Apps Won't Save Apple

Dec.28.13 | About: Apple Inc. (AAPL)

There's a big debate about whether Apple (NASDAQ:AAPL) can sustain its position as the most profitable smartphone and tablet maker.

Bears point to Apple's declining market share in both tablets and smartphones. They argue that Apple's outsized profit share is a legacy of it pioneering modern smartphone and tablet form factors, which has given Apple products a halo effect among consumers, but inevitably that will fade.

Bulls like to point out that Apple still has the largest share of premium smartphones (above $400) and tablets. It also earns more profit than anybody else, including Samsung, in mobile computing devices.

Bulls go on to argue that Apple has a strong moat around the premium segments of the market and that moat is Apple's App ecosystem.

Have phone, need App

No one can deny the impact Apps have made on the tech world over the last 5 years.

BlackBerry (NASDAQ:BBRY), formerly the leading smartphone maker, was dethroned after consumers started shunning its keypad equipped phones in favor of touch screen smartphones. However, even after BlackBerry launched its own touch screen phones, starting with the BlackBerry Storm sales continued to slide.

BlackBerry's latest phones, including the Z 30, which is meant to compete with flagship phones from HTC (OTC:HTCCY), Samsung (OTC:SSNLF) as well as Apple, have been well reviewed. However, most reviews of these phones have noted the lack of popular apps as a major drawback. Nokia (NYSE:NOK) had similar problems with its new phones.

It has been Android that has achieved the greatest success of all the operating systems.

Click to enlarge
(Click to enlarge)

Source: Wikipedia

This suggests that having apps, including Google's (NASDAQ:GOOG) own services such as Maps, Search, Gmail and YouTube, in a app form is essential if a smartphone ecosystem is to compete.

Now if you look at smartphone makers' market share within Android, the big winner is Samsung . It has nearly two thirds of the device sales and essentially the entire profit of Android smartphone sales.

But of course Samsung has exactly the same kinds of apps on its phones as HTC, LG, Sony (NYSE:SNE) and the rest of the Android handset manufacturers do.

What then explains the success of Samsung, if not apps?

Samsung has the best mobile devices

I would suggest that Samsung has become the leading Android tablet and smartphone vendor through

  • Being the fastest to market, out of all the Android vendors, in bringing out touch screen smartphones and capacitive tablets.
  • Form factor innovation: it brought out a 4 inch screen smartphone before Apple did. This even forced Apple to respond with its own larger model, the iPhone 5, and for a time it seemed as if Apple was lagging in innovation.
  • Offering multiple devices and sizes to serve as many demographics as possible. Samsung is a true conglomerate: not just phones and tablets, but TV's, fridges etc.
  • Deploying the biggest marketing budget: Samsung is on course to spend a mammoth $14 billion this year on marketing.

Isn't it contradictory to say that Apps are important in the context of BlackBerry's decline, but not that important when it comes to the battle between Android and iOS?

I concede that you do have to make a small leap of logic, but the analogy is to water. Water is essential - ask someone without any who's in the desert - but having more of it after a certain amount doesn't make any difference. Likewise, being without core apps can be enough to put someone off buying device, but the top 10, 20, 50 and 100 apps are pretty much common to both Android and iOS, and soon Windows too. In fact the average person only downloads 25 apps so beyond a certain point app availability is unlikely to make any difference.

Apple's success has been built on products not apps

As far as apple's success goes, one can attribute it to better products: better user interface, smoothness of software and innovation - they are been first to include new features such as retina screens or voice recognition.

The rest of Apple's success can be put down to the power of Apple's brand: the only difference with Samsung is that Apple hasn't needed to buy that brand through huge spending on marketing. Instead, it's made some clever adverts like the famous I'm a Mac; I'm a Pc ad, as well as quite a bit of product placement. Mainly though it achieved its leading brand status from its legacy of innovation over the last decade and having had a hugely iconic CEO in Steve Jobs.

Recent events have borne out my thesis that apps matter less than products do: Apple's stock has been on a tear recently

AAPL Chart
(Click to enlarge)

AAPL data by YCharts

and concerns that Apple is lacking in innovation have quieted down. None of this is because Apple has extended its "App gap" over Android or Windows. Rather, Apple has launched well received products in the form of the iPhone 5S and the iPad Air.

Personally I think the fingerprint recognition on the new iPhone is a bit of a gimmick, and I don't think many people care about the new A7X 64 bit chip either. However, I don't deny that a one pound iPad is impressive.

Rivals are falling behind

Indeed, the gap between Apple and Android in tablets seems to be widening if anything: the new Kindle Fire tablets haven't set the world on fire, even with an innovative video help chat service, Mayday.

Android's flagship tablet, the new Nexus 7, hasn't sold nearly as well as last year's model. I've bought one of these tablets and unfortunately, like quite a few other people who have bought this device, have found that the device won't boot up on several occasions, requiring a factory reset to fix it, as well as finding the keypad registering multiple touches erroneously . For a second generation device, and as I noted, a flagship device, this is pretty poor. So much so, that I have bought an iPad Mini instead.

Final thoughts

Still, relying on Apple to maintain an edge in device design and usability indefinitely is I think a mistake. Eventually, other manufacturers are going to get their act together or Apple itself will slip up.

The long term bull case for Apple must be based on the idea that it isn't just another consumer device company like Sony, which had massive success introducing new products like the Walkman and other high end entertainment devices, but eventually fell to earth.

Apple's only real hope of avoiding that fate is to use its App advantage as a long term differentiator over rival operating systems, but as I've demonstrated in this article, apps have already lost most of their salience.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.