ERICOPOLY Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Let Ballmer explain it to you: A $500 phone? Link to comment Share on other sites More sharing options...
VAL9000 Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Because 99% of the features and functionality offered by any smartphone can be replaced by any other smartphone. That makes the offering almost completely fungible. And that is what makes a commodity a commodity. There was a time when RIM was light-years ahead. Then AAPL was light-years ahead. Then everyone started offering basically the same thing. So to prove that this is not a commodity, can you give a realistic example of a feature that might capture 25% of my iPhone 5 usage that can't be replicated on a Galaxy S3? Link to comment Share on other sites More sharing options...
Palantir Posted March 6, 2013 Share Posted March 6, 2013 It's not about "features", it's about how the product works as a whole, everything from software to form. What does Mercedes have that Honda doesn't? Link to comment Share on other sites More sharing options...
Parsad Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? We haven't reached that conclusion. I believe Tim Cook has though...thus the cheaper iPhones they are developing. ;D All you have to do is look at PC, laptop, tablet, flat-screen television prices over time. Yes, you can come out with new technology and price it at much higher margins, but once the technology becomes universal, it begins to behave exactly like a commodity. I hope they are developing iWatches, and it's as innovative as the iPhone was, since margins on the watch should be spectacular. Cheers! Link to comment Share on other sites More sharing options...
Parsad Posted March 6, 2013 Share Posted March 6, 2013 It's not about "features", it's about how the product works as a whole, everything from software to form. What does Mercedes have that Honda doesn't? Cachet. What does Hyundai have that Mercedes doesn't? Better margins! Cheers! Link to comment Share on other sites More sharing options...
racemize Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? We haven't reached that conclusion. I believe Tim Cook has though...thus the cheaper iPhones they are developing. ;D All you have to do is look at PC, laptop, tablet, flat-screen television prices over time. Yes, you can come out with new technology and price it at much higher margins, but once the technology becomes universal, it begins to behave exactly like a commodity. I hope they are developing iWatches, and it's as innovative as the iPhone was, since margins on the watch should be spectacular. Cheers! Well, the mac laptops still sell at a premium and the iPods held their margins--however, it does not appear that Apple is pursuing the same strategy on iPhones/iPads as there has been some margin compression. Perhaps they will start holding at this level. Link to comment Share on other sites More sharing options...
Liberty Posted March 6, 2013 Share Posted March 6, 2013 What does Mercedes have that Honda doesn't? A big part of the luxury car market psychology is centered around exclusivity (same thing with expensive watches or crazy house prices in certain neighborhoods). It's easier to have that with products that have costs out of reach of the masses -- the point of paying a lot is that you're paying a lot, and other people know that. Apple has some of that going on, but it has been going down steadily since 2007, IMO. Link to comment Share on other sites More sharing options...
Ross812 Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? We haven't reached that conclusion. I believe Tim Cook has though...thus the cheaper iPhones they are developing. ;D All you have to do is look at PC, laptop, tablet, flat-screen television prices over time. Yes, you can come out with new technology and price it at much higher margins, but once the technology becomes universal, it begins to behave exactly like a commodity. I hope they are developing iWatches, and it's as innovative as the iPhone was, since margins on the watch should be spectacular. Cheers! Well, the mac laptops still sell at a premium and the iPods held their margins--however, it does not appear that Apple is pursuing the same strategy on iPhones/iPads as there has been some margin compression. Perhaps they will start holding at this level. A premium to Windows laptops. In 2004 I bought a hp laptop for $899. I was really considering the Macbook with a power PC cpu. It was $1599. I spent a long time making that decision and I remember the prices well. The other day I was in Bestbuy and saw an absolutely beautiful MacBook Air 11.6" for $899. http://www.amazon.com/Apple-MacBook-MD223LL-11-6-Inch-VERSION/dp/B005CWJ8YA/ref=sr_1_3?s=electronics&ie=UTF8&qid=1362600959&sr=1-3&keywords=Apple+MacBook+Air If margins stayed the same, Apple would need to sell 78% more MacBooks today to maintain earnings. Apple doesn't compress margins too much. The iPod nano is 3x more expensive than the sansa clip. They do the exact same thing. Apple also sells an iPod shuffle for the same price as the sansa clip. As a consumer I may pay up for the better made premium iPod shuffle but forgo the nano. Apple maintained margins but lost 66% of their revenue to a price sensitive customer. Right now there is not a ton of price competition in smartphones because it is a subsidized market. The U.S. is unique with this kind of market. Going forward Apple will have to be more price competitive. The $600 iPhone will not outsell a $300 phone in an unsubsidized market place. Call it 'revenue compression' is already happening with the iPad. It's called the iPad Mini. Link to comment Share on other sites More sharing options...
Palantir Posted March 6, 2013 Share Posted March 6, 2013 How is it revenue "compression"? By releasing a iPhone Mini, they can target the $300 market in a developing nation. To me that sounds like revenue expansion by getting the customer that wouldn't have considered a $600 iPhone 6. I don't understand what your argument about the MacBook Air has to do with this. Please explain. Even if margins compress, it's fine, if they sell a lot. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? We haven't reached that conclusion. I believe Tim Cook has though...thus the cheaper iPhones they are developing. ;D All you have to do is look at PC, laptop, tablet, flat-screen television prices over time. Yes, you can come out with new technology and price it at much higher margins, but once the technology becomes universal, it begins to behave exactly like a commodity. I hope they are developing iWatches, and it's as innovative as the iPhone was, since margins on the watch should be spectacular. Cheers! Lower prices does not mean a commoditization. Where did you make that jump? Tim Cook is considering a lower priced phone because it allows Apple to compete in now price segments in emerging markets and Europe where there is no subsidization. Not because of commoditization. This is basic market segmentation and price-demand curve (economics). Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Let Ballmer explain it to you: A $500 phone? Yeah, Ballmer laughed when the iPhone came out. Now the world is laughing at him. Link to comment Share on other sites More sharing options...
Ross812 Posted March 6, 2013 Share Posted March 6, 2013 How is it revenue "compression"? By releasing a iPhone Mini, they can target the $300 market in a developing nation. To me that sounds like revenue expansion by getting the customer that wouldn't have considered a $600 iPhone 6. I don't understand what your argument about the MacBook Air has to do with this. Please explain. Even if margins compress, it's fine, if they sell a lot. Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Because 99% of the features and functionality offered by any smartphone can be replaced by any other smartphone. That makes the offering almost completely fungible. And that is what makes a commodity a commodity. There was a time when RIM was light-years ahead. Then AAPL was light-years ahead. Then everyone started offering basically the same thing. So to prove that this is not a commodity, can you give a realistic example of a feature that might capture 25% of my iPhone 5 usage that can't be replicated on a Galaxy S3? You have just show that when you are light years ahead, you make a lot of money. Not commoditization. Android and iPhone are fairly different offerings. I'll make the problem simpler. Android phones are ever more similar (vs Android and iPhone). How come Samsung keeps gaining market share and keeping higher prices which competitors like HTC and on the verge of getting kicked out of the market? For more than 80+% of the searches, Google and Bing produce almost the same result. Why does Google dominate? Link to comment Share on other sites More sharing options...
Palantir Posted March 6, 2013 Share Posted March 6, 2013 Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. To show that there is revenue compression, you'd need evidence that iPad sales are being cannibalized to a greater extent than the addition of new customers who would have never considered an iPad. You're just looking at the raw numbers and saying that the firm is suddenly becoming less profitable. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 How is it revenue "compression"? By releasing a iPhone Mini, they can target the $300 market in a developing nation. To me that sounds like revenue expansion by getting the customer that wouldn't have considered a $600 iPhone 6. I don't understand what your argument about the MacBook Air has to do with this. Please explain. Even if margins compress, it's fine, if they sell a lot. Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. ASP of iPad was down because of the Mini. When they released the iPod nano, etc, ASPs went down. Were mp3s commoditized? iPod had fewer features than many mp3 players. What is Apple's marketshare in that market? ASPs of iPhones remained constant. If people choose more 4 or 4s over the 5 that would mean that Apple raised the price of the iPhone 5. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. To show that there is revenue compression, you'd need evidence that iPad sales are being cannibalized to a greater extent than the addition of new customers who would have never considered an iPad. You're just looking at the raw numbers and saying that the firm is suddenly becoming less profitable. Revenue compression does not mean commoditization. Apparently insurance is a commodity. How come Berkshire shows an underwriting profit in most of the years, while others show losses? How is Geico pricing a commodity higher? Link to comment Share on other sites More sharing options...
nkp007 Posted March 6, 2013 Share Posted March 6, 2013 How is it revenue "compression"? By releasing a iPhone Mini, they can target the $300 market in a developing nation. To me that sounds like revenue expansion by getting the customer that wouldn't have considered a $600 iPhone 6. I don't understand what your argument about the MacBook Air has to do with this. Please explain. Even if margins compress, it's fine, if they sell a lot. Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. BINGO! I'm not saying this commoditization will definitely happen with Apple, but if history is any indication, it's the likely outcome eventually. Link to comment Share on other sites More sharing options...
compoundinglife Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Sure, buying an iphone vs buying a competitors phone is not the same as buying corn or natural gas. In the later examples the products are identical and the only differentiator is price. Most current purchasers of apple products buy because of the difference in the product. I think that by competing with lower cost devices you are selling to people who do not care about the differentiation, they only care about price. So you reduce prices to get into the market and then competitors follow up by reducing their prices. As a result people that were willing to pay for the higher end devices you had might opt for the lower cost devices because they may meet their needs. But you are still required to lower prices if you want to sell to the people who don't care about the differentiators. Maybe getting these people into the ecosystem results in longer term revenue streams through apps or content purchases, but I am not sure those people who are purchasing based on price will really spend much money in the ecosystem. Maybe commodization is not the proper term. But basically taking a premium product and competing with more commodity like products. The main point in my response to the Mercedes comparison where I said Mercedes doesn't sell refurbished cars at Walmart is that I think that analogy is a non-starter. You can't compare automobiles and consumer electronics. Link to comment Share on other sites More sharing options...
Ross812 Posted March 6, 2013 Share Posted March 6, 2013 Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. To show that there is revenue compression, you'd need evidence that iPad sales are being cannibalized to a greater extent than the addition of new customers who would have never considered an iPad. You're just looking at the raw numbers and saying that the firm is suddenly becoming less profitable. Revenue compression does not mean commoditization. Apparently insurance is a commodity. How come Berkshire shows an underwriting profit in most of the years, while others show losses? How is Geico pricing a commodity higher? A differentiated product by definition cannot be a commodity. However the market for that product as a whole ebbs and flows. Insurance is not a commodity, but when the market hardens, insurance companies as a whole will make more money. Berkshire will make even more underwriting profit in a hard market. Smartphone unit prices will fall in the coming years. iPhones will still be priced at a premium but their average unit selling price will decrease. A declining commodity is just a way of framing the thought experiment. If in the next 10 years oil will go from $100 to $50 Exxon will have to produce twice as much oil to maintain earnings. If you are expecting Exxon to grow earnings at 10% per year, they have to produce 5.18x more oil in ten years. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. To show that there is revenue compression, you'd need evidence that iPad sales are being cannibalized to a greater extent than the addition of new customers who would have never considered an iPad. You're just looking at the raw numbers and saying that the firm is suddenly becoming less profitable. Revenue compression does not mean commoditization. Apparently insurance is a commodity. How come Berkshire shows an underwriting profit in most of the years, while others show losses? How is Geico pricing a commodity higher? A differentiated product by definition cannot be a commodity. However the market for that product as a whole ebbs and flows. Insurance is not a commodity, but when the market hardens, insurance companies as a whole will make more money. Berkshire will make even more underwriting profit in a hard market. Smartphone unit prices will fall in the coming years. iPhones will still be priced at a premium but their average unit selling price will decrease. A declining commodity is just a way of framing the thought experiment. If in the next 10 years oil will go from $100 to $50 Exxon will have to produce twice as much oil to maintain earnings. If you are expecting Exxon to grow earnings at 10% per year, they have to produce 5.18x more oil in ten years. What makes insurance not a commodity ? Do they not offer the same terms? Do you know which one has better customer service - Geico or Esurance? Link to comment Share on other sites More sharing options...
Palantir Posted March 6, 2013 Share Posted March 6, 2013 Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression How do you know this? There is no evidence that this is the case. How many bought an iPad mini over an iPad? Also, how many bought an iPad Mini over a non Apple tablet/no tablet? I don't expect a response. Link to comment Share on other sites More sharing options...
Guest valueInv Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Sure, buying an iphone vs buying a competitors phone is not the same as buying corn or natural gas. In the later examples the products are identical and the only differentiator is price. Most current purchasers of apple products buy because of the difference in the product. I think that by competing with lower cost devices you are selling to people who do not care about the differentiation, they only care about price. So you reduce prices to get into the market and then competitors follow up by reducing their prices. As a result people that were willing to pay for the higher end devices you had might opt for the lower cost devices because they may meet their needs. But you are still required to lower prices if you want to sell to the people who don't care about the differentiators. Maybe getting these people into the ecosystem results in longer term revenue streams through apps or content purchases, but I am not sure those people who are purchasing based on price will really spend much money in the ecosystem. Maybe commodization is not the proper term. But basically taking a premium product and competing with more commodity like products. The main point in my response to the Mercedes comparison where I said Mercedes doesn't sell refurbished cars at Walmart is that I think that analogy is a non-starter. You can't compare automobiles and consumer electronics. Aha, so the commoditization mental model is not the right one to apply here? After all, do we get new models of potatoes every year? Link to comment Share on other sites More sharing options...
Palantir Posted March 6, 2013 Share Posted March 6, 2013 The main point in my response to the Mercedes comparison where I said Mercedes doesn't sell refurbished cars at Walmart is that I think that analogy is a non-starter. You can't compare automobiles and consumer electronics. Used car dealers? Link to comment Share on other sites More sharing options...
DukeCrow Posted March 6, 2013 Share Posted March 6, 2013 Average price of iPad down to $467 from $500: http://qz.com/47265/apple-ipad-mini-is-cannibalizing-sales-of-the-larger-ipad/ revenue compression Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression I just made up 'revenue compression', its just a way to think about the necessity to grow unit sales when unit price decreases to maintain profit level. When apple hits the ceiling in the U.S. after reaching the remaining 55% of not-smartphone users, this gets to be a huge problem going forward. To show that there is revenue compression, you'd need evidence that iPad sales are being cannibalized to a greater extent than the addition of new customers who would have never considered an iPad. You're just looking at the raw numbers and saying that the firm is suddenly becoming less profitable. Revenue compression does not mean commoditization. Apparently insurance is a commodity. How come Berkshire shows an underwriting profit in most of the years, while others show losses? How is Geico pricing a commodity higher? A differentiated product by definition cannot be a commodity. However the market for that product as a whole ebbs and flows. Insurance is not a commodity, but when the market hardens, insurance companies as a whole will make more money. Berkshire will make even more underwriting profit in a hard market. Smartphone unit prices will fall in the coming years. iPhones will still be priced at a premium but their average unit selling price will decrease. A declining commodity is just a way of framing the thought experiment. If in the next 10 years oil will go from $100 to $50 Exxon will have to produce twice as much oil to maintain earnings. If you are expecting Exxon to grow earnings at 10% per year, they have to produce 5.18x more oil in ten years. What makes insurance not a commodity ? Do they not offer the same terms? Do you know which one has better customer service - Geico or Esurance? I'd have to agree with you. Insurance is, by and large, a commodity. As capacity (i.e., surplus) grows and shrinks, prices rise and fall in response. Yes, there are some specialized areas of insurance that aren't commoditized, but those are the exception and not the rule. Link to comment Share on other sites More sharing options...
Ross812 Posted March 6, 2013 Share Posted March 6, 2013 Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here? Sure, buying an iphone vs buying a competitors phone is not the same as buying corn or natural gas. In the later examples the products are identical and the only differentiator is price. Most current purchasers of apple products buy because of the difference in the product. I think that by competing with lower cost devices you are selling to people who do not care about the differentiation, they only care about price. So you reduce prices to get into the market and then competitors follow up by reducing their prices. As a result people that were willing to pay for the higher end devices you had might opt for the lower cost devices because they may meet their needs. But you are still required to lower prices if you want to sell to the people who don't care about the differentiators. Maybe getting these people into the ecosystem results in longer term revenue streams through apps or content purchases, but I am not sure those people who are purchasing based on price will really spend much money in the ecosystem. Maybe commodization is not the proper term. But basically taking a premium product and competing with more commodity like products. The main point in my response to the Mercedes comparison where I said Mercedes doesn't sell refurbished cars at Walmart is that I think that analogy is a non-starter. You can't compare automobiles and consumer electronics. Aha, so the commoditization mental model is not the right one to apply here? After all, do we get new models of potatoes every year? Where is the forest? http://farm1.static.flickr.com/163/437848724_60778caa8c.jpg The terms 'commodity' and 'revenue compression' are just a way of forming a mental model of the smartphone market. I am trying to take a long term view on it and not get excited about this bell or that whistle on a new phone. Individuals choose an new iPhone 4s over a 5 - revenue compression Individuals choose iPhone Mini over 4s or 5 - revenue compression How do you know this? There is no evidence that this is the case. How many bought an iPad mini over an iPad? Also, how many bought an iPad Mini over a non Apple tablet/no tablet? I don't expect a response. Go spend some time in a cell phone store or talk to a Bestbuy salesperson. Many customers come in to buy an 'iPhone'. 4, 4s, or 5, the customer buys the one that is cheapest that does what they expect. A 'mini' or 'lite' just gives them another cheaper choice. The Link to comment Share on other sites More sharing options...
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