A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.
Skate where the puck is going, not where it's been.
Crediting Apple (AAPL) with a "first mover advantage" in smartphones isn't really accurate - Microsoft (MSFT) had smartphones years before - and it misses the meat of Apple's platforms approach. A "first-mover advantage" implies a one-time effect that fades over time, leaving the world's Betamaxes in the dust behind Johnny-come-lately technologies like VHS, DVD, Blu-Ray, and streaming high-def digital subscriptions. This article explains how Apple's software platform - far from providing a one-time first-mover-style advantage - helps the company to skate where the puck will be in the markets offering the best growth.
The Dark Ages
In the Old Days of software on floppy disks - and then compact discs - one bought a computer largely based on whether it could run the software you needed to do your work. A computer could run software only if the software were compiled for that type of computer. This is still true now (though some software targets virtual machines that can run on multiple hardware platforms). But in the Old Days, everybody "knew" the customers all used Microsoft's Windows operating system, and if you didn't have it, you couldn't use the software for sale in stores.
No matter what you paid for it.
Worse: if you lived (or needed to do work) in a non-English-speaking country, you needed to make sure you bought a version of the software that had been compiled so that when it ran, it would show labels and instructions in the language you (or your client) wanted. Microsoft sold many versions of Windows to address the various international markets: just figuring out what version of Windows was running requires required special steps to ascertain not only the OS' version number, but also its language version. (Current versions still require language packs to be downloaded.) Legacy applications sold to run on Microsoft's operating systems around the world were designed for an operating environment unaware of the possibility of changing languages on the fly. Each time developers wanted to sell a different language version of an application, they had to recompile a version of the code in which all the labels were changed to reflect the new language (and hope they didn't miss any!). To this day, Microsoft's flagship application - MS Office - even charges for foreign language support packs.
Being a developer under a scheme like this has a cost: you can develop only in your own language (which you hope is a high-demand language), or you can find a way to share your development with strangers. For a small developer with few contacts globally, this casts a pall on multi-language support. Being an international user under a scheme like this also involves a sort of second-class status. Buying specific language versions risks sticking users on the wrong side of a language barrier as users travel, seek support, and learn new languages they want to practice in their work.
In the bad old world, multiple language support is hard.
Apple's development environment changed dramatically after its purchase of NeXT and its object-oriented programming environment NextStep. Touted as the Holy Grail in a mid-'90s Rolling Stone interview, NeXT's object-oriented development environment - now in a post-acquisition evolution now called "Cocoa" - encourages developers to separate the interfaces of applications from the internal logic that drives the applications' behavior, so the back ends of applications can remain consistent regardless what changes are made in the interface. Cocoa applications aren't huge executable files containing all their program resources, but clickable folders that launch little executables within, referencing all kinds of resources hidden away, tucked into the folder's interior structure. At launch time, every Cocoa application asks your OS which supported language you rank highest in your system-wide preferences - so each application launches in the language you like. And - failing that - your second-favorite language, and so on, depending how you set your preferences. One application, multiple language support. One operating system version, worldwide.
Many Cocoa developers have foreign-sited users or other compatriots (or contractors) who send them localization files for their preferred languages, based on edits made to non-executable interface-support files within the users' copies of their paid-for application bundle. The developer never needs to show anyone the application code to get support creating language resource files for inclusion in future application bundles. Developers can support more languages without needing more developers, just users adept in applications' target languages. Cocoa's ease of use enhances product capabilities: users who need to cross borders for work and collaboration can re-order the languages in their Preferences and simply re-launch an application to show an interface in the local language. And back.
Where does one find this Cocoa? In the Mac. The iPhone. The iPad. All Apple's products are driven by - and support - Cocoa. Development for Apple's products is Cocoa development. Sure, Apple supports development using cross-platform standards like HTML5 and Ajax, and on Macs one can install virtual machines to run Java applications or Adobe Flash. But for the real deal - accessing computers' full performance unmediated by additional translation layers and third-party software bugs and unnecessary insecurity - the leading answer is Cocoa.
Because Cocoa is object-oriented, Cocoa allows programmers to use others' objects in one's own programs without re-inventing the wheel. It's so compelling, Microsoft now supports object-oriented programming on its own products, despite continuing support for its old Win32 API and its crustier predecessors. But with decades of evolution dating back to the NeXT days, the objects Apple offers developers are not only more worn into usable shape by years of tweaking in the face of feature requests and bug reports, but they are also more battle-tested than anyone is likely to find in an object elsewhere. Cocoa developers rave about the things Cocoa allows developers to do in small groups or alone, and the speed with which that work is possible - like develop the world's first HTML server, all alone, in mere months. Cocoa - and Apple's success in delivering its most current versions to users - explains in part why Apple is winning the tablet wars.
Cocoa Selling Like Hotcakes
Following the iPhone's international launch, Apple began earning the majority of its revenues outside the United States. Success wasn't limited to iPhones; Apple began to be ranked in some foreign countries not just as a top PC vendor by sales, but by units as well. Can it be an accident that the Cocoa platform - that makes all the U.S. applications available in foreign countries in the local language without even a need to recompile - is such a hit internationally?
The author was going to write that sentence quite differently - about the languages spoken - but English isn't the only language spoken in the US, either. In big and growing states like California and Texas, for example, Spanish is a major language. Huge Chinese-speaking communities exist here. Apple's platform works naturally in polyglot environments because it allows people to pick their languages on the fly rather than at the checkout counter, and prioritize language preference when availability is challenged.
Unsurprisingly, Apple's stable of mobile applications exploded as Apple's handsets circled the earth - attracting developers and users alike, each keen to see more users supported globally.
Microsoft's response to Apple's success in developing an application ecosystem for its phones was sharp: phone apps are unimportant, and offer no competitive advantage. That this was bogus is illustrated by Microsoft itself paying developers for Microsoft-compatible versions of major applications that weren't being made for Microsoft's platform. Microsoft needed the applications, after all. As noted by the New York Times, even really silly applications:
Ben Huh, chief executive of the Cheezburger Network, a collection of humor and entertainment sites, said Microsoft's market share was too small to warrant in-house development of a Windows Phone app. But when Microsoft approached his company about making an application featuring funny photos of cats, he agreed. "They made it very easy for us," he said. "They took care of everything."
Casey McGee, senior marketing manager for Windows Phone at Microsoft, confirmed that the company offered an array of incentives for developers, but he declined to name the apps Microsoft had financed.
Applications matter, and Apple has the developers in their corner. Sure, developers have concerns about Apple's application approval process - a necessary evil if Apple is to operate an application store - but 89% of mobile developers are "very interested" in iOS development. No one else comes close; Android developers' "very interested" rate was recently 53%. By contrast, BlackBerry (BBRY)(Formerly called Research In Motion) and Microsoft have been paying developers to port to their platforms.
Years ago, before there were any non-U.S. iPhone sales, Jaded Consumer looked toward Apple's development environment's built-in support for multiple languages to provide Apple with an advantage internationally. Apple's retail stores had been increasing in number, and this increased the opportunity created by the sudden availability of a platform in which Apple wasn't locked out of the mainstream market by customer lock-in to incompatible applications and file formats.
According to Canalys, global growth in the cell phone growth was flat in the last quarter of calendar 2012, with 438.1 million units. Within those sales, though, smartphones grew 37% to 216.5 million. Apple's sales are exclusively within the growing segment of the cellular market, and with 47.8 million units sold over the quarter Apple held 22.1% of the global smartphone market share. Several Chinese vendors - Huawei, Lenovo (LNVGY.PK), ZTE (ZTCOY.PK), and Yulong - enjoyed triple-digit growth compared to the year-ago quarter. Nevertheless, globally Apple gained on Android in share globally, moving from 15% to 22% even as Android slipped from 74% to 69%. Over the entire calendar 2012, Apple was the second-most selling smartphone vendor after Samsung (SSNLF.PK), shipping 101 million more smartphones than did Nokia at #3.
Huge volume may not help some of these cellphone sellers: the mobile hardware business is murder. For an example, look at Nokia (NOK). With a billion dollars a year in tailwinds - thanks to contractual payments by Microsoft to sell Widows Phone 8 - Nokia may finally turn a profit after six quarters of losses, though its confidence in the future may be reflected in its decision to halt its dividend. Selling against a vertically integrated monster of Samsung's size is a daunting enterprise: nobody but Apple seems to show successive success at it.
It's interesting to note that while Cocoa gives Apple a leg up on international competition, BlackBerry has announced its new platform won't make it to Japan. According to The Telegraph, "[t]he company thought it would cost too much money to develop a Japanese-language operating system for the Japanese market."
The Importance of International Growth
Reports on innovative uses of iPads illustrate a stark truth: American growth just can't keep up.
To increase sales at a meaningful pace, Apple must deliver products that have competitive advantages over even domestic products that might be cheaper to make. It must do this in a software and services environment heavily stacked in favor of Android's dominance in unit sales. The solution seems straightforward: not only must Apple maintain its hardware manufacturing advantages over competitors, but Apple's software must offer as much differentiation as possible. Toward that end, Apple has positioned itself where the puck was headed: a core competency of Cocoa is internationalization. By allowing developers a low-overhead way to broaden their available language versions without complicating their distribution or debugging operations, Apple lowers the cost of offering multiple-language support. Apple even enables non-programmer "end localizers" to offer low-overhead localization support to developers lacking language skills suited to the markets demanding their applications. Cocoa makes Apple's hardware more valuable to everyone wanting the best applications in the world on their mobile devices today.
International growth is crucial to Apple's success. Apple, after all, earns more abroad than at home - and has for years. Apple certainly enjoys growth at home: for the first time ever, it sold more smartphones in the U.S. last quarter than all other manufacturers combined. Taking 18.5% of U.S. cell phone sales is far ahead of Jobs' initial target of 1%, but Apple dramatically lead smartphones' installed base with 36.3% of U.S. smartphone subscribers (against 53.4% for the combined Android vendors) at year-end, and 53.3% of U.S. smartphone sales over the 12-week period ended just before Christmas. But U.S. growth is limited both by the capacity of domestic markets to grow and by the large share Apple already enjoys. The hundreds of millions in the U.S. offer a rich market indeed - but nowhere near the seven billion worldwide.
The future turns on Apple's success on distant shores.
Apple knows this: of 401 retail stores, Apple has 150 outside the U.S. Of 11 new stores opened last quarter, 4 were in China. Apple's stores aren't trivial: they expose Apple's products to people where they can see their features showcased. Exposure to Apple's product quality seems to cause sales: Apple leads in retail sales metrics like sales per square foot (nice charts here), and its same-store metrics are still showing growing traffic and sales volumes. Expect to see Apple build stores in markets (unlike India) that allow it to do so.
Markets like China. Year-over-year, Apple grew "Greater China" profits 66% (26% sequentially) to $6.8 billion. Apple's iPhone sales continues to enjoy more than 100% annual growth in China. Last year, Apple dominated China's tablet market with 71% of the sales share. Recently, Apple was able to sell every iPad Mini it could deliver in China. People may complain about Apple's performance in China, but Apple's discipline in keeping to its pricing policy will pay dividends as Apple further develops the price points at which it offers mobile products.
Ideally, Apple should have a strategy to grow sales internationally without costly, risky, and novel stratagems - or the need to target numerous tiny niches. And there is room for concern: Apple has, after all, suffered some embarrassment in India operations. Apple misunderstood how to approach the market, resulting in minuscule market share. But things are looking up in India. Indians reportedly like Apple's products, reserving in advance everything sent for the last iPhone launch. As in other countries, initial inventory didn't last a day (unlike some markets, initial inventory in India was reportedly trivial). Apple's growth program for India included revamping its distribution system to include non-carrier resellers, and up-manning local operations from 30 to 150. Apple launched an Indian iTunes version featuring pricing apparently tailored to the market: a place teeming with intellectual property theft and high price-sensitivity. An advertising push and a new installment-sales plan had a dramatic effect: Apple's sales increased 400% over only three months. Financing unsubsidized phones is an attractive trend the world will see far beyond India. Financing will lower the barrier to purchasing for consumers uninterested in (or unable to acquire) the long-term service contracts that some view as the iPhone's job to sell.
Further lowering the barriers to selling in markets like India and China are new devices designed to sell against commodity competition. It's true that Apple won't sell cheap junk just to seize share - it has a valuable brand to protect - but it's also true that Apple's pricing policy is to deny competitors a price umbrella under which to operate competition-free. Apple will sell a lower-priced handset for markets requiring a competitive product in the unsubsidized handset market.
And guess what? With the trend T-Mobile (DTEGY.PK) appears to be leading, the unsubsidized smartphone market may become most important smartphone market faster than expected.
Apple has positioned itself with Cocoa to leverage key trends in advancing its platform. First, Cocoa is an Apple technology, and Apple can give away the development tools for free to anyone with a Mac. Which it does. Everyone with inclination to develop for Apple's platforms can get the software as cheaply as they can get hardware on which to run it. Second, Cocoa's enablement of small developers to quickly create sophisticated applications with beautiful interfaces means that without much investment beyond their own time, creative developers can become fierce competitors in the software industry. This makes Apple attractive to new developers, and keeps successful developers loyal. Third, making applications multilingual - and thus dramatically growing their global reach - doesn't require foreign language skills or even knowledge of someone whom developers can trust with their code. Localization on Cocoa doesn't require lots of non-personnel overhead, and can be performed as a cottage industry by multilingual computer enthusiasts - without running the risk of multiple incompatible software versions with different internal logic, because all the versions launch from the same bundle sold at the same time by the original developer.
Apple has positioned itself to leverage its global success in mobile devices to grow the value of its platform among developers - and thereby, also consumers (who think application availability is an asset). Unlike the Mac - which was small, but had the reputation of having customers willing to pay for applications - Apple's mobile devices are unit sales leaders among consumers. Apple has paid over seven billion dollars to developers distributing software through its e-store. No other mobile manufacturer has such success with its platform, and Apple's opportunity for developers only expands as it continues to reach more customers in more countries.
Enormous growth in huge international markets will drive Apple's future performance. Investors concerned about the limited opportunity offered by mature markets should consider Apple's opportunity in China and India. Apple's outstanding growth in these markets means good things for shareholders, and Apple's strength in international application development and broadening the language support of existing applications will make Apple's products more quickly valuable as Apple reaches speakers of additional languages. India has hundreds of languages, and over 1.2 billion people. It and China are both great markets in which to have triple-digit growth.
Disclosure: I am long AAPL.