I’m not predicting the following will happen, but I’m also not saying it won’t.1
September 18, 2018, Beijing, China – In a development few could have foreseen even five years ago, it’s Beijing and its global icon Xiaomi that is the star of September, the role formerly filled by the increasingly irrelevant Apple.
At 10AM local time (7PM Monday on the West Coast) Xiaomi is expected to announce the Mi 8, the latest version of their free phone that has taken the world by storm. Like its predecessors, the Mi 8 is expected to be gorgeously designed, available online, and priced at $0 without a carrier contract.
$0. You read that correctly, and it’s that price that explains what has happened to Apple.
Xiaomi has focused on creating well-designed yet inexpensive phones from the very beginning; the phone comes with a plethora of Xiaomi services and the ability to fully customize every aspect of the phone. Xiaomi makes money off of the subscription fee users pay for these services, as well as by collecting a percentage of all the transactions that occur on the device, ranging from subway tickets on every rapid transit system in Asia, to designer bags in Shanghai’s most exclusive boutiques.
This focus on services and recurring revenue allows Xiaomi to keep its phone prices as low as possible; Moore’s law and the “good enough” nature of phone hardware made what is possible effectively $0 (Amazon and Google have pursued similar strategies in the tablet space, to the iPad’s detriment).
Apple has struggled to adapt. The company had become accustomed to massive hardware margins, subsidized by carriers. In fact, for the first eight years of the iPhone’s life the top-of-the-line model was priced at $650. Critics, however, point to the introduction of the iPhone 5C as the turning point. Eager to solidify its hold on markets subsidized by carriers, and confident that a slightly lower price would help in countries like China, Apple priced their “low-cost” phone at a still-high-end $450.
That same summer Xiaomi hired Google’s Hugo Barra as its vice president of Xiaomi Global, and Barra quickly attacked Apple’s pricing overstep, grabbing the design-conscious market in not just China but the rest of Asia as well. From then on, Xiaomi simply rode the wave of the fastest-growing region in the world, building a massive war chest that let them break into America’s rapidly growing prepay market.
In the meantime, Apple, stuck with an obsolete business model, has been working steadily on increasing its services offering, an area that has never been a strength for the company. Unfortunately, even if Apple’s services were as attractive as Xiaomi’s offering, it would be exceptionally difficult financially for the company to shift from the $325 it formerly acquired per iPhone buyer to the $50/year that Xiaomi receives.
Many fans hold out hope Apple will return to its former glory, but investors are circling, and the hype machine has long since crossed the Pacific.
Again, this is a fable, but perhaps a useful one; were we to know for certain it would happen (and here, Xiaomi is simply a convenient stand-in for any number of potential challengers), how ought Tim Cook respond?
It’s not like Apple doesn’t know the importance of services; they’ve been investing in what is now iCloud since iTools launched in 2000. They’re just not very good at it; it doesn’t seem to be in their culture to build and iterate the type of product that has failure built in.
Moreover, the time to prepare for that 2018 scenario is now, yet does anyone seriously think Apple should lower the price of the iPhone? There is broad consensus that the 5C would be appropriately priced at $450, in order to maintain Apple’s quality and margins; yet, it’s those very same margins that would make the iPhone uncompetitive with Xiaomi’s M8, were it to exist in the attractive form I describe.
And that’s the dilemma. Were Tim Cook to shift Apple’s business model away from hardware to services, with the vague promise that Apple will make it up in volume by 2018, he would rightly be fired. Immediately. And yet, if he doesn’t, and Apple falls, he’ll be marked a failure just the same.
Of course, there are plenty of reasons to believe that Xiaomi or a similar company will not disrupt Apple in this way. Apple simply has too many devoted users, and there are too many apps. To overreact would be foolish. Better to double-down on your strengths and build the best device possible for a higher price, and besides, your culture would never let you do anything different.
To be disrupted is not to lack vision, or intelligence, or even product sense.2 Rather, it’s to be challenged by a business model that offers good enough products or services at a price you simply cannot afford to match. Were this situation to befall Apple (and again, I am not predicting this by 2018) Tim Cook would not have failed; he would have simply met the fate that all of recorded business history suggests is inevitable. What would be far more surprising would be if he, or his successor, did not, at least eventually.
I mentioned in my recent podcast with Horace Dediu that Apple does a great many things wrong. If they are still iconic in ten years time, then we will know for a fact that it was everyone else who was mistaken.
In 2010, I wrote an academic paper arguing that Apple was particularly well-suited to resisting disruption. Many of the references are dated, but it’s still worth a read: Apple and the Innovator’s Dilemma
Although I don’t think it will, at least in this timeframe. The iPhone is far stronger than its critics realize ↩
To be clear, Steve Ballmer clearly lacked the third, and I would argue the first as well. I find it deeply uncomfortable to be in some small way defending a CEO that I truly think was bad at his job ↩