At the Apple iPhone 4s event on 10/4/2011, Apple revealed some interesting numbers about the market share for some of its products. I’d like to use those numbers to briefly introduce market share figures as they apply to New Lanchester Strategy (NLS).
First, let’s cover some basics:
Lanchester Strategy, named for its inventor, Frederick William Lanchester, was originally a theory of combat developed during WWI. It was expanded by British and American researchers into what became known as Operations Research. Used successfully in the PAcific theater during WWII, it was introduced to the Japanese after the war, and transformed into a Sales and Marketing strategy by Nobuo Taoka.
Market share is a central pillar of NLS, and NLS highlights the correlation between market share and profitability. The math is quite complex, but you only need to understand that there are three market share targets:
The maximum target market share is (MTMS) 73.9%. In this position, you have market dominance. It’s difficult to stimulate demand or maintain market share above this level for a variety of reasons. In addition, the correlation between market share and profits disappears above this point.
The equilibrium target market share (ETMS) is 41.7%. If you can get to this point and above, the profitability gap between you and your competition widens in markets with more than two competitors.
The minimum target market share is (NTMS) 26.1%. This is another profitability point. Above this mark, you begin to achieve greater profitability than your rivals, particularly in a crowded market where everyone has a fairly small percentage.
First let’s look at the numbers for “Mobile Installed Base”.
source: comScore July 2011
First, we can see that Apple is above the 41.7% ETMS, which puts it in a different profitability category than its rivals. Second, we see that RIM, at 17%, is well below the 26.1% NTMS. But I only bring up these numbers to make an important point: you can get useless results if you don’t define “market” properly. Or, perhaps it’s better to say that, depending on how you define a “market”, you can come to quite different conclusions about the significance of any particular market share figures. In this case, the main problem is that Android isn’t linked to a single company, so, the fact that it sits in the middle at 33% is a little misleading. But, at least for RIM and Apple, their market share numbers seem to correlate well with the relative health of the two companies. For Apple’s fiscal quarter ended 25 June, 2011, it’s profitability was 25.6% (profit/revenue), while RIM’s 27 August, 2011 filing showed a profitability of 7.8%. Of course, this isn’t a completely fair comparison, since Apple produces several other products as well, but I don’t have better numbers.
Now let’s take a look at the “Portable Music Player Market”
22% everyone else
source: NPD for US August 2011
In essence, this game is over, and Apple won hands down. The fact that Apple’s market share is “only” 78% testifies to how hard it is to own 100% of a market.
As for the tablet market…
74% – iPad
26% – everyone else
This market, in its current iteration at least, is also over. None of the current players really stands a chance. Amazon’s Kindle Fire has generated recent interest because they have managed to offer a tablet that performs a subset of what the iPad does at a very different price point. Whether this is a new market or actually an iPad competitor remains to be seen.
Finally, let’s look at the Desktop PC market.
A look at Wikipedia PC Market Share shows that, in 2010:
In fact, looking all the way back through 1996, no company has ever topped 19% market share, let alone the NTMS of 26.1%. Incidentally, the 42.1% for Others continues a steady consolidation of the market; in 2006, Others held 51.6% of the market.
Looking at the OS reported by web browsers Wikipedia web visits by OS, it is estimated that Apple holds ~8% of the market, although some have estimated that figure to be a few points higher. This puts Apple firmly in the top 5 either behind or ahead of Lenovo. But that would be a bit misleading, because Apple really isn’t targeting the same market, and charges premium prices for its desktop products.
So, a few key takeaways:
1) This small, unscientific survey seems to support the market share correlations as postulated by NLS. (iPods, iPads, iPhones)
2) It is vital to be very clear and consistent as to what defines a market, otherwise, the results will be misleading. (Apple desktop PCs)
The relationship between market share and profitability is what drives new companies to differentiate their offerings in order to create new markets that they can dominate. Differentiation does not have to come exclusively in the form of product features or pricing. Feature wars can erode profits when new features cause retooling, while price wars directly impact profit. Companies can differentiate through marketing efforts, technical support and service, availability, etc. The key is to find ways to differentiate that are meaningful to the customer. In this respect, looking at Apple’s announcements…
Because the iPod wars are over, you can expect incremental iPod improvements along with incremental price reductions–just enough of each to maintain their position and dissuade anyone from trying to mount a challenge. This is exactly what Apple announced, a few minor features to the nano (just a software update), along with some minor price cuts. You can also expect to see marginal players exit this market. Zune is a likely candidate, and there is, even at the time of writing this, come confusion as to whether Zunes will continue to be offered or not.
As for the iPhone 4s, Apple has been criticized in the first 24 hours regarding it. Apple’s differentiation is centered on the “user experience”, and not features per se, so there were a few feature upgrades, but no features that could be considered game-changing. The unification of iPod, camera and phone is ongoing, so the camera upgrade is really just maintaining an adequate amount of feature parity. I’m not in the business of punditry, but I think SIRI–originally developed by SRI International under a DARPA contract–is the sleeper feature, here. It is being wrongly categorized as speech-to-text, but the real secret sauce is its workflow optimization capability, which allows the product to adapt itself to the way its owner works. If SIRI delivers on this promise, it could become the golden handcuffs that guarantee customers never switch; who would switch and lose that level of customization?
Anyway, I own an old iPod, but no other Apple products, before anyone starts complaining. I’ll cover more about differentiation in another post.