Apple's segmentation strategy, and the folly of conventional wisdom

Ten years after an iPod powered rebirth, Apple's run continues unabated.
by Mark Sigal !netgarden "Mark Sigal September #$, #%&%
'onventional()isdom*+,ymoron.pngThere is a myth, more of a meme actually,
about the -inevitability. of commoditi/ation. 0t is a view of the world that sees
things linearly, in terms of singularities, and the so*called 1one right path.2
0n this realm, where commoditi/ation is 3od, hori/ontal orientation 4versus
vertical integration5 rules the roost. 6ow else to de7ne consumers, not in 8esh
and blood terms, not as spirits that aspire to speci7c outcomes, but rather, as a
composite set of loosely*coupled attributes.
This mindset is compelling because it is simple and familiar, but it also leads to
blind obse9uiousness.
6istorical edi7ces are held as indelible fact. 10t.s Microsoft v. Apple all over
again.2 1There has to be one absolute, dominant leader.2 1+pen will always
prevail : and should prevail : over proprietary systems.2 1Market share matters
above all else. ;ven pro7ts.2
There is one small 8y in the ointment to this ethos, however, and its name is
Apple. 4<or a historical perspective on tech industry architectural orientation,
check out 1)aves of Power2 by =avid Moschella.5
Apple.s gaudy performance relative to its industry peers
The following inconvenient facts must be an a>ront to the hori/ontal,
commoditi/ed, open, market share /ealots. Apple has launched three ma?or new
product lines since #%%&@ the iPod 4+ctober, #%%&5A the iPhone 4Buly, #%%C5A and
the iPad 4April, #%&%5.
The company.s stock is up D,%%% percent since the launch of iPod, &#E percent
since the launch of iPhone, and #% percent since the launch of iPad.
0n that same time period, the ma?or devotees of the loosely coupled model :
Microsoft, 3oogle, 0ntel and =ell : have been, at best, outpaced by Apple FG 4in
the case of 3oogle dating back to the launch of iPod5 and at worst, either been
wiped out 4in the case of =ell5 or treaded water 4in the cases of Microsoft and
0ntel5 in every comparison period.
Apple*Performance.png
Het me go a step further and make the forceful assertion that in the red hot
mobile computing segment 4inclusive of smart phones, media players and tablet
devices5, anything that Iokia, J0MKLlackberry and even 3oogle Android are doing
is simply orthogonal to Apple.s i+S*based device play 4iPhone, iPod touch, iPad5.
'heckers to chess.
That is why it.s laughable that the latest meme du ?our, 1The Apps Hifestyle2 :
and believe me, it is a lifestyle : is ridiculously framed as a trend of the multi*
vendor 1cell phones2 segment. )hyM The clear*cut truth is that Apple.s i+S
device platform is the staging ground of the Apps Hifestyle, something that N$%*
percent of i+S device owners 1get2 to the point of it being intrinsic, assumed and
embedded.
Ly contrast, maybe &E percent of non*i+S device owners embrace The Apps
Hifestyle, or even know what it means, and that.s probably being generous. Oet,
this composite translates to #$ percent of all users 4according to Pew Jesearch
'enter5.
6ow can you not confuse the tail with the dog, with that kind of framingM
The folly of conventional wisdom
Mobile*6andset*Share*Pro7ts.pngTherein, lies the problem with conventional
wisdom. Iamely, that it.s conventional. 0t doesn.t think outside the bo, in terms
of strategic imperatives, like building di>erentiation, growing margins or
defensibility.
That e,plains why the top three mobile handset unit sales -leaders. 4Iokia,
Samsung, H35 are outselling Apple in raw units an astounding #D.E to &, yet for
all of that e>ort, combined they are garnering only P# percent of Apple.s pro7t
level.
0s it surprising, then, that the reward for achieving such distinguished leadership
was for the ';+s at two of those companies 4i.e., Iokia and H35 to get 7redM
Het me net it out for you@ 'ustomers buy outcomes, they don.t buy attributes,
and they certainly don.t pay a premium for it. )hether you love or hate Apple,
recogni/e that they are an e,emplar of this truth.
Analy/ing Apple market segmentation strategy
0n the real world of building products and attacking market opportunities, market
segmentation is the process of de7ning and sub*dividing the aggregate,
homogeneous market into addressable, targeted needs and aspirations buckets.
Luckets that are in turn, thresholded by demographic, psychographic andKor
budgetary constraints.
Market segmentation strategy enables a company to drive complete, uni7ed
product solutions that are harmonious with messaging, customer outreach, and
channel strategies for selling and supporting customers.
0n this regard, Apple.s product strategy is a study in market segmentation.
Qersus merely trying to stu> a product, burrito*style, with as many di>erent
features as possible, they target speci7c user e,periences, and build the product
around that accordingly.
'onsider the recent iPod event in September, where Apple completely rebooted
the iPod nano, rolled back the iPod shuRe to an earlier interaction model, and
ma?orly forked the iPod Touch in a way that also speaks to iPhone positioning.
Mind you, each of these e>orts represent ma?or strategic iterations of successful
products, not reboots of failed ones, so it speaks volumes about how the
company thinks about its users, their work8ows and corresponding segments.
Moreover, it underscores the integral*ness of continuously re*calibrating on the
de7nition of the situationA not merely doing more for the sake of an added bullet
point or to support a desired price point.
=oes Apple have a perfect crystal ball on these thingsM The history of the nano
and the degree of iteration of this generation.s shuRe, suggests that no, in fact,
they don.t always have a perfect read. Lut make no mistake@ )hile they may not
always be right, they are never confused or hapha/ard in their approach, and
that is the hallmark of sound market segmentation strategy.
Apple segmentation from iPod shuRe to MacLook
As such, the chart below is an attempt to logically organi/e Apple.s product line
so as to better understand the company.s approach to market segmentation@
Apple*Segmentation.?pg
So what does it all meanM
0f 4in football terms5 we are now entering the second 9uarter of the age of mobile
computing, it helps to see the continuum of connected devices from the
perspective of their means of mobilityA namely, whether they are wear*able,
pocket*able, bag*able or portable.
Similarly, the diverse set of device input methods that Apple embraces : from
physical buttons, keyboards and mice to multi*touch and tilt : provides a
window into the types of use cases and work8ows that they are optimi/ing
around.
<urther, when you see how Apple has used its vertical integration of the iPod
media player and the iTunes marketplace across all of its devices to create a
billing relationship with &F% million consumers vis*S*vis simpli7ed discovery,
purchase and distribution, it provides a window into how they.ve facilitated a
market segmentation approach that is simultaneously harmonious and discrete.
0n the harmonious bucket is the way that i+S*based Apps and their
corresponding 1ecosystem surround2 directly overlay on top of iTunes and the
iPod media player. This approach is no doubt a business school study of how
companies can marry strategy and tactics across product lines and product
lifecycles.
0ronically, it is the holistic approach that has given Apple the ability to be
?udicious in its implementation of di>erentiating hardware components at the
display, phone, camera and video capture level.
)ant the best build 9uality device that Apple makesM 3et the iPhone T. 6ow do
we know thisM )hile the iPod Touch has recently received iPhone T pi,ie dust, in
the form of a camera, 6= video recording and a retina screen, the build 9uality is
a step below the iPhone T, which feels like a ?ewel bo, forged by a craftsman.
To be sure, the iPod Touch is beautiful and solid, but its screen is slightly
diminished in e>ect, and the camera is intentionally hobbled. 0n other words,
while Steve Bobs himself may refer to the iPod Touch as the 1iPhone without the
phone,2 in truth, the functional segmentation keeps it a step below the iPhone.
Iow, this is completely logical when you consider how much more e,pensive the
iPhone is. Pricing 4and margins5 that are hidden from the customer via carrier
subsidies.
That is also why recent analyst data that suggests that the iPad is
1cannibali/ing2 low*end MacLook sales : versus simply swallowing the low*end
)indows P' and netbook segments for lunch : is dubious at best. 0f you own an
iPad and a Mac, you know two things@
The iPad targets a set of 1?obs2 that are not dependent upon keyboards and
mice, but there are plenty of ?obs for which a tablet is an unsatisfying
replacement for a traditional computerA
Apple doesn.t make low*end MacLooks, or similarly hobbled devices, for which
an iPad would represent a practical alternative.
Lut then again, as 0.ve stated before, Apple is a rare bird, pursuing non*linear,
high*orchestration, high*leverage strategies. ;,actly the type of comple,
storyline that is easily dismissed by simple*minded analysts, investors,
competitors, media and the like.
Ueep that in mind the ne,t time you come across a story citing 1Apple2 and
1inevitable2 in the same conte,t.