Think about your phone… is it an iPhone?  What apps do you have, or more importantly what apps do you use?

The Situation:

Apple the world’s most “successful” company is at a decision point, one they’ve seen before.  Apple’s winning edge in their categories has been based on being clearly the best product available.  The iPhone in particular is by far the best phone you can buy.  (Or at least it was)  About a year ago the iPhone’s market share begin to fall back.  Apple was able to cover that up by expanding to Verizon and Sprint which has given them a short-term bump in market share.  In time though they will return to the issue of declining market share.  This is pretty normal as more and more people buy smart phones and more and more competition shows up in the market.  Android has done a very good job at grabbing share as the platform of the “everyphone”.  The trick is that no two Android devices are quite the same, creating a market not made up of two major user experiences as almost every graph would suggest, but rather a market place of one major user experience (iPhone) and hundreds of niche experiences.

Effectively the key to this is that the smart phone market has evolved into a marketplace with lots of different devices, creative lots of choice and niche offerings.  Some phones are better of taking pictures, others are all about the web, other basically just high-end GPS units, but all of them are unique in one way or another.  This is causing the smart phone buyer/user to place a lot of weight on what the main features of value

proposition of each phone is.  Buying a phone is like buying a car, there become a lot of things to consider and often that consideration leads a customer to want the iPhone for its quality.

Enter the problem – It’s hard to stay different with app stores and cloud based solutions.

Almost every smart phone has some version of an app store, a place where users can go to download additional features for their device.  These app stores usually have a number of different phone upgrades available in them.  Instagram to upgrade your photos/camera, Evernote to upgrade your note taking capabilities, even Foursquare to improve on the initial maps tool that comes with your phone.  This is where Apple starts running into some problems -

1.  Over time Apple can’t sustain an advantage in the hardware it produces.  While Apple may continue to stay ahead of the curve, the major hardware features most consumers crave will be available on both iPhones and its competitors.  This creates an issue where customers will no longer be able see the iPhone as differentiated from its competitors in the physical device’s features.

2.  If all smart phones have app stores than an app builder, say

Facebook, could build there apps pretty uniformly across all of the smart phone providers.  This creates a problem for Apple when trying the differentiate the iPhone when it comes to Apps.  In the early days, app developers were mostly private individuals, so iOS being the biggest market to build apps for Apple enjoyed having apps like Instagram be iPhone Exclusive.  But over the next few years, this isn’t going to continue.  The most popular apps  are going to be owned and managed by big companies such as Facebook.  The big companies may not build them, but they’ll buy them and give them the resources to develop the app on all platforms, not just the iPhone.  (The App developer world is going to evolve in a very similar way to how the video game industry and PC software industry have.)

3.  When working on an internet enabled device one has the ability to send/save their data anywhere, this simple technology overcomes the biggest switching cost when buying a new phone.  The user never wants to risk losing their photos, contacts, recent conversations, and so on.  This also undermines the need for me and all of my friends to have the iPhone, because not only are all my favorite apps on every device, my friends can have them too, no matter the smart phone type.  The cloud combined with app developers like a Facebook create problems from Apple’s differentiation argument.

What remains of Apple’s Power Base, and How Facebook and others will destroy it.

Some things that got me thinking this way:

1.  The Nintendo64 over came its old technology, the cartridge, because it was able to differentiate itself by have more/better games to play.  Apple used to share the advantage of better apps, but that won’t be the case in the long-term.  Nintendo eventually lost the more/better games point of differentiation because games became uniformly available across platforms.

2.  Microsoft is entering the market and has played this game before… Twice… and Won.  In the video game industry Microsoft showed up in a later wave of video game consoles as the technology began to be a lot more like the computer industry.  The XBOX wasn’t a huge success initially, but as video games became for uniformly available the system took over share by differentiating itself with online play.  This gap was widened as the company was able to continued growth in the industry with the XBOX 360.  Before the video game industry though, they played this game with Apple, betting that software would be the long-term champion of the computer market.  By creating a world where software could work uniformly across all types of computers Microsoft made it very hard for the customer to differentiate between HP or Dell or even Gateway (Microsoft’s own brand of computer).  Microsoft has put a lot behind the most recent Windows Phone launches and looks to be learning from its previous victories.  The windows phone embraces the cloud not so much as a Microsoft thing, but rather an app world thing.  (The heavy integration of Facebook is a bigger then most might think.)

3.  Evernote and Dropbox have created storage solutions that work across the internet

connected world making Android’s, Windows’, and Apple’s solutions somewhat irrelevant.  By making the use of the apps free up front Evernote and Dropbox make it easy for users to adopt the apps, and the ease of transition from one device to another basically make the Notes irrelevant.

4.  Beyond Evernote and Dropbox, look at all the apps out there that basically make the basic software features of the iPhone irrelevant.  iMessage can basically be replaced with Facebook Messenger, Twitter and old fashion email.  Notes as mentioned can be replaced with Evernote.  Google+ Hangout or Skype replace the value of Facetime.  Instagram and Facebook Camera can cover all the value offered by Photos and Camera, basically all the Photos tool is needed for is short-term storage until you can upload your photo to Facebook.  This pattern continues with a number of other features.

5.  And then there is Facebook.  Facebook is the company best positioned to take advantage of the changing landscape.  When Zuckerburg says Facebook is in the business of changing the way people communicate… he wasn’t just saying something nice for the IPO.  Facebook is about to make that change to how people communicate, and this weeks release of Facebook Camera…

How Facebook is going to ruin Apple:

Things to understand about Facebook,

-Massive user base already, at the end of 2011 more people were on Facebook than had smart phones.

-Massive amounts of data and storage- messaging, conversation history, photos, contact info, event planning and so on, all in the form of data stored on Facebook.

-Presence on most phones.  There app is widely adopted as a pre-loaded feature on almost every phone.  (except the iPhone)

Facebook’s positioning over the next few years will be what changes the smart phone marketplace.  As we’ve seen over the past few months Facebook has changed its approach to the mobile solution, adapting and learning from the most successful apps that connect to it.  They’ve changed from trying to have one app that does it all (which they’re not deleting any time soon) to feature apps focused on one specific thing.  Basically their bringing the most popular apps on their platform to mobile.  (eg. Photos is an app on Facebook that know is on your phone as “Facebook Camera”)  If they were to do that, think about all the features they could replace.  (Contact Info, Maps, Messaging, Camera, Photo Storage)  Then step back and think about all the features apps tightly aligned with Facebook could replace. (Video Chat (Skype), Music (Spotify),  even the News (Washington Post)) Facebook’s app suite is actually really well set up to add value to any mobile user.  The key there was “any”, all of the apps Facebook is creating can be fitted across all devices.  Facebook unlike most app developers has the resources to make the phone you own not matter when it comes to connecting with them.  With all the data being saved back Facebook itself, the phone again doesn’t have to have any specific amount of storage capabilities.

This is a major issue for Apple, as Facebook could make a run at positioning itself as the means of communication for the average smart phone user.  If that becomes the case, then almost all the differentiating points that make the iPhone such a leader now won’t matter.

The solution:

Honestly, Apple should buy Facebook.  Not because Facebook is some kind of great revenue producer, it’s actually a very flawed one, but because Facebook poses such a threat to the future of Apple as the industry leader.

Thanks for listening,

Zach West