Being Overtaken and Market Cannibalization

As I concluded Defining an Industry I again found myself once again trying to decide whether I should continue writing or stop where I was. On the one hand I was happy with the article’s length, approximately 550 words. On the other hand though, I really wanted to spend some time talking about being overtaken in a market and about market cannibalization. Ultimately proposing that adhering to industry standards in a given market will not perpetuate success, for in such a case a newcomer unbeholden to existing stigmas will eventually enter and surpass the incumbents, I felt such a topic would fit nicely in Defining an Industry. The more I thought about it though the less I agreed with my initial sentiment though, so I finished the piece, saved it for posting at a later date, and began this article.

Look back six years to January of 2007: the dominant smartphone platforms are primarily RIM and HP, and they have been for a number of years. So long, in fact, that it would not have been out of line to say that innovation in this space had nearly stagnated. Less than six months later, Apple released the iPhone; the world of smartphones would never be the same.

Now look back just three years, this time honing in on the computing industry. Netbooks are the hot topic these days. Offering extreme portability and unheard of battery life, computing power seemed like such a small price to pay for the obvious benefits these devices. Unlike in the smartphone market three years ago innovation was in full swing when the iPad launched in the beginning of April. Nevertheless, it took the portable computing industry by storm; by the end of the year, Netbooks were already a fading memory, and the tablet industry was booming with Apple in the lead.

To adopt the format of the article these ideas nearly went into, the consistent vein present in these two anecdotes is stagnation. Stagnation, and the opportunity created along with it. In the case of the smartphone market, innovation had stagnated; little was being done in the way of major disruption to the proven successful products. When Apple released the iPhone, they released a device “five years ahead of anything the competition had to offer” in the words of Steve Jobs. The portable computing industry, however, had stagnated in a different way: while innovation was certainly taking place, it was only occurring within the netbook space, a narrow segment of the industry as a whole. Apple recognized this and chose to look outside that crowded space, where it developed the iPad. As a result of these two wildly successful products, Apple grew to become the most profitable company in the world. These are both well known stories, and stories you are undoubtedly very familiar with. Consider this next example as well:

Following its release in 2004, the iPod Mini soon became the most popular electronic device on the market. Twenty months later, with sales still going strong, Apple discontinued the product. A curious decision for sure, when canceled the iPod Mini was Apple’s most popular product. A year after that, Apple released the iPod Nano.

This is the first example of market cannibalization within the Apple product line: Apple discontinued a wildly successful device in order to release a similar, new device soon after. With the launch of the iPhone 2, Apple perfected this strategy: whereas with the iPod Mini Apple had discontinued the previous version before releasing the new iteration, the first iPhone remained available long after the company released the iPhone 2. Now, rather than discontinuing the outmoded product, Apple shifted it to a lower price point, thereby capturing the high end with the latest version and a slightly lower tier with the previous version. In exchange for capturing the wider product base, Apple cannibalized the iPhone 1 market, transferring a portion of that revenue stream to the iPhone 2 while simultaneously attracting another segment of the market with the iPhone 1. Apple continues to implement this strategy today.

The release of the iPad Mini was simply a supplement to this rule. Although the proven successful strategy of using the previous iteration as the moderately priced, entry level device was working with the iPad, no amount of versioning and price reduction could transform the tablet into a different form factor, the form factor the iPad Mini now occupies.

Along with the release of the iPad Mini many prophesied cannibalization of the iPad’s market without realizing that Apple had already been doing this with other products, and without realizing the obvious differentiating factor in the two devices: the form factor. The iPad Mini allowed Apple to not only occupy the high-end tablet market with the iPad and the high-end smartphone market with the iPhone, but also the previously-unoccupied (by Apple) market for medium-sized tablets. With the versioning strategy first implemented with the iPod Mini, Apple is now uniquely positioned to saturate the market at the high-end level with quality devices of varying form factors and of varying prices.