The four most dangerous words in investing are: 'this time it's different.'
So goes the sage advice of legendary investor Sir John Templeton. Is Apple (AAPL) the exception to the rule? The rise of Apple from the quirky alternative to Microsoft-(MSFT) based PCs to the juggernaut of the mobile age seems to have convinced most investors that this is one company that can do no wrong. In this article I argue that no matter how strong Apple appears on paper no company can continue to dominate like Apple has.
The Rise and Fall
Cast your mind back to 1994. The mobile phone was new, Mark Zuckerberg was ten years old, and the dot-com boom was years away. Motorola (MMI) was the global power in mobile handsets, with 60% of the world market share and trading at all-time highs. In 1995 Motorola announced results that smashed estimates: revenue up 31% to $22.2 billion and net profits up 53% to $1.6 billion.
By 1998 Nokia (NOK) had become number one, and Motorola never recovered its early highs. Nokia had grown into a mobile monster, dominating markets from Europe to Asia. The dot com boom helped send Nokia's share price to an all-time high of almost $60. Nokia was spending $22bn on research and development and demand for its $500 high margin phones was strong. Nokia had simply out-innovated Motorola.
And history repeated again. In 2005 suits and kids alike were rushing to buy Blackberry. A premium price package did not seem to deter and raked in huge profits for Research in Motion (RIMM). Its share price reached an all-time high of $148 in 2008 and in contrast Nokia, which had failed to recognize the emerging smartphone market, dropped to $16 by the end of 2008. Again, a company that was entirely dominant had lost control of the profitable high margin buyers.
We all know what happened to Blackberry. Recent lackluster products and a failed entry into tablets with the Playbook has left the share price decimated and forced the recent outing of the joint-CEOs Jim Balsillie and Mike Lazaridis.
Why should this history lesson worry Apple, the world's largest company by capitalization, with an incredible record of beating estimates time and time again? The reason is simple - no company can stay ahead of the curve forever. In a race of ten sprinters, the front runner has to stay ahead of nine other runners. The rest are focusing purely on beating that single runner.
Motorola dropped the baton and Nokia picked it up and ran with it. Nokia was then an unstoppable giant and stomped over efforts by Ericsson and others to gain market share. Few predicted that Nokia would fall so far so fast. Then came Blackberry and seemingly overnight stole the top spot in the high margin business and premium market. Blackberry was the friend of Big-Business, and few could see how it could be toppled when its product had been so readily accepted by usually slow-to-adopt IT departments.
Google (GOOG) has made a major push behind Android, HP (HPQ) is soon to open source WebOs, Blackberry continues to develop the BlackberryOS platform, and Microsoft has impressed the technologists with Windows Phone 7. From these, the biggest worries for Apple should be Google and Microsoft.
Android is presented as a "free" operating system that any manufacturer can use. While there are some restrictions and licensing issues which have led to tit-for-tat comments between Google's Andy Rubin and Apple heavyweights about how free it really is, there is no doubt that it is the only viable choice for a manufacturer who wishes to compete with Apple while retaining some control over the code that goes into their phones. With the recent release of Ice Cream Sandwich, Android's 4th major revision, it is now a real challenger. It has always been a technologically good platform, but now, crucially, the interface, where it has always been a distant cousin, is finally looking like a real competitor.
Windows Phone 7 has surprised many. Microsoft has long been written off as the uncool unfashionable uncle of Apple and WP7 was expected to be too little too late. However the innovative Metro look and feel, the slick interface, and the speed of the devices have impressed many, including this author. The recent tie up with Nokia, and speculation that Nokia will be acquired by Microsoft to complete the supply chain, makes this a formidable challenger. At the risk of going too technical, let's also consider what I believe is Microsoft's coup de grace.
Apple's iPhone tapped into the small, but keen, base of Mac users. Mac developers were instantly at home developing for the iPhone - they used the same basic toolset. Android did the same, but for Java developers. This leaves one group of developers without a natural mobile home: those who develop for Windows based systems. Windows OS and Windows Phone 7 are based on the same stack and so Microsoft has an army of developers ready to jump into the app world. This solves one of the problems that Symbian, WebOs and BlackberryOS suffered from - lack of small development houses already using the technology. This in turn meant few apps were developed and released.
In addition, in the early days of smartphone adoption, Apple's offerings had many features not available on other phones - YouTube, Google Maps, and the iTunes App Store. As competitors have caught up, Apple's products (the iPhone in particular, and to a lesser extent the iPad), are no longer a generation ahead of products from the likes of Samsung and HTC. Apple now trades more on its reputation and ease of use than technology alone.
This is not to say that Apple is not a great company. It is without doubt the greatest innovator of recent years in the mobile sphere with an incredibly loyal fan base and an aura of "cool" unrivaled, in this author's opinion, by any other brand in any other industry. That is also not to say Apple won't continue to make great products, and continue the intense innovation that has been the hallmark of Apple since Steve Job's return in 1997.
However Apple's share price is predicated on its continuing dominance of mobile. And as the saying goes, "The King is dead, long live the King" and the tide could turn against Apple very quickly. One killer release from Samsung, HTC or another hitherto unknown Asian manufacturer, or a lackluster future iPhone release and the seismic shifts that have happened so often in the mobile industry could occur again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.