If you’ve been paying attention to the stock market lately, you may have noticed that Apple is doing quite well. At the time of this writing the stock is over $500 a share, the company has just had another quarter of record earnings, and Apple is worth more, in market capitalization, than Microsoft and Google combined. And some analysts say its growth rate is accelerating…
What is driving such amazing financials? Primarily, it’s being driven by a device that didn’t even exist until five years ago: the iPhone. The share of revenues accounted for by iPhone sales was almost half Apple’s total, and that half was more than Microsoft’s TOTAL revenue in the same quarter. The iPhone is one of the most profitable and successful products, ever. And almost every customer who buys an iPhone is going to be “locked in” to their iPhone for a long long time. Not necessarily because the iPhone is “better” than competing mobile devices from Google, Nokia or Microsoft… but because of Apple’s secret weapon: the app store.
I’ve spent quite a bit of time research user habits and behaviors, and have some observations about why people are resistant to change and get stuck in “ruts.” A primary reason is people are either comfortable or afraid of change… or both. But another key factor is cost… both tangible and intangible. We say, “I can’t exercise more, I don’t have the time!” because we think we don’t have the currency – time – to spend doing it. “I can’t change phones, I have everything setup the way I like it” is the inverse of that argument, in that we look at the amount of time setting up and personalizing our phone as an “investment,” one that would be lost if the user switches to a different type of phone.
Directly aligned with this is the Apple app store, where both actual and perceived cost comes into play. As Apple has the biggest app store, and has made the process of buying apps as simple as possible, it’s easy for users to start loading apps that suit their lifestyle… and the more apps users add and use on the iPhone, the more users become locked into the “tender trap” of the iPhone. Since the majority of apps cost money, this very quickly results in a lot of additional costs for the new iPhone customer, which this (perhaps unconsciously) increases the value of the phone to the user.
Beyond that “sunk cost” of apps, the customer’s use of the apps and the phone over time is another “investment” – the phone becomes more “valuable” because through use, content is created – notes, photos, game achievements, to do lists, etc. This results in a perceived cost to switching, a loss of that created value (which, like the “investment” above, would have to be “respent” with a new phone). This is how the “lock in” happens: the customer personalizes the phone to reflect his or her interests and load it with their own content… and there’s no easy way to “get that stuff out.” Unless, of course, they upgrade to the next version of the iPhone… then it’s easy!
A final point: The factors referenced above were the same reason that Windows has dominated computers for years – the hard and soft cost of the applications and the data that was created in them made it hard for customers to “switch” to another OS. This need to continue to keep customers on Windows, was one of the reasons Microsoft has focused on backwards compatibility with their apps and operating systems. With a new generation of consumers and an active effort by Apple to convince the world that “switching” was a positive painless thing, that is now far less a factor. If rival phone manufacturers want to “break” the lock the iPhone is creating with customers, they would be well advised to take a page out of Apple’s “switch” campaign.