition seems to be struggling to learn from Apple.  One of the most notable examples was Nintendo’s recent product where the company seemed to forget the biggest lesson Apple provided: brand and marketing are still very important.  In 2012 Nintendo launched two major hardware systems the 3DS XL and the Wii U with almost no major marketing efforts. In the shadow of Apple it seems Nintendo forgot that only a few years ago it was marketing and branding that made them for a brief time the darling of the investment community.

So far the nimble Apple brand has been difficult to catch in the marketplace.

So far the nimble Apple brand has been difficult to catch in the marketplace.

Supposedly hardware had become a commodity as content became king and successful hardware devices were easily copied.  A major exception was video game hardware where manufacturers could provide unique features and control content.  This was a model pioneered by Nintendo and successfully imitated by Sony and Microsoft.   However, it took Apple to come along, and with a succession what should have been commodity consumer electronics products, revolutionize the entire hardware and software/services business model.  The iPod, the iPhone and the iPad were all luxury items that were far more expensive than the competition but still somehow managed to dominate the portable music space, the smartphone market and the tablet market. Furthermore they did this without Apple having to focus on generating proprietary content.  Apple just created and managed the iTunes and iOS App Store for users to buy content that was usually also available on other systems.

Right now one must wonder what would happen if Apple seriously targets the video game space.  Video game systems are essentially a luxury item and Apple excels in that demographic.  The iPad has to be one of the most unnecessary luxury devices that everyone feels they must have.  It is basically a laptop PC with less features but more convenience at a higher price.  It is a more expensive and cumbersome ebook reader than an Amazon Kindle.  It can play games but nearly as well as a Nintendo 3DS at a fraction of the price.  Like most every other hot portable system it can access the Internet and play music and movies.

Best of all, Apple has made sure consumers will need to replace their iPad every year or two.  Don’t even think about trying to use an iPad from the dark ages of 2010.  What if your iPad runs out of memory and needs an upgrade?  Too bad, there is no memory card slot.  On the base model you get 16 GB of memory which you can upgrade to 32 GB for another $100.  Individual games for the PC, Xbox 360 and PlayStation 3 can all take up more than 16 GB.  Don’t even try to compare the specs of an entry level $499 iPad versus a comparably priced laptop.  A laptop in that price range will have a larger screen, a faster processor, significantly more memory and a much bigger hard drive for storage.  Most importantly the laptop will be expandable so it can last for years.

Market Value Apple-NintendoThe entire Apple model is about getting consumers to rapidly buy new hardware.  Consumers that bought an iPad 3 in March 2012 got to watch Apple release the snazzy new iPad 4 in October.  Then of course there is the launch of the iPad Mini in November 2012.  This smaller system is Apple’s effort to compete with products like the Kindle Fire HD and Google Nexus.  Of course at $329 the iPad Mini at $329 costs 65% more than the $199 and under price for most competing small screen tablets.

In short, Apple has been successful by breaking many of the rules of how to build a loyal and satisfied customer base.  Nevertheless, consumers still can’t seem to get enough of Apple products.  Of course, Apple products are top of their class, innovative and user friendly.  However, that alone doesn’t explain how Apple has been able to charge such a premium and still dominate the market in an era when consumers are supposedly watching their wallets.

The reality is Apple has done an unprecedented job of marketing that creates an amazing allure around its brand and products.  When it comes down to it, consumers in mass are very prone to status symbols and keeping up with the neighbors.  Apple has does a great job equating being cool in today’s society with having the latest Apple products.

Other hardware manufacturers should look to learn a lot from Apple.  This is especially true of game hardware manufacturers who were once great at making their proprietary products status symbols.  Once upon a time consumers paid a premium for “Sony Style.”  Sony still makes great hardware but is having a hard time getting consumers to notice. Only five years ago, Nintendo was named marketer of the year 2007 by Advertising Age.  In 2012, Nintendo managed to launch two major new innovative hardware systems with barely any noise.  The 3DS XL could have been positioned against the Kindle Fire and even the iPad.  Instead Nintendo just quietly threw the system in the marketplace and hoped somehow consumers would find it.

Did you see this Wii U commercial last November? Neither did we.

Did you see this Wii U commercial on TV last November? Neither did we.

As the first major video game console launch in six years, the Nintendo Wii U should have been the talk of holiday 2012.  Even if the Wii U shipped in limited quantities, everyone should know of its existence and get on the waiting list.  Maybe this would have happened if Nintendo had decided to run something even remotely resembling a serious marketing campaign.  Instead Nintendo seems to focus on its core base of fans that made systems like the Nintendo 64 and GameCube nice second place contenders in the video game console war.

Ironically it is Microsoft that seems to be doing the best marketing in the video game space.  This is ironic because Microsoft is not at heart either a consumer electronics manufacturer or a traditional provider of consumer entertainment.  Microsoft has never been known for marketing products as innovative.  However, Microsoft has been very good at looking at the competition and using its vast resources to best emulate what made them successful.

With the Kinect, Microsoft learned a lot from companies like Nintendo and Apple.  The Kinect didn’t really do that much, but Microsoft made it seem cool and innovative.  The Kinect helped drive the Xbox 360 to its best years in 2010 and 2011. The Xbox 360 even did well in 2012 as the video game industry had a major decline.  This was unprecedented for a game system launched in 2005.

With the iPad, Apple is coming dangerously close to the heart of the video game industry. At the very least, Apple is sucking precious leisure time and money from consumers.  For content creators the situation is not ideal as the Apple model mainly focuses on getting consumers to spend most of their money on hardware with content being provided at a very low cost.  This is the opposite of the video game model which has sold hardware close to, or even below, cost and looked to make money on premium software.

Apple products like the iPad Mini are definitely a threat to the established video game industry.

Apple products like the iPad Mini are definitely a threat to the established video game industry.

In short, Apple is definitely a threat to the established video game industry.  However, Apple is not without its weaknesses and that is where opportunity awaits for savvy competitors.  At some future point consumers could easily grow weary of expensive hardware that is only cool for a few months.  The iOS content model where it is difficult to find the gems in a sea of junk could also prove frustrating to consumers.  Consumer passions can fade suddenly and Apple is in danger of economic fatigue in its consumer base.

There is a great opportunity for game manufacturers to show consumers that their products are both more fun and less expensive.  However, convincing consumers that your product is THE thing is just as much about sales and marketing as it is product development.  In 2012, Nintendo seemed to somehow have forgotten that core point.   Now it is Sony and Microsoft that need to avoid repeating the mistakes of Nintendo’s recent product launches.

The law of gravity says drop something and it falls to earth.  The law of getting consumers to buy a non-essential product is all about sales and marketing. An apple falling from a tree may have inspired Newton to discover gravity.  But that doesn’t mean if the apple didn’t fall there would be no law of gravity. The entertainment business is all about selling consumers on stuff they don’t really need. Apple didn’t invent that rule or even discover it, they just did a good job of putting it into practice. Once upon a time Sony and Nintendo were also great at communicating with consumers.  However, with Apple still at the top of the tree they seem to have forgotten their core.  Yes Apple is major competition, but more importantly the game companies need to focus on what made them successful in the first place.  It may seem like the rules have changed when in reality if you drop something it still falls.

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