How Apple’s Ecosystem Thwarts Rival Diffusion
Despite the unpredictability of financial markets throughout 2020, Apple’s share price has soared nearly 72% year to date, making it the first ever corporation to surpass a market capitalization of two trillion dollars. Despite this incredible valuation which has grown year after year, Apple surprisingly does not have a dominant share of any of the global markets it competes in. For the past five years, only about 15% of the new smartphone market was ceded to Apple; the Macintosh line of personal computers also represents just about 11% of its respective market. This ultimately begs the question: what do investors see in Apple that make it the most valuable corporation in the history of modern commerce? In short, the answer is an airtight cluster of users affixed to its ‘ecosystem’ making diffusion of any rival technologies excruciatingly difficult. The importance of this ‘ecosystem’ is apparent in nearly any given case study, report, or news briefing surrounding Apple’s success- such as this report from the USC Economic Review, this CNBC analysis on Why People Keep Buying Apple Products, and even this comprehensive McKinsey & Company analysis on the power of technological ecosystems as a whole.
In the technology, media, and telecommunications sector, the term ecosystem has largely become a buzzword used to denote an interconnected, synergistic product line – both within and between individual users. This very ecosystem ultimately encourages consumers to stay loyal to that brand throughout time and technological evolution. In our studies of networks, however, such ecosystems can be explained as a cleverly manufactured cluster of users tied to a particular brand – thus mitigating diffusion of rival technologies. These clusters are created using principles of both direct-benefit and network effects, with the latter proving more fruitful in recent years. In essence, the direct-benefit of owning Apple products pales in comparison to the social and informational benefits created by following the crowd and sharing such an ecosystem with neighbors in the network.
It’s no secret that Apple has lagged behind its competitors in recent years when it comes to introducing hot new tech features – as competitors’ mobile phones with superior tech specs and near equal pragmatic abilities can be had at fraction of the price of the darling iPhone. Despite this, the CNBC All-America Economic Survey finds that a staggering 64% of Americans own an Apple product, with that statistic being decidedly greater among younger and more socially connected demographics. Herein lies an overarching cluster of Apple users: Americans. On a macro level, this alone could account for the failed diffusion of rival technology in the States when we recognize the high switching threshold created by the network effects of communication via exclusive features like iMessage, AirDrop, and FindMyiPhone. The direct benefits of these features aren’t particularly high, as each has alternatives with comparable pragmatic abilities. Instead, the network effects – such as the “all blue” iMessage group chats that are demonstrable of an ‘in’ group – heighten the value proposition of choosing based on what neighboring nodes are already using. Given that younger and more socially connected generations use Apple products at an even higher rate, its practical to recognize that these groups have even higher thresholds and have a social network where the edges connecting them to people with whom they interact more often are valued more than others (ie. the closer one is to a particular friend, the greater the subsequent network effects).
Furthermore, an interesting aspect of Apple’s success as derived from its ecosystem is the fact that their devices (namely mobile phones, laptop computers, smartwatches, among others) are one of the most frequently replaced high value goods in any consumers’ bundle. Industry analyst SellCell reports that the average American smartphone user upgrades his/her just about every 22 months, and, for 90.5% of current iPhone users, that means picking up a newer iPhone. This demonstrates that the opportunity to switch is frequent – as the average consumer is making the conscious effort to remain in the ecosystem every two years. Additionally of those iPhone users surveyed, 21% explicitly listed the Apple ecosystem as the sole driver for deciding to purchase another iPhone. In all, the difficulty of Apple’s competitors to penetrate the market and diffuse their technology is explained best by network effects. Even with lower prices, pragmatic equivalency, and practically zero difference in direct-benefit, competitors struggle to break into the market solely because technological ecosystems improve with market share, and the current conversion threshold favors Apple maintaining its share – at least in the US market.