Apple's problem, in a word

The iPad maker is reeling under the Android threat after Samsung's Galaxy Note grabs the value end of the market. Pricing, it turns out, is more important than Apple realized.

By TheStreet Staff Jul 29, 2013 1:21PM

Models pose with Samsung Electronics' new Galaxy Note 2 in Seoul on September 26, 2012 (© Lee Jae-Won/Newscom/Reuters)By Dana Blankenhorn, TheStreet



Apple's (AAPL) problem is that it failed to perceive the threat that phablets -- small tablets that double as phones -- would create for it.

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Samsung launched its Galaxy Note phablet in 2011, two years after the introduction of the first iPad. The phablet was designed to undercut both the iPhone and iPad by giving low-income consumers, especially in Asia, one inexpensive device that combined the functions of Apple's immensely popular gadgets.


This doesn't just appeal to Beijing hipsters. One of my dearest friends, a 68-year old Vietnam War veteran, recently chose a Note phablet over the iPhone. His eyes desired the bigger screen, and his wallet demanded he get one device, not two.


Apple, which maintained premium pricing on its iPod line for a decade, did nothing against the threat to its iPad dominance for more than a year. The response, when it came, was the iPad Mini. The problem with the Mini was that it did not address the real challenge of the Note, namely price.

Ignoring history's lessons

As any market matures, pricing theory holds that the wise supplier moves from "premium pricing" to "value pricing," sacrificing margin in order to maintain market share. Apple did not do this with the Mini. Samsung did this with the Note. (AMZN) also did this with the Kindle, which is less a tablet and more an Amazon-only device -- the browser is deliberately terrible. But when you can get the price below $200, as Amazon has, you can move a lot of boxes.


The result of failing to address the low end of the market, combined with rivals' decisions to go after it aggressively, can be seen in the market share data.


The saturation of the phablet market and the high price of the iPad Mini pushed Apple's second-quarter share of the total tablet market down to 35.5%, against 21.5% for Samsung, with a host of other Android names taking up what remained.


This was a huge win for Google (GOOG) Android operating system, which powers nearly all the market's small fry, as well as Samsung. Google is now trying to consolidate its advantage with the LG-made Nexus 7, which reviewers at C|Net compare very favorably with the Mini, along with the Moto X phone, produced by its Motorola division and backed by a $500 million ad campaign dwarfing anything Apple has ever done.


Usually, at this time of the year, we in the media are all breathlessly awaiting the next Apple press conference, speculating about what great new stuff the company is about to offer us. Instead, we're now watching to see which Apple executives walk the plank, and speculating about Google.


The "cool" end of the market, the premium end, always responds in time to what is happening at the low or "value" end of the market. Just as Toyota made the Lexus possible, just as Chevrolet made Cadillac possible, so mass market success breeds class market profit.


This is Business 101. Tim Cook's Apple, in its arrogance, ignored the lesson of history and is paying the price, in the stores, on the streets, and especially on Wall Street.


At the time of publication the author owned shares of Apple and Google.


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Jul 29, 2013 2:27PM
How quickly folks forget that Apple was at one point a dismal failure with Steve Jobs. They actually almost went under with Steve as CEO. He eventually came back and the rest is history. The Genius of Steve was knowing how to spot those that bring something big to the Table. It also didn't hurt that phone companies are subsidizing the hell out of I-Phones. Take away the subsidizes and a maturing Markets and maybe the trend would have been the same regardless of it Steve was there. We will never know for sure. Until enough folks get that Apple's products are just overpriced toys, their ability to print money via their products will continue.
I've seen this with multiple companies.  They can make money when there is no competition, but as soon as there is, they do not know how to make money anymore.  They just send their product overseas to make it cheaper.   That is their way to compete.
Jul 29, 2013 1:56PM
Interesting view.  It was Apple's premium which made their position in the electronics world.  By not falling for the commonly held misconception to fight for the lowest price, Apple maintained its panache between price and capabilities.  Apple's problem in a word is Steve Jobs.  With the loss of his genius, the company just hasn't been able to harness the creative juices of its fantastically smart employees to beat the socks off the competitors. 
Jul 29, 2013 3:41PM
Horrible reporting......LG makes the Nexus 4 phone NOT the Nexus 7 tablet which has always been made by Asus.  Screwing up details like that is unacceptable.
Jul 29, 2013 3:47PM
who cares.....I still use flat stones and a chisel/Tin cans and string!!!!!
Jul 29, 2013 4:25PM
I would love to have Apple's problems.
Jul 29, 2013 3:06PM
Apple summed up in one word... ROTTEN.
Jul 29, 2013 2:10PM
Yeah CynicFan, but the only reason they could charge that premium is because no one else was even close to their technology.  Now that the market has caught up and everyone is on a fairly even playing field, Apple struggles.  You're spot on with Steve Jobs.  Without that man, Apple will begin it's slow downward spiral like it did the first time Jobs left.  However, this time there is no saving grace of Steve ever coming back.  
Jul 29, 2013 3:47PM
I saw a hipster walking down the street the other day with one of these 'phablets' in his back pocket. He looked ridiculous. There too big to conveniently carry around without a holder of for women a purse.
Jul 29, 2013 4:42PM

Apple has always been "eletist" about both it's products and customer base, it's what nearly caused the demise of the company the first time around.Apple may have better products initially, but in this day of touch screen idiot proof operation is "better" realy worth $200+ more? And it realy doesn't help when your better and more expensive product has a better and more expensive version every 6 - 9 months, upgrading is so much less painfull with an almost as good (some say possibly better) cheaper Apple alternative. I personally never went or will go the Apple route, never saw the point in spending that extra money ( or standing in line for a product, I have bladder issues)


Jul 29, 2013 4:20PM

Stupid wormy just cant seem to wake up ! I have been saying this for years

1. Removable Battery

2. Sim Card

3. Hard case included

4. External Antenna jack

I like the operating system , Bye Bye apples my next upgrade just not worth it !

Jul 30, 2013 7:53AM
Aug 11, 2013 10:06PM
It's not just Apple, it could be the whole industry. How sure is anyone at any company of the big 5 or 10 in that business that they have or know the next coming thing? I see this and that and hear about the rise and the fall of this gadget or that. There's been an elephant in my room for a long time though, and it has to do with the way that computers have become too much of our lives. If any one of the large major companies could reassess our position just in terms of a sensible way for the industry to go, they would be able to lead the rest into something sustainable that, would, over time grow steadily and not be such a mad rush and race for the money, money, money. What I'm saying is that computers and the software were overdone and gained too much faith from consumers in terms of what any new idea would be able to really hold on to. What they may have to do to get back to a better position, it to admit that and carry on with a new more basic and robust computer that doesn't do quite as much complex stuff and have quite so many features. As I'm writing this, the scroll bar on the side of this MSN site is moving the page up and down. I refresh the page and it moves up and moves down. When I'm on the MSN main page, the MSN Money page peaks through as if it a new feature that lets us put in a ticker from the main page instead of having to go to the money page. What is that? A hacker? Did someone at MSN forget to save the HTML? I don't know, but in the least it could be termed a sort of security breach, either through incompetence or lack of attention to what is important. These sorts of things are gotten away with way too much for such an important portion of our daily information sources and so forth. What I want to hear from Tim Cook and all the others is that they've realized they overshot the popularity estimate with computers in the main by 20-60% and need to regroup and retarget the industry for better security and decreased reliance on the temperament of software and hardware learning by consumers. Period.
Jul 29, 2013 3:16PM
Jobs was the everything to Apple.  His vision, his ethics, his marketing, his work ethic,  and the demands he put out for greatness.   Apple is just a little fish in a big pond now.  Yes like many of us the thrill is gone.  I'm sure many as always will hang on and on but I wouldn't expect the unexpected from Cook and the other "employees".
Jul 29, 2013 3:46PM
Apple did the same thing with personal computers.  They introduce a computer with an innovated interface and than: nothing.  Other than the initial concept Apple has zero vision.

History will repeat itself; in five years when people think about tablets they will think Microsoft...

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