Strategy 101 and the Wall Street Journal: A Fisking

The Wall Street Journal has 531 words in a news item about Apple’s plans to start production on a new iPhone in the second quarter. 155 of the words are useful:1

Apple Inc plans to begin production of a refreshed iPhone similar in size and shape to its current one in the second quarter of the year, according to people familiar with the device’s production, teeing up a possible summer launch for the next version of its flagship device.

At the same time, Apple continues to work with its manufacturing partners in Asia on a less expensive iPhone that could be launched as soon as the second half of this year, these people said. The four-inch device likely will use a different casing from the higher-end iPhone. Apple has been working on different color shells for the phone but its plans remain unclear.

The other 376 are absolute garbage and actively make the reader dumber.

A sampling:

The two devices reflect new pressures on Apple. The Cupertino, Calif., company has long commanded unique premiums for the iPhone, but consumer demand for cheaper products is spiking.

But is a conjunction is commonly used to list two contrasting facts about the same topic.

  • “The box is small but heavy.”
  • “The movie is two-and-a-half but goes by quickly.”
  • “The WSJ is a business paper but doesn’t seem to understand basic strategy.”

The problem with this sentence is that Apple commanding unique premiums doesn’t necessarily have anything to do with consumer demand for cheaper products. Turns out not all consumers are the same! Some will pay more for a better phone, some only think about price. And some live in the United States where an iPhone 4 can be had for…$0!2

Of course, any “good” article needs a supporting quote, and a Neil Mawston from the unfortunately named “Strategy Analytics” is happy to help:

A flood of smartphone entrants and the rise of Samsung Electronics Co. have commoditized the market, squeezing margins and dividing profits among an array of devices.

“There isn’t really any major differentiator between the players at this phase,” said Neil Mawston, an analyst at research firm Strategy Analytics. He said to cope, Apple needs to take a page from Samsung and launch more products faster.

“The panacea is to transform the industry with a revolutionary design,” Mr. Mawston said. Until then “you have to do the traditional business school implementations like manage costs and move quicker than rivals.”

Interestingly enough, the panacea for Mr. Mawston may be attending business school! He would see something like the following in Strategy 101:

Sustainable Competitive Advantages
Sustainable Competitive Advantages

Mawston, like most analysts, seems unaware that phones can be differentiated by more than speeds and feeds, and is thus fixated on the lower right corner. Here there is no differentiation, everything is commoditized, and the day is won with volume, supply chain dominance, and wide distribution. And Samsung is winning in all three areas. They have the greatest volume, the own what is likely the most efficient supply chain, and they are available on basically every single carrier in world. (The vast majority of that volume is actually at low price points. The Galaxy S is only about 10% of their total volume of smartphone – the article wrongly suggests it is 100%.) Kudos to them!

But it turns out there are two sustainable positions in an industry (and to be clear, this isn’t exactly rocket science. Again, business school…). The low cost leader – Samsung – and the highly differentiated one. See, Apple already did “transform the industry with a revolutionary design.” And while Android has made significant gains on the hardware, software, and even ecosystem fronts, the overall package offered by Apple is still highly differentiated. The evidence bears this out: Apple charges the highest prices for phones, happily subsidized by carriers (especially in the US), because customers will change carriers to get the iPhone. This results in by far the highest margins in the industry with only a small portion of the overall volume.

What’s funny is the article actually provides said evidence in the last paragraph:

Samsung’s share of global handset shipments rose to 25% in 2012 up from 21% in 2011, according to Strategy Analytics. Apple’s rose to 8.6% from 6.0%. Last year, Apple captured nearly two-thirds of the profits in the industry, up from 62% in 2011. Samsung’s share rose to about a third from 19%.

The total disconnect between this final paragraph and the rest of the article is mind-boggling, and truly does a disservice to the reader. Not just because it’s wrong – although it is – but because it overlooks the much more interesting truth that Apple is facing challenges with the iPhone. While their current position is very secure – and suggesting it isn’t is where this article, like many others, goes wrong – they are moving ever closer to saturation in the markets where carrier subsidies shield customers from the iPhone’s true cost. In fact, Apple’s stock slide is understandable; theoretically, the stock price accounts for future growth, and the flipside of saturation is continued high profits but lower (or even negative) growth.

Apple dominates every market, like the US, where price is immaterial. They are not under much threat from Samsung or from anyone.3 A lower-cost iPhone, which is still differentiated but approachable on a full-cost basis, is about growth in unsubsidized markets (like India for example), and is the key to avoiding saturation (and unlocking the stock price).

While the company is widely believed to have innovative products up its sleeve, many analysts think the next developments that could really disrupt the market—like bendable displays or mainstream wearable devices—are years away.

I mean, seriously.

  1. Although I highly doubt an iPhone will launch in the second quarter; production may begin for a September launch []
  2. To be sure, in much of the rest-of-the-world device makers sell direct to customers, which makes iPhones more of a tough sell. But that doesn’t mean consumer demand for cheaper products is “spiking;” it means that as the iPhone pursues greater growth it is necessarily moving down the demand curve []
  3. Although I do think the lack of a large screen is an issue. My wife, to take a sample size of one, is planning to switch to Android this fall if there isn’t a large screen iPhone by then []