On the Syfy tv show Alphas one of the characters is able to see something once and learn it perfectly. Thus, she can learn a martial art, or how to fix a car, or how to speak a language just by imitation. This ability is rightly considered a superpower. Yet, in economic models it’s assumed that everyone has this ability.
Imitation, however, is difficult even when knowledge is freely available. In Launching I give the example of The French Laundry Cookbook which promises that with “exact recipes” and “simple methods” that “you can now re-create at home the very experience the Wine Spectator described as ‘as close to dining perfection as it gets.’” Yet despite exact recipes and simple methods we don’t see imitations of the restaurant twice named the best in the world popping up in Muncie, Indiana (trust me on that one).
Similarly, in Apple v. Samsung the jury found that Samsung copied Apple and indeed they copied Apple well enough to survive but nowhere near well enough to eliminate Apple’s monopoly power as Eli Dourado points out:
According to a recent article at Fortune, Apple sells 8.8% of mobile phones, but it has 73% of profits in the market. Samsung sells 23.5% of phones and earns 26% of profits. Everyone else is barely breaking even or losing money.
This does not look like a market in which Apple’s competitors are successfully copying it. It looks like a market in which Apple’s competitors are trying to copy Apple, and failing.
The point of patents is to incentivize innovation through a grant of monopoly. But what Apple’s success, pre-verdict, clearly shows is that in many markets, mobile computing among them, it’s a lot harder to copy innovations than you think. Apple’s real innovation is putting designers in charge and building a corporate culture in which everything is subordinated to making elegant products that people want to use. I’d like to see Samsung try to copy that, but I think the difficulty of doing so gives Apple all the monopoly it needs.
Who could have ever thought of large buttons and a full touchscreen and (trumpets sound) dual touch screen! Except me and everyone else 10 years prior.
LOL, too true. The other thing that’s not included in the snippet Alex posts is that if one looks at sales, Android phones way outsell the iPhone. Because there are multiple hardware vendors, none of them can build in the same profit margins as Apple does with the iPhone. Android phones are also cheaper for the user to purchase (they pretty much give them away; I payed ONE penny for my latest Droid Incredible from HTC. I didn’t need 4G and this model was being closed out. I couldn’t get the same deal on an iPhone).
Apple’s high net margins reflect its focus on more than just hardware. Indeed, it spends just 2% of revenues on R&D compared to 6% to 10%+ for most of its competitors. It leverages the R&D of its suppliers, pouncing on hardware innovations that are just behind the bleeding edge, (such as with capacitive touch screens or its low power ARM technology). It locks up these suppliers either via a buyout or with enormous orders and capital investment. Thanks to its carefully integrated software, a well-controlled developer environment and retail support network, it can then command a 20% to 30% sales price premium over its competitors, virtually eliminating price discounting via “fair trade” agreements with its distributors. On top of all of these advantages, Apple also exacts tribute in the after-sales market — apps, music, books, accessories and, soon, ads — for a continuing revenue stream after making a sale. It’s really the hardware-focused myopia of its competitors that limit their margins and overall profits, not their inability to copy Apple.
As for Nokia and RIM, their losses stem from “GM syndrome,” high fixed overhead and a rapidly shrinking market share.
I got my iPhone 3GS for 99¢ from AT&T. Pretty much the same deal.
Buttons. Hmm.
Android has a four-buttoness built into it’s sole. That’s a good thing because apple-one-buttoness sucks. Samsung makes Android machines, but they have a special genious and can do things no no ordinary idiot would have thought of.
First they remove one of the the four buttons. Gah!
Then they have three buttons. So they make two of them invisible.
The final button has a specific purpose, with a traidtional symbol that indicates it’s meaning. That symbol is not a retangle with rounded corners.
So they make the final button unmarked, but shape it into a rectangle with rounded corners.
So we have a one button missing, two invisible and obfuscated. And even so, it’s much easier to use the buttons on the Galaxy than on the iPhone.
It take it back. Android does not have four-buttonness built into it’s sole. In fact, it doesn’t wear shoes.
Do you also take back the “genious” and the “retangle”?
That’s a funny market where 65% of the units sold are sold at a loss. Wonder what economics has to say about such a situation.
I’m not sure that is an accurate interpretation. RIM and Nokia are not profitable companies for other reasons. Android phone makers are profitable but margins are not as high.
While I am sure there is some overcapacity in the mobile phone industry, it seems more likely that most manufacturers sell phones above their marginal cost. For the ones that lose money, they do so because they simply don’t sell enough phones to cover all of their other expenses.
But that isn’t a viable model in the long run, is it? At some point they either have to cut those fixed costs or leave the market, I assume.
Of course they will need to leave the market and this is what is forcing RIM to reevaluate things. Android phone makers don’t have to pay for software as Google provides it for free (for the time being pending patent litigation issues). Nokia are banking on the Win operating system to get them back in the game as their own software was not successful. Long term the question is whether the generic hardware makers can continue to produce Android phones/tablets or will Apple succeed in quashing the market on IP grounds.
It’s quite possible that Nokia’s “own” software would have been unsuccessful. But it’s only actual failure in the real world was that Nokia decided to pull it.
Complementary goods.
Phones are to networks as shavers are to blades.
Apple switched the two, and google is trying to switch it back.
“That’s a funny market where 65% of the units sold are sold at a loss. Wonder what economics has to say about such a situation.”
Isn’t that a typical outcome for simple microeconomics models?
The marginal producer sells at a price that equals marginal cost.
That means his unit contribution margin is zero.
And he has a loss equal to his fixed costs.
How many producers are in this siutation depends on the market strucure of a particular industry.
But the simple microeconomic model easily allows for a majority of producers with (on average) zero profit.
Innovating is actually easy. Getting products to market is hard:
http://online.wsj.com/article/SB10001424052702304388004577531002591315494.html
See also Xerox, Kodak, AT&T.
Innovation is especially easy when you patent what you have rightfully stolen.
Now we can start taking bids on the time to the antitrust suit.
Maybe Nokia was hampered by spending so much money insisting the N-Gage was awesome and that stupid Americans were stupid for not loving it, as it was clearly the awesomest product ever.
“On the Syfy tv show Alphas one of the characters is able to see something once and learn it perfectly. ”
Speaking of copying, that is a copy of Marvel’s Taskmaster, one of the coolest villains around.
Imitation is one of the skills included in the vast arsenal of psychopaths.
An ex-prosecutor, now a criminal defense lawyer, wrote a piece in “The Atlantic” entitled “The Startling Accuracy of Referring to Politicians as ‘Psychopaths’” (The Peak of Sanity – 5).
The ancient observations that power corrupts probably need more attention in this “The Anthropocene Epoch”, a.k.a. the “Sixth Mass Extinction.”
Imagine if an Irish rock band who specialized in arpeggiated 3 note delay and 2 note base lines burst onto the scene named U3. That wouldn’t fly. I think the use of lawsuits shows Apple doesn’t have as much of a brand as we think.
Apple has an installed and loyal user base that Nokia or Samsung won’t have in the foreseeable future. It (Apple) does a few things well that other manufacturers don’t:
1) Apple sells an easy-to-use and, more importantly, maintenance-free OS and core set of apps that are consistent across devices.
2) Apple leads the market, or at least designs products that come off as market-leading. One example: marketing iPods in a variety of colors set off a tech industry trend such that even now – decades after Apple brought that kind of choice to tech products, I can purchase a Samsung laptop in blue, black, or red – superficial as that may be.
3) Apple integrates and syncs its devices in a way that no other company is able to do, mostly because it controls the OS of its products and because, as per above, iTunes on an iPad works like iTunes on a Macbook works like iTunes on an iPhone. Calendars and contact lists across multiple devices are in sync. Safari bookmarks are in sync. Movies, photos, podcasts, books, downloaded apps, are in sync, and all among multiple devices. This is why while half of all US households own at least one Apple product, “…homes that own at least on(e) Apple product, own an average of three. Overall, the average household has has 1.6 Apple devices, with almost one-quarter planning to buy at least one more in the next year.”
And you get to pay a large premium for the hardware and are subject to Apple’s software changes that might adversely impact other programs that you rely on. Regarding the second point, ask any photographer who has had to deal with screwball decisions by Apple on implementing color management when their printing applications now are going haywire because a new OS version. Don’t have the same problem with Windows OS. With respect to synching my Android phone with Windows, it’s very easy as HTC provides the free software to do that. I could also opt to use Google’s gmail and calendar which would accomplish the same thing. Bottom line is that I save about $1000 on hardware costs by adopting this solution.
“Don’t have the same problem with Windows OS.”
Thanks for the hearty laugh!
“Bottom line is that I save about $1000 on hardware costs by adopting this solution.”
But you probably spend several to many hours each year wrestling with your apps and hardware. Time is money. I save a lot more than $1000 a year on frustration avoidance. Then again, I only run studio grade music composition applications and have an entire orchestra at my fingertips with not as much as a hiccup over a decade of OS X upgrades; I can’t speak to color management issues.
Apple’s real innovation is putting designers in charge and building a corporate culture in which everything is subordinated to making elegant products that people want to use.
As someone in the software industry, I have no idea how they stay in business. In my experience, the vast majority of developers are obsessed with making things as complex and un-intuitive as possible, in a perverse effort to prove how smart they are.
Developers != Designers
I know, that’s my point.
Apple is to tech as Thomas Kincaid is to art.
I’m not sure which way to read that.
Focus more on the blow and less on the purported “art”. That’s where that comment was going.
One implication is that there isn’t that much risk in outsourcing to China. At least not from Chinese copycats.
In what sense does Apple exercise “monopoly power?” I recognize that patents grant them a monopoly over particular designs and technologies, but I don’t think that they have “monopoly power” in the sense that they are the only seller in a market. If Apple raised prices, I assume that they would lose market share to Android. Apple does not have a differentiated product in the iPhone that has no adequate substitute in the market. Rather they are reaping disproportionate profits by selling price-competitive products with a better supply chain.
I would be curious to know what Apple’s market share is in the $200+ phone market.
“Yet despite exact recipes and simple methods we don’t see imitations of the restaurant twice named the best in the world popping up in Muncie, Indiana (trust me on that one).”
Market niche! GO!
I don’t believe Muncie Indiana does not have a MacDonalds any more.
The last time I drove through Muncie, sometime in the 60s, Muncie had a couple of MacDonalds.
And MacDonalds is certainly the best restaurant in the world based on the metrics economists hold dear for success!
I had a date in muncie once. I wanted to take him to a nice restaurant. He suggested the olive garden. I’m not sure there’s a critical mass to support a french laundry clone in muncie. But there could be. I enjoyed the French Laundry cookbook,at least the parts I read. I learned why to (briefly) cook veggies in salted water. It opens up the cell walls, releasing flavor.
Decisions are made on the margin. Imintation may not be easy, but it woud easier if patents were not so broadly issued.
Would that be bad for consumers, if the point is to expedite getting innovation to consumers?
The justification in R&D is that if you can’t profit people won’t undertake innovation.
From a consequentialist view, you can’t really claim that imitating designs reduces innovation distribution or that Apple isn’t profitable as they have basically all the profits.
Imitation, however, is difficult even when knowledge is freely available. In Launching I give the example of The French Laundry Cookbook which promises that with “exact recipes” and “simple methods” that “you can now re-create at home the very experience the Wine Spectator described as ‘as close to dining perfection as it gets.’”
How much of the French Laundry is about recipes and cooking technique and how much is about access to the highest quality ingredients? 80-20, 70-30. etc?
Samsung can’t imitate or replicate the iCult.
“Samsung can’t imitate or replicate the iCult.”
It’s really not that simple anymore. Historically, Apple products were niche products and the users did seem somewhat cultish. However, the iPod followed by the iPhone, followed by the iPad were all pretty much best in category products. They’ve hit home run after home run and are reaping the rewards.
That being said, I don’t think very highly of ‘design’ patents.
How much of it is the government protecting status symbols?
Without iTunes the iPod would be merely neato. I don’t know about the iPhone, I have a 5yo Palm. Tablets were around. How much actual innovation did they perform? They design and do good at integrating (iTunes, app store, etc.). Someone hurry up and file a defensive patent so we can keep ‘white’ for the people!
People who view their tech products as a feature-delivery mechanism constantly marvel at how Apple could possibly be successful. People who view their tech products as experiences would not buy from anyone but Apple.
^ This. There seems to be a never ending stream of people who think the best tech product is the one with the biggest pile of features.
Wow. I don’t think I’ve ever agreed with a comment more.
What drugs were you using when you said that?
Electronic devices as an experience….well, maybe the ones your woman uses.
“Yet, in economic models it’s assumed that everyone has this ability.” Yes, comparative advantage as a rationale for free trade depends on it.
Hey! As a graduate of Ball State University, layoff Muncie! Oh and I really enjoyed the rest of this as well.
Food and wine are the proof that labor and special knowledge gained only from experience are required for true quality output.
Economist argue the way to deliver great food cheaply is by using GMO seeds with lots of machines and fertilizers laid out by computer software and then processed in vast factory complexes and then prepared and delivered by precision mass production. But the logic of economists, the absolute best food to eat is the Big Mac Combo Supersized for $7.99.
For some reason, Tyler never reviews the ultimate in ethnic food, American ethnic food that is obviously so fabulous it can be found everywhere but North Korea and the South Pole: MacDonalds.
Food starts with farming, and economists make terrible farmers, because nature refuses to perform according to the demands of economists.
And pretty much the same thing applies to Apple. Steve Jobs is like a great chef, who exploited his very experienced food buyer who knew where to find the absolute best farmers, the farmers who really really know farming and really really invest in farming and farm workers. Steve Jobs could imagine a meal, and Tim Cook knew where to get the absolute best ingredients, and where to find the chefs and cooks to slice and dice and saute meal after meal according to Steve Jobs recipe.
Samsung has the farms and chefs and cooks who can match Foxconn who Apple outsources all the kitchen work to.
Unfortunately, no one in the US is skilled and experienced enough and worked to build up the farm community needed to match Samsung or Foxconn, so Apple can’t build the dinners it creates in the USA. And that means Apple’s only value is the kind of creativity that Steve Jobs was so great at, because he spent so much time learning about the world and art and craft and human being. Apple succeeds only if Steve Jobs taught the life experience method of product design well to create a culture that lives on, and Apple is able to find the food prep services with the great farmers supplying the best ingredients outside the USA.
Unless someone makes it a matter of national policy that the USA can do the things Korea and China ensured Samsung and Foxconn can do….Since the 80s, the policy expressed here has been “let the Asian government subsidize the industries supplying goods Americans want and we will get cheap goods subsidized by Korea and China.” The thinking in the 80s was, the Asian nations would go bankrupt while we had saved lots of money getting cheap subsidized imports.
Well this rant is pretty much a rant and not particularly thoughtful. But at the very least if you are going to criticize a company, you should at least go to the trouble of spelling their name correctly.
It’s McDonalds.
To be completely pedantic: McDonald’s Corporation
To be fair, I think law might have been contributing to Samsing’s failure to copy, even before this case.
Given that Samsung has a larger smartphone market share than Apple, I don’t think you can say they’ve been unsuccessful with their products (whether or not they’re unsuccessful in *copying* Apple, as such). Clearly, at the consumer level, they’re winning (which is why Apple had to go after them). And their unlocked price point is comparable to Apple’s.
Apple’s higher profits are a result of their business model, not their product. When splitting money with cell carriers, they’ve probably historically been able to keep a bigger share, and in terms of underlying costs, I’ve heard they lock in low supplier prices years in advance.
I have it on good authority that imitation is extremely easy for movies and books: you just upload the torrent.
*facepalm*
Apple is to tech as regular people preferring rock and roll is to elitists preferring classical music.
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