Apple: The Leader That Others Continue to Follow

Includes: AAPL, NFLX
by: Rafael Grillo

If you were to buy a tablet computer today, what would you buy?

Let me describe what just happened in your mind: as soon as you read the word "tablet," the very first image that was conjured was the Apple (NASDAQ:AAPL) iPad. Almost immediately, two or three additional options came to mind: Motorola’s (NYSE:MMI) Xoom and Samsumg’s (OTC:SSNLF) Galaxy Tab; in addition, you thought of Hewlett Packard’s (HPA) new offering soon to be launched. A little voice told you that before buying a tablet, you would need to check those alternatives out. That is the right thing to do; you owe it to yourself. "But, who am I kidding," another voice interjected, "What I want is the iPad."

As I wrote in another article:

"No different than in other aspects of life, as consumers we are anything but rational. As a general rule, rationality kicks in just after we are emotionally committed to a decision. That applies to almost anything: from the impulsive decision of buying a pack of chewing gum at the convenience store counter to choosing the person we will share the rest of our lives with. We emotionally decide we need that new flat-screen TV. Then rationality engages to a) validate and justify the decision and b) sift through features and alternatives to select the specific product and model to buy. Even this is not a sequential process: there is a constant feedback loop between our emotional and our rational beings before we arrive to a concrete purchasing decision and act on it.

"Based on this precept, the implications for any marketer are obvious: engage the emotional side of the customer first. Get him to emotionally commit to your product and then just provide him with the rational arguments for him to justify and validate his decision. If a marketer tries to win the competitive war based on the assumption of consumer rationality, he’d be choosing the harder, riskier path to success."

Very few companies have succeeded by copying the leader, because: a) The leader has usually already conquered the emotional commitment of the consumer and b) copying the leader usually means appealing to the rational side of the purchase decision, which, as indicated, is feeble. Sure, followers can create a comfortable niche for themselves simply by covering the gaps the leader has left unattended. But they seldom represent a real threat to the leader.

Actually, in most cases, what these followers do is validate the leader, thus increasing its power and its volume. How come? Let’s continue with our story: what just happened when Apple launched the iPad? Pundits and competitors alike dismissed it as basically a frivolous gadget: too big for a cell phone that didn’t make phone calls, too small for a computer that didn’t even have a keyboard. Just one little detail: consumers loved it. A leader was created. Now, all these critics rush to launch a version of the breakthrough product. By doing that, they are validating the tablet as a viable, necessary tool. What this does is drive the late adopters and laggards in the consumer ranks to finally accept that they ought to have a tablet. It is after all, a necessity, isn’t it?

In marketing, we call this "normalization," that is, the new product is finally inserted into the mainstream and the bulk of consumers finally take the plunge. Guess who benefits from this normalization? The leader. It is a tide that raises all boats … and one aircraft carrier. Because most of the late adopters and laggards will just repeat the mental process I described at the beginning … and will purchase an iPad.

In order to truly dethrone a leader, you can’t just launch a better mousetrap. You have to create a whole new disrupting model. Until then, your efforts will actually tend to support the leader. Hollywood Video was never a threat to Blockbuster (BBI); it made a decent business out of the crumbs Blockbuster left behind, but it was not a real challenger. It took Netflix (NASDAQ:NFLX) to come up with a better model to drive Blockbuster into oblivion. Which is interesting, because several companies, including Blockbuster, were able to copy Netflix’s model. But they didn’t come up with a new one, so they failed. Consumers don’t invest a lot of time assessing and re-assessing offers from different purveyors of the same product. For as long as they are emotionally satisfied with their current choice and can rationally justify it, they’ll stick to it. That is the power of positioning. Movies at home? Netflix. Thank you very much.

So, what does this have to do with investing? Everything! Investors have beaten down Apple significantly over questions about the sustainability of its iPad leadership in the face of stiffer competition. My reply to this argument is that, in reality, it is actually the opposite: Apple’s brightest days are still ahead. For as long as Apple continues setting the standards, its leadership in volume, growth and profitability will go uncontested. The rest of the pack will always follow: it is to be expected; yet, for as long as they keep doing that, Apple will be fine. What should scare us is when we see one of these companies coming up with something new. So far, it doesn’t seem likely.

P.S. By the way, this also applies to Netflix. Amazon (NASDAQ:AMZN), as much as I like it as a company, will not be a threat to Netflix’s leadership.

Disclosure: I am long AAPL.