Apple's Secret Sauce Smothers Rivals

By Stephen D. Simpson, CFA | August 23, 2011 AAA

In the space of a week, two of Apple's (Nasdaq:AAPL) biggest potential competitors largely packed up their tents and conceded that they could not compete on their own in markets like smartphones and tablet computers. While the circumstances are indeed quite different - Hewlett-Packard (NYSE:HPQ) is basically exiting the consumer PC and portable electronics business, while Motorola Mobility (NYSE:MMI) accepted a buyout from Google (Nasdaq:GOOG) - the fact remains that precious few companies have taken Apple's best shot and come out swinging for the next round.

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What makes Apple special? And perhaps more to the point, does Apple's way of doing business give it an enduring advantage on its current and would-be rivals?

The Squishy Bits
Words like "culture" are thrown around too readily sometimes, but there is at least some kernel of truth in the idea that a distinct operating philosophy can make a real difference at the bottom line. In the case of Apple, this is a company that largely trusts its own vision(s) and does not feel the need to endlessly consult with focus groups or take a committee approach to design. What's more, there are plenty of accounts that Steve Jobs has established a demanding culture at Apple where high expectations are the norm.

Perhaps Steve Jobs gets too much credit for what happens at Apple (and the vice presidents too little); it wouldn't be the first case of that in corporate history. But maybe a clear vision and demanding standards explain why Apple has been on-time and on-target with its consumer products while rivals like Hewlett-Packard, Motorola and Research In Motion (Nasdaq:RIMM) seem to go wide of the mark too often.

Focusing on Both Halves
What seems more unusual about Apple is that the company seems to genuinely focus a lot of time and energy on ensuring that the hardware and software that go into a device complement each other. While reviews of rival phones and tablets have sometimes include descriptions like "clunky" or "unintuitive," Apple products often get reviewers' praise for how well everything seems to fit and work together.

In the case of HP, for instance, there was a lot of praise about the quality of the webOS software but a general sense that the hardware didn't maximize it. Likewise, it would seem that some of the motivation for Google's acquisition of Motorola (apart from IP) revolves around how to best exploit and highlight the benefits of the Android operating system.

A New World?
Apple seems to be succeeding by throwing away the old rulebook. For a long time companies were content to allow Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT) to dominate the direction of consumer technology development, with companies like Nvidia (Nasdaq:NVDA) occasionally pushing new boundaries in particular niches. These companies decided what would be possible in hardware or software, and then the box-makers dutifully assembled their products and fought it out in the markets on the basis of design, distribution, brand reputation, and shoving the largest amount of performance into the smallest price tag possible.

Now Apple seems to be following a different path. True, the company relies on a web of suppliers (licensing technology from ARM (Nasdaq:ARMH) and using chips from suppliers like Broadcom (Nasdaq:BRCM), Atmel (Nasdaq:ATML) and so on), but the company seems to be proactive in telling potential suppliers what it wants (or demands) in terms of performance. What's more, Apple takes that next step to optimize performance and make sure that the software and hardware work together as well as possible.

Perhaps this goes some way towards explaining why Intel and Microsoft now find themselves on the outside looking in when it comes to these new consumer electronics. They no longer call the tune or decide what consumers want, and that would seem to naturally lead to a readjustment process.

The Bottom Line
Common sense says that companies will adapt and look to meet (and then beat) Apple on their own turf - there's too much money at stake to just cede the field indefinitely. Moreover, it is not as though all big companies are hopelessly uncompetitive; Samsung seems to have found a way to make devices that are good enough to be seen as Apple alternatives. Still, it will take a while for companies to move from a focus on just assembling components and hoping they work to rolling up their sleeves and ensuring that the hardware and software work together seamlessly.

In the meantime, companies like Hewlett-Packard and Dell (Nasdaq:DELL) look to emulate IBM (NYSE:IBM) and de-prioritize consumer products. It will be interesting to see if Chinese companies, known better for their low-cost assembly prowess than design and integration, can fill the gap. If not, it may be some time before Apple has to deal with multiple competitors that are as committed to an integrated (hardware and software) approach as it currently is. (For additional reading, take a look at A Primer On Investing In The Tech Industry.)

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