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Think small

We can put all of our products on the table you’re sitting at. Those products together sell $40 billion per year. No other company can make that claim except perhaps an oil company.

We are the most focused company that I know of, or have read of, or have any knowledge of.

We say no to good ideas every day; we say no to great ideas; to keep the number of things we focus on small in number.

Tim Cook said this in February 2010 at the Goldman Sachs technology conference.

Since then the only product that has been added to the kitchen table has been the iPad. The sales level however, has increased in proportions shown in the chart below.

The revenues are shown with their contributory products and the costs of those products. The payments for costs of sales as well as R&D, SG&A and Taxes are then subtracted revealing the Net Income (in green). This is done for the second quarters of 2010, 2011 and 2012.

Since Tim Cook made the analogy, the  table holding the products has not gotten any bigger but the sales level has more than doubled while profits have nearly tripled.

In his talk he cited revenues of $40 billion (for the pervious year, 2009). In the last twelve months Apple’s revenues were $148 billion.

Tim Cook went on:

I think this is so ingrained in our company that this hubris you talk about that happens to companies that are successful and sole role in life is to get bigger, I can tell you the management team at Apple would never let that happen. That’s not what we’re about. [We have a] Small list of things to focus on.

The irony is that by thinking small, Apple became the biggest company that ever was.

The trick to thinking small is the same as that of “focusing” which means saying no, a lot. I touched on this in February 2011. Focusing is the willful rejection of the Nobel-prize winning theory of portfolios.

From the wiki link above,

Diversification eliminates non-systematic risk, but at the cost of increasing the systematic risk. Diversification forces the portfolio manager to invest in assets without analyzing their fundamentals, solely for the benefit of eliminating the portfolio’s non-systematic risk (the CAPM assumes investment in all available assets). This artificially increased demand pushes up the price of assets that, when analyzed individually, would be of little fundamental value. The result is that the whole portfolio becomes more expensive and, as a result, the probability of a positive return decreases (i.e. the risk of the portfolio increases).

This theoretical view into asset management applies in spades to product portfolio management. The idea that it’s better to spread one’s bets and cover all segments is “safer” has been thoroughly debunked by Apple.

Understanding the “fundamentals” of a product is far more important than having lots of products for the sake of diversification alone.

The fundamentals of a product are knowing its job to be done and thus its requirements which, when well executed, will position it precisely and unambiguously on an opportunity.

  • Kizedek

    “Understanding the “fundamentals” of a product is far more important than having lots of products for the sake of diversification alone.

    The fundamentals of a product are knowing its job to be done and thus its requirements which, when well executed, will position it precisely and unambiguously on an opportunity.”

    This is a great defense of Apple’s strategy. I get tired of hearing analysts or Apple detractors saying how “Apple’s income is almost entirely the iPhone, if a new Android or Windows phone suddenly captured the popular imagination, Apple would be back to normal size overnight.”

    As though Apple is lucky to have been able to move sideways into the consumer electronics space to produce a gimicky phone that betrays Apple’s roots as a computer company (“Apple Inc.” as a design house vs. “Apple Computers Inc.”)?

    As Horace states, the table of products is extremely focused and they all complement each other extremely well, making use of the ecosystem (not sure how the table will bear a car though ;) ). At the same time, it shows just enough diversification. The two operating systems re-inforce each other, and the each family of products work together seamlessly.

    How can anyone think this is a negative strategy, compared to the “table” of products at MS or Google? Where is the criticism of these two companies who have sunk inordinate amounts of cash into “diversification” without any return to show for it?

    Would it look better if the iPhone lost money like the XBox? Would it look better if Apple stuck to a phone partnership with Motorola rather than develop its own OS and revolutionary iOS products? Apparently these people think it would be better, because then Apple wouldn’t be “dependent” on the iPhone income stream.

    • Rudolf Charel

      Quote: “not sure how the table will bear a car though “.

      Imagine a car, fully integrated with all Apple has to offer, plus a few new angles no one has thought of yet. It could be an existing car designed to take advantage of this or a car designed by Apple.

      The mind boggles at the possibilities.

      • Kizedek

        I can certainly imagine it. I was just joking that the kitchen table would literally not bear a car.

    • obarthelemy

      I think most people’s worry is that Apple is very focused on the consumer market, which is more fickle than the entreprise market.

      They were the first to realize that computing was ripe to break out of the “nerd” niche, and to come out with products that innovated in ease of use and social desirability, which are arguably the 2 main criteria for the consumer market. But these 2 attributes are very volatile; the competition has caught up up on both counts: Many luxury brands have had a negative impact once everybody and their dog starting rocking the same device, and honestly Android is as easy and cute as iOS nowadays.

      Apple does have a network effect (it’s much easier to share content and apps within a full-Apple household) and lock-in (all the purchased apps and, less strongly, content, are not very easily portable to non-apple devices). That’s not as strong a sales driver as having the only phone that looks good and that you can actually use, though ^^

      And the network effect also works the other way around: Now that smartphones and tablets have gone mainstream, the unwashed masses want them, but don’t want to shell out $600+ for the latest and greatest. Apple does not have a compelling entry-level proposition (no cheap 7″ tablet, a $400 iPad 2 that’s almost twice as expensive as broadly equivalent branded Android 10″ tablets, iPhone 3 and 4 that are not compelling with equivalent entry-level Android handsets and also don’t offer choice of keyboard, screen size…for the outliers that want them), so new users of smartphones and tablets might well get a cheap Android taste to start with, and stick with it when time comes to get fancy.

      Plus there’s uncertainty on growth going ahead: Apple managed to grab a pre-existing category (MP3 players), then, broadly speaking, create 2 new ones (smartphones then tablets). MP3 players are mature and down or at most stable, smartphones are getting there, only tablets are still growing strongly for the medium term. Apple will soon need a new product to maintain growth; which one ? Or will it start retrenching to these 3 categories ?

      • jawbroken

        “a $400 iPad 2 that’s almost twice as expensive as broadly equivalent branded Android 10″ tablets”

        What Android tablets are you talking about here?

      • obarthelemy
      • jawbroken

        I guess, 8GB vs 16GB, etc but it depends on your definition of “broadly equivalent” and “almost twice” I guess.

      • obarthelemy

        well, on one side you have only 8GB vs 16GB, on the other, you have 1GB RAM, a µSD slot, more pixels (1280×800) so win some, lose some… if you’re willing to see the whole picture, it’s not just 8GB vs 16GB.

        And $400 is indeed almost twice $229.

      • steven75

        I see a $400 tablet with a 150,000+ tablet specific software ecosystem, modern OS, and great resale value vs a $229 tablet with (largely) phone apps, a year old OS, and terrible resale value.

        If you’re willing to see the whole picture.

      • obarthelemy

        I’m not sure Android is less modern than iOS. For example, widgets and alerts are much nicer on Android. the Iconia has an automatic ICS update as soon as you start it up, so no year-old OS. I’m not sure the “last season” argument is as valid as for fashion items though, but the fact that you make it an issue kinda fits.
        Android has a lot of tablet apps too. The only one I’m personally missing (well, for my mom) is Scrabble. It also seems that video/photo editing apps are better and more numerous on iOS, but that’s a fairly narrow market. For the broader, media-consumption stuff, Android is OK, too, and most of the stuff (dlna, video/music players, RSS readers…) is free.
        So i disagree totally on the “modern OS” part (plus, both are based on Unix, deep down), and also disagree mainly on the “more apps” part, except for special cases, with the counterweight that Android apps are a lot less expensive and more standard-based (dlna vs airplay, FTP/LAN Access…)
        As far as resale value is concerned.. well, first you have to intend to resell it. If a tablet is not a fashion accessory but a tool to do a job, that’s probably not likely, and not right for some time. If Android loses 50% of its value at resale, and iOS, only 25%, you’re still losing $100 in both cases. If your tablet gets lost, stolen, broken, you lose a lot more on iOS. And, finally, on the Android side, you also get a chance to change hardware brands without losing your apps+content, and mostly not losing your peripherals (microUSB stuff, µSD cards…). on Apple stuff, you’ve got to stay with Apple or you lose all your investment, and even then still might lose a bit if, as seems in the cards, they change connectors (I know, it’s only 1 extra adapter plus some clever engineering to try and make that sturdy and cool).

      • Kizedek

        “As far as resale value is concerned.. well, first you have to intend to resell it. If a tablet is not a fashion accessory but a tool to do a job, that’s probably not likely, and not for some time.”

        Hmmm, the reason an iPad user may “intend” to sell it, is usually because he wants to upgrade. The reason he is getting higher percentage of resale value is because there is a market for the iPad as a superior tablet, even second hand ones! Your quip about “losing” the same amount as on an Android tablet entirely misses the point. And, oh, I better not lose my iPad or I lose a lot more! How telling; you got that right!

        Furthermore, almost every point you make, such as getting “a chance to change hardware brands” indicates the high turnover among Android tablets, and the fickleness of their unsatisfied users.

        It’s funny how you try to frame strengths of the Apple product, and the strengths of it’s ecosystem as its weak points, and the lack of these strengths on the Android side as a “feature”. For example, people using iOS invest in apps and accessories precisely because they are confident in Apple and its products, and in its continuity, such as regular and consistent OS upgrades (unlike the confidence one could have in, say, MS with the Zune, Plays for Sure, the Kin, the Courier, Google with half its beta services, or any of the Android tablets that has been discontinued after selling a few thousand).

        The new Apple products with the new port are going to come with their own cable, and old cables will continue to work for older products, so that’s moot. Those who have invested in a A/V cable or something usually want a dedicated one per device anyway.

        Your remark about networking standards and protocols is unfounded and ignorant. Airplay is on top of the things you mentioned.

      • jawbroken

        Sure, I said “etc”. If you call a ~15% error “almost” then yes, sure, that’s fine. I mean, retail price appears to be $299 anyway so I don’t know how much sense this comparison makes. Are there other “broadly equivalent” tablets in this price range? You did mention plural.

      • obarthelemy

        yes, 15% is almost.

      • Chandra

        I don’t want to get in the middle of this debate this late but de ja vu, this reminds me of a similar debate with a Nokia fan saying similar things back in 2007 about Nokia phones compared to the iPhone. Individual statements are hard to knock down since there is a lot of wiggle room in every statement but taken together all those arguments fell flat for me. The next few years proved how wrong that Nokia fan was.

        obarthelemy, your problem was you took too big a bite with the statement “a $400 iPad 2 that’s almost twice as expensive as broadly equivalent branded Android 10″ tablets” and you are trying to chew it down. It is probably better that you water it down. You are a good debater but you are hanging on to a lot of straw-man points.

        yes, someone who wants a tablet can get one for $229 but that is no iPad 2. Remove your ‘broadly equivalent’, no one will pick an argument with you. If you want to insist that the $229 tablet is indeed broadly equivalent to an iPad, good luck on that.

      • Chris Jones

        Acer’s website tells me the MSRP is $299. So it looks like you’re comparing a discount price with Apple’s MSRP. Can you explain why this is justified and why you choose not to compare “apples to apples”, as it were?

      • obarthelemy

        I chose to compare the price at which I can buy a tablet, to the price at which I can buy another tablet. I don’t see the issue.

      • simon

        @obarthelemy

        *Facepalm*

        The irony is that even Android enthusiasts in general do not like that Acer tablet. What does it tell you that even Android fans are paying more for other similar tablets?

      • obarthelemy

        This one is recommended by my go-to tech review site (http://www.lesnumeriques.com/tablette-tactile/acer-iconia-tab-a200-p12449/test.html, was in their “top five” until 1-2 weeks ago). I got one for my parents, it’s OK.

        People are free to pay more for a more trendy brand or different features. What does it tell you that many people are choosing to pay less for noname tablets ?

      • Simon

        @obarthelemy: It tells me some people will buy anything cheap but most people will pay for quality. iPad at least has the vastly superior ecosystem. Asus and Samsung tablets don’t even have that advantage and still outselling this Acer by a big margin.

        I mean even Android buyers are staying away from this and buying more expensive Android tablets. You’re trying to tell us most of Android tablet buyers are just buying other tablets out of stupidity or this Acer tablet just isn’t that good? But if you admit that your argument falls apart because other tablets aren’t that much cheaper than iPad 2.

      • obarthelemy

        You’re trying to put derogatory words in my mouth. Please express your opinions as your own, and own up to them, especially when they are as insult-ridden as those.

        I’m saying the Acer is a good tablet, with similar specs for about half the price as an iPad 2. Again, people are free to have fashion/design/brand as a criteria, or to want a keyboard and extended battery (Asus). It’s a bit like the thinness criteria that was all the rage 2 years ago, before people realized most tablets never left home. Thinness was hyped, and it can be a legitimate criteria for people who do tote them about and need to save 5mm. It’s irrelevant in most cases though, with most tablets staying home and even for the mobile ones, 5mm not being a big deal, really.

        I’m also saying that that tablet does everything an iPad does (except, again, play Scrabble in Europe and probably photo/video touch-up, though that needs checking, I never looked into it)

        Also, Android buyers are not staying away from even lower-specs tablets, as the success of the very low-specced Kindle Fire and Nook Tablet shows.

        I see the Acer (or whatever first-tier 10-incher is the $200 deal of the month) as a baseline. I might make sense to pay more, but at least for me there has to be a reason. and “magical” isn’t it for me. Extended battery and keyboard does (Asus); AMOLED screen too (Samsung, though 7.7″ max for now), rugged (Motion Computing), active digitizer (Lenovo, Samsung). I fail to see how Apple’s ecosystem is superior, or their ergonomics, or their hardware, and nobody has been able to argue their case, so I’m unconvinced. And I think seeing my weekly schedule, new emails, and RSS feeds on my home screen, is a very nice feature.

        We’ll know in a handful of years if customers still perceive Apple as better, and if they’re willing to pay twice as much for it. On smartphones, Android is edging out the iPhone, though both are making a killing. I don’t see any reason why the same won’t happen in tablets. But again , maybe I’m wrong and Apple is totally fabulous and I’m an idiot for not seeing it. I just like to drag and drop my files, and AMOLED screens :-p

      • simon

        @obarthelemy
        “You’re trying to put derogatory words in my mouth.”
        Sorry if you feel that way but your argument hinges on the wrong premise. You posit that Apple products are overpriced by presenting the Acer as an equally good product. Yet consumers have shown that they don’t consider the Acer to be as good as other more expensive Android tablets, let alone iPad.

        “I fail to see how Apple’s ecosystem is superior, or their ergonomics, or their hardware, and nobody has been able to argue their case, so I’m unconvinced. ”

        If you can’t be convinced that Apple’s ecosystem is superior for tablets, I have to check your sanity. Have you actually seen the difference in availability of apps and accessories?

        “I’m also saying that that tablet does everything an iPad does”

        And $100 Android tablets do everything that Acer does. Why are people not buying $100 tablets?

        “Also, Android buyers are not staying away from even lower-specs tablets, as the success of the very low-specced Kindle Fire and Nook Tablet shows.”

        That’e because Kindle Fire and Nook Tablet serve a different market, the smaller 7″ niche. Can you show me any figure that any cheap 10″ tablet had any big success on the market? The Asus Transfomer is probably the biggest one and even Asus’ market share is minuscule in comparison.

      • obarthelemy

        1- I don’t have an issue with the premise but with the rhetoric; and it’s not a feeling but a reality: when you say “You’re trying to tell us most of Android tablet buyers are just buying other tablets out of stupidity ” you’re using words *I* would never use and that are your own. Own up to them.

        2- There’s more, undoubtedly. Is it better, or even relevant ? As have said about 5 times now, there’s nothing I nor anyone around me wants to do with a Tablet that can’t be done pleasantly on Android (apart from playing Scrabble in French). I’d even argue it’s easier or even possible to do stuff on an Android tablet that’s impossible or a lot harder and often more expensive on an iPad: connect it to a non-iTunes PC to swap files to/from it, put widgets so your mails, news, calendar are always there, hook up a hard drive and a big screen…

        3- I said in earlier, but I can repeat again: brand name / support. Many no-name tablets also have quality and/or feature issues (battery life, no GPS or BT…)

        You seem to imply that market share = quality. What does the about 50% bigger market share of Android compared to iOS in smartphones tell us then ? I’m trying to go back to basics, and I assume people have/need reasons to pay 50 to 100% more for Apple stuff. I’m just looking for those reasons, and for now I only found marcom.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        I think it says many more people are willing to pay a bit more for hardware from a class A systems integrator dedicated to the smaller user instead of large enterprise.

      • Kizedek

        Ha! The perception that the consumer market is more “fickle” is due to the fact that a consumer like you and I can pop out and replace our computer any old time we want to.

        Guess what? Mac users really don’t do that all that much. There is some brand loyalty there… in fact it is something that Apple and Apple users are, ironically, lampooned for.

        So what it boils down to is: Dell, or HP, or Acer, or Sony users are fickle: because they may up and get a different brand next time, or before they wanted to or expected to have to!

        And, on the contrary, it is enterprise that is increasingly becoming fickle… they realize they don’t have to get gouged by MS every year, with licenses for every little thing for every user; they realize they now have a choice, or that 10 year-old software is adequate.

        Just listen to the second half of Horace’s last podcast, about the “impossible becoming the inevitable.” The “Enterprise” really is not the customer that it is cracked up to be…

        In fact, we have MS and Google chasing the customer that they secretly covet, the consumer. And doing a poor job of it in the process. MS thinks it is making changes that will attract the consumer, but this is at the expense of the Enterprise — the changes are annoying its supposedly more valuable customer.

        At the same time, most consumers ARE workers in “the Enterprise”, and employers are becoming increasingly more flexible and accommodating toward their consumer employees.

        Consumers are becoming increasingly discerning, as companies have to change or get disrupted… by new companies that don’t have such an entrenched and inflexible IT structure. And what’s the bigger market anyway? A room full of PCs for traditional companies, or multiple devices (phone, tablet, laptop) for every man, woman and child on the planet?

        So, those who buy into the concerns you outline need to rethink.

      • obarthelemy

        The ratio hardware+OS / services+software is a lot lower for companies than for individual. So changing hardware+OS generates multiple times higher costs in software and services, for companies. This is probably not the case for consumers, I’m guessing hardware+OS is actually higher then services+apps. That’s what makes the entreprise market more sticky: changing platforms is not just about buying a new PC. Indeed though, MS OEMs are getting a fairly raw deal, there’s not much margin nor lock-in in hardware (“commoditized” said IBM).

        I’m sure consumers are discerning, I’m arguing the main criteria they are discerning about are coolness and ease of use (rather than, for example, features, performance, interoperability, reliability, robustness, availability and quality of service…). All are perfectly valid criteria, but coolness and ease of use are a less durable than others, I think.

      • Kizedek

        Oh, I totally agree that coolness is less durable. Which is why you never hear about Sony any more. Coolness is why people drool over the Surface and the Courier. Despite the fact that there literally is no substance there, and may never be.

        Coolness may well be something that initially draws some consumers to switch to Apple for the first time; but since switching from Windows to OS X is, as you pointed out, a little more involved than switching from HP to Sony, a little more research and thought is put into it, or since it is based on the recommendation of friends or family. Thus, it is usually a more considered decision, rather than strictly fickle.

        Furthermore, whatever the reason for the initial switch to Apple, do you really think Apple customers switch again because something else is perceived as more “cool”? Apple customers quickly come to find out what they like about Apple, and it isn’t the coolness — it’s everything else on your list.

        You sound like someone who has been disappointed with Windows or Android OEM after OEM, and naturally project that onto Apple as well: after all, Apple is just another computer company, and a tool is just a tool, right?

        I mean, Apple is all just about the design and coolness factor, right? And that kind of thing will naturally wear off, and some other company may hit on a cool trend or fashion. I always find this kind of thought amusing — because Apple always makes one minimalistic design for each product, without frills, and in maybe two colors if any.

        Good design never goes out of fashion — that’s why Apple is almost always perceived as “cool”. And Apple’s commitment to the other things on your list is why Apple customers were not perturbed that the iPhone 4S looked like the iPhone 4; and this was, I have to say, less about an alleged RDF than confidence about what was inside. The only ones perturbed about the lack of a fresh case design were analysts and Android and Windows fans.

        So, it sure isn’t Apple that is chasing the fickle customer! But, then, this is just something that the Android and Windows fan just can’t process.

      • obarthelemy

        Actually, I’ve been amazed by Android OEM after Android OEM. I got stuff I never could have gotten form Apple, because of prices (got a $200 Xoom1, though it might have been $230, it was a while back, and in euros ^^), a $200 Nook Color, and a $450 Galaxy Note. I’m a very happy user of all 3. More than the price though, the features are unmatched, especially the huge pleasant screen of the Note (it’s a blessing to me, and a curse to others, though). The one thing I’m waiting for is a larger tablet, at a less horrendous price than the $650 Toshiba want for their Excite 13″.

        It’s just that
        1- I’ve have yet to see something iDevices do that Android devices don’t, apart from playing Scrabble in France and photo/video touch-up that I don’t do anyway (and that might well be feasible on Android too, I just didn’t check).
        2- On the balance, I would even say that what both do, iDevices don’t do in an easier or more reliable way. At least as an iDevice ignoramus, I’m having to struggle to do simple stuff on my brother’s iPad, iPhone, or iMac. OTOH, is is amazed when I copy pictures onto his computer by drag n drop; and my neighbour just couldn’t believe is $1 Android phone could push/pull pics and videos to/from his mac via bluetooth.

        I’d be very interested in a clear demonstration of something an iDevice does, but Android doesn’t, or of something iStuff does in an amazingly better way that isn’t counterweighted by something else.

      • Kizedek

        I am really glad to hear that you are amazed by those products and that you can do everything you want to do and more, “just as easily”.

        For me, I see less in them than you do: less refinement and consistency in the OS, less commitment to user experience and service, less commitment to a viable OS upgrade path by either the manufacturer or Google, less quality and durability in the materials and build, less refined apps and less choice in apps, less innovation in the component design that gives the ability to more work with less power, less thoughtfulness about design, etc….

        And for all these things I am satisfied with the Apple product and prepared to pay more.

      • obarthelemy

        So, no examples. Okay.
        Your post kinda examplifies the issue: it’s fluff, and at times factually wrong (the durability of their all-glass phone is below par, Apple’s commitment to users stops at acknowledging when there’s a virus going around, etc, etc…). People will at some point start to realize what the reality is, and that Apple are not that strong on what they *are* selling (ease of use is on a par, now), and sidestepping important features for the sake of looking good.

      • Kizedek

        It’s hardly fluff because you can put the tablets side by side and see and feel the difference.

        For me (again), my list is very tangible — perhaps more tangible than that this or that app is easier to use. The items I listed do check my boxes.

        I hired the iPad as a general computing device and it fulfills that remarkably well. I know exactly what Apple is “selling” and promising, and through experience I have found that, if anything, they tend to under-promise and over-deliver; certainly adding software features as time goes on.

        As capnbob67 stated, it’s the aggregated weight of a lot of little things.

        I have downloaded over 1000 apps of all sorts, and I usually have about 300 on any one device at a time. I am not about to go through them one by one, comparing them with individual Android apps and debating my impression of them with yours. I’m just not interested.

      • obarthelemy

        Whatever the type of malware, it *is* telling that Apple employees got orders to *deny* it. That’s not good service, nor even respect.

        That ad ? http://www.youtube.com/watch?v=twzRX982DNQ&nofeather=True

      • capnbob67

        These are all just your opinions and personal needs. They are irrelevant as any marker to the perceptions of the market. If someone else says that iOS is more elegant and easy to use, has higher quality apps, etc. that is just their opinion too and they will wheel out their examples as to its superiority which are no less valid than your little anecdotes. It is the aggregated weight of those perceptions across the market that mean something. Customer satisfaction is the only proxy we have and it squarely supports the iOS experience.
        Your android/PC skills are your bias but they just don’t mean anything beyond your personal preference. Others are amazed by photostream putting their photos onto their Macs without ANY intervention. Your iOS/Mac ineptitude is your problem, not Apple’s.

      • obarthelemy

        well, it kinda doesn’t chime with the “ease of use” argument.

      • unhinged

        I see your point, however “ease of use” is a term that is difficult to define and highly dependent on context. Apple have always touted “ease of use” as relating to a complete novice, or someone with very low aptitude for memorising complex tasks – hence their focus on streamlining process (remember the old iMac adverts: “There is no step 3?”).
        My perception is that Android allows users of your proficiency to leverage existing behaviours and learned tasks to interact with computers as they have been developed over the last 30 years. So for competent folks comfortable with “regular computing” Android has a higher “ease of use” factor because there is less to learn (and less to unlearn).
        Where the two worlds collide is the attempt to measure “ease of use” objectively and equate it with various other qualitative measures such as “desire” and “usefulness” and “value.” There will always be disagreement because of the wide range of possibilities. To me it seems odd to disregard the practical value of entrenched behaviours and knowledge, so I don’t see any value in the “objective” approach.
        However, this attempt to measure appeal and satisfaction is driven by the urge to describe and predict the market. We have some pretty good information about the market, we’re fairly confident about the number of products sold with each type of operating system and the total values for each product. But what really matters to us as investors is: where is the money? Where will it be in a year’s time? In 5 years’ time? The number of products sold (the market share) is only relevant when (a) one can use it to derive the total profits, if not already available, and (b) it identifies a tipping point that clearly shows where the profits will be in the near future. From an investment point of view, everything else is noise.
        From a consumer point of view, the number of units sold is an instinctive proxy for the longevity (and thus value) of the system being purchased. The consumer wants to know: once I buy this, can I get maximum use from it? Do I know other people who have one? Are they satisfied? Do they know more than me, so I can get help if required? Is the price something I can afford? Is there anything about this that worries me?
        The consumer is reassured by large numbers of other people buying the same thing. The investor is reassured by large numbers of dollars being collected by the companies in which an investment is made.
        Perhaps we all can consider which point of view we are taking when reviewing and/or contributing to the discussion here?

      • obarthelemy

        Indeed, flocking to the leader when uncertain is a very valid and frequent behavior. It does require uncertainty though, and people will probably get a bit more tablet-literate in the long run. Or, because of that uncertainty, refuse to spend several hundreds of $ on a device, and get their toes wet with a $100-$200 device (which is what I did with a Nook Color, then I rushed to upgrade to a Xoom barely a few months later, when it got on sale ^^). Also, I’m thinking already having an Android phone kinda makes getting an Android tablet the default choice ? It’d be interesting to have data on what smartphone iPad owners have. I’m betting “iPhone” “others” and “none” are over-represented compared to “android”
        I’m really not seeing any inherent advantage to iOS per se. Or at least not ones that aren’t counterbalanced by equally important drawbacks. I’m not seeing killer apps either (the way Office might be one for Win RT), except in a few vertical markets (I’ll add music making to my previous photo+video editing, but those are niches). There is some value in the accessories segment, but again, every iPad owner I know either has none of those, or has just enough to provide what Android does from the start (USB slot, SD slot, HDMI link)

      • handleym

        “Oh, I totally agree that coolness is less durable. Which is why you never hear about Sony any more.”

        Sony did not lose its value because of something as nebulous as coolness. Sony lost its value because it started shipping crap. Once a company starts shipping crap its brand becomes worthless; no-one is willing to pay 30% more for the promise that that 30% is buying general quality and value (better construction, better operation, better functionality, etc — all the intangibles you can’t know until after you’ve used the device for a few weeks).

        You can see the same process happening right now with Samsung. Samsung have switched to shipping enough crap in their lineup that, once again, you cannot be sure if you;re paying 30% more for a Samsung tablet or phone that you are paying that money for intangible quality, or because you are a sucker.

        Sony’s other great problem, of course, was acquiring Hollywood and then being captured by them.
        The same thing in essence happened to MS, captured by enterprise and then unwilling to do anything that would upset them (until, of course, the bizarre suicide note that is Win 8).
        Google certainly looks like it is captured by the telcos and its advertising underpinnings; I think just not enough time has passed yet for the corrosive effects of this to become obvious.

      • Kizedek

        Right. I think “coolness” is kind of the flip side to quality in many cases. Sony went for “coolness” over their traditional commitment to quality.

        If the argument is put in terms of “coolness” and marketing and external appearance (as it was in this thread), then how much more is it true of Sony and Samsung, et al, than it is of Apple?

        It’s certainly easier to add a few colors, or add a kickstand, than it is to change your entire production methods and materials.
        Yes, “coolness” IS nebulous — the problem is that “coolness” in its worst incarnation is always applied to Apple, while it never seems to be a negative for anyone else. Whatever it is that makes Apple successful, they say, (and they suspect it is only “coolness”) it is completely duplicatable and doable by everyone else, so Apple better watch out.

        Sony was for awhile held in high regard by Apple and Steve Jobs. Then Sony lost its way by “shipping crap”. All Sony could do to look for some of the success Apple was enjoying was introduce some black and white into it’s product designs. Nothing deeper.

        You can’t argue like Obarthelemy that you can pay less for a Samsung or some other brand and get something “comparable”; that Apple is just about the brand name and coolness factor and slick marketing, when the reality is anything but that. He is so dead set on sticking Apple with the “coolness” label that he will go to any lengths to avoid admitting, let alone discussing, any qualitative differences — most of which lead to subjective differences as well. Most people are interested in the quality of their tools, particularly ones they use many hours per day and use to manipulate something valuable, such as personal data and media.

        With Apple’s commitment to good design, quality is not compromised — it goes hand in hand with design; the design is based around what can be done with quality materials (like solid blocks of aluminum for sturdiness); and design is a part of the development process, rather than a last-minute addon. Now that’s “cool”.
        But when others speak of design, it’s about externals only, which IS a slave to fashion and what’s cool at the moment. So, of course Sony messed up by shipping crap — because that is all that “good design” and “coolness” meant to Sony and they thought that was enough.

        This is the key: Treat your customers with respect. Don’t act like they are fickle and only interested in coolness and externals as an excuse to give them “choices” that amount to nothing more than different colors of crap.

      • handleym

        As I have said before:
        - coolness is other directed. It was what other companies ship. It is about how OTHER people view you and your device. It is about having a few gimmicks you can show others so that they ooh and ahh. – what Apple ships is not coolness, it is DELIGHT. Delight is SELF-DIRECTED. It is about devices that bring you joy day after day, and who cares whether they demo well, or can be shown to others.
        Samsung, right now, is a company that cares a lot about coolness, and nothing about delight. That’s why, to take a recent example, they ship a Note 10.1 with two flashy features you can show your friends — pen, and the equivalent of MacOS 1.0′s desk accessories, allowing you to open multiple apps at once — but both these features actually perform horrendously. They do the cool job fine — show them to your friends for a few minutes and they will be impressed — but they do the delight job abysmally.

      • Kizedek

        Totally agree. Good way to put it.
        [BTW, if you thought I didn't agree and thought that I misrepresented that, then I could write more]

      • Space Gorilla

        As an Apple customer since 1984 I can tell you I have zero loyalty to the brand ‘Apple’, my loyalty is to the quality of the products. There’s a difference. If Apple builds a product that doesn’t work well, isn’t easy to use, doesn’t do the job I want it to do, I won’t buy it. If you think people buy Apple products because of some imagined cool factor or because of slick marketing, you’re absolutely wrong.

      • Kizedek

        Sure, there IS a difference, and I concur that the product is far more important than the brand. However, they go hand in hand in the case of Apple: I can shorthand it as “brand loyalty” precisely because Apple consistently gets more right in each successive product than anyone else. *That* IS why I am “loyal to the brand”, not because I worship Steve jobs or something.

        If you read any of my other comments then you know I am the last person to think that people buy Apple products “because of some imagined cool factor or because of slick marketing”.

        I, too, have been a Mac user since 1984, and along the way that has included many second-hand machines or hand-me-downs that I have used as much as 11 years after their manufacture, so slick marketing and coolness factor has nothing to do with it for me — it’s pure utility and job to be done.

      • Space Gorilla

        Glad we’re on the same page. My comment wasn’t directed at you personally, just at the concept of brand loyalty in the context of luxury products, marketing, coolness, and the other excuses people put forth to explain Apple’s success.

      • Sacto_Joe

        “Apple will soon need a new product to maintain growth.” I disagree. Apple is demonstrably still ramping up its iPhone sales and its iPad sales, and its conventional computer sales are also still growing. Even Apple TV is growing. What you’ve left out is the effect of synergy. That’s why having an integrated set of products is so vitally important, in conjunction with a superb solution for customer service.

      • handleym

        The problem with this “analysis” is that it considers surface not skeleton, but skeleton is what matters.
        Specifically, as I have stated before, where Apple has strengths far beyond its competitors is in the unheralded area of frameworks (and their hardware equivalent). They have achieved this by continually
        (a) not wasting time on side issues
        (b) refining what they have.

        Consider hardware. While their competitors (phone or computer) keep changing, from one season to the next, the shape of their devices, whether they are made of plastic or magnesium or carbon fiber, how the motherboard is laid out, etc, etc Apple sticks to a single scheme that works, and continually refines it. (Including, if the rumors are to be believed, now transferring the unibody technology of MacBooks to iPhone construction.)
        Return to your statement that “Apple is in a fickle market”. True, to a point, but it’s certainly easier to sell a good product if you’re superb at manufacturing it that than if you’re incompetent at manufacturing it — look at the reviews about the build quality of the latest Samsung iPad clone (“The build quality is so bad I think it gave me cancer” as one example).

        Now consider software. Apple is in a position that few other SW vendors are — customers are willing to cut them some slack because they know, based on experience, that Apple will fix bugs in their software. Again Samsung fill each new device with a bunch of features, which are basically useless because they ship half-assed and then Samsung never bothers to fix the bugs.
        Google has burned through so much churn that it’s not at all clear the extent to which one can trust them to improve features or just abandon them; MS in the past went to the opposite extreme with never changing anything. Both of these approaches could not result in a body of code that was nicely architected and reasonably flexible. As for MS as of Windows 8 — well we all have our opinions but we shall see.

        Both of these represent the same point — Apple continually refines their underlying skeleton, and they can do so BECAUSE they’re not wasting time re-inventing the wheel. A good idea in the phone team (SW or HW) has a high chance of also being used in laptops and iMacs and minis (not least because iMacs and minis are designe dto share as much with laptops as possible).

        Perhaps another way to see this is non-brittleness.
        Back when I was writing video code targeting 30MHz CPUs, we were forced to perform every low-level trick imaginable in the code to make it fast enough to be useful. But that sort of coding — low-level assembly, instruction flow matched to a particular CPU architecture, etc — is extremely brittle. The world changes, and the code changes from high performing race-horse to painful to keep working dinosaur. And I in fact saw that happen during my professional career — code that was optimized for CPU instruction flow needed to be re-architected to be optimized to reduce memory access, as CPUs increased in speed a lot more than did memory bandwidth and latency. (Not to mention the next big change needed, to match multiple CPU cores.)

        Fortunately for most of us those days are over; but Apple, I think has exploited this better than most. They’ve resisted the urge to optimize the hell out of most of their code base, and as a result they have a language, and a code base, that are fast enough, but also flexible enough. Similarly in HW, they’re not optimizing each device separately like a traditional PC company would do — creating an iMac, say, that is completely uninformed by what the MBA folks are doing. This may leave some money on the table short tern — eg an iMac may cost say $15 more than it would if you “optimized” it. But the larger picture, again, is that things change; and all that work you put into optimizing today becomes a strait jacket tomorrow. Rather than optimizing for a one-off iMac 2012 case, optimize the process of making unibody cases appropriate for the entire product line and you’re way better off in the long run.

        Which is to say, ultimately, that I reject your premise. Sure things will change. In the near future smartwatches will become a new product category. In the slightly longer term, perhaps project glass type devices. Apple may get into car UIs (if they can find an auto manufacturer willing to do things Apple’s way, without loading their own crap on top). But that won’t change the issue of focus and fundamentals. As plenty of people like to point out, Apple weren’t first with DAPs, or smart phones, or tablets.
        The difference was in all three cases, they weren’t driven by an insane obsession to ship crap and let the buyer suffer. In all three cases, having decided that they could do a good job shipping a particular product, they then took the time to figure out an optimal product — a single optimal product — and ship that.

        Look at, for example, smartwatches. We’ve seen a few contender ship already. They all suck. Pebble and Strata are supposed to ship soon. they look like they will also suck — just not as much as Moto and Sony’s current offerings. Do you sincerely doubt that when Apple decide they can ship something better, they won’t, in fact, ship something better? Better HW, better SW, vastly better graphic design, vastly more thought put into what such a device is for and so what it should and shouldn’t offer in its UI?

      • DesDizzy

        This reply encapsulates the “proletariat” mentality. How long have BMW/Mercedez been premium brands and taken all the profits and how long have GM and Ford pandered to the masses and taken most of the losses? There is no business virtue in cheap. There is business virtue/economic logic in premium priced superior products/brand.

      • obarthelemy

        Say again ?

        http://en.wikipedia.org/wiki/Automotive_industry

        couldn’t find a nice table with profits, and figures over serveral years would be better than just one, but still, I know which company I’d like to own.

        I think people on this blog are suffering from lack of empathy. They think about what *they* want, and are all upper or middle class ?

  • http://nmuppala.wordpress.com Nalini Kumar Muppala

    The idea seems to do only products that can be personalized. When turned off they are alike, when in use each product is as unique as the user’s finger print.

    • http://www.facebook.com/profile.php?id=827769573 Jomy Muttathil

      Computers are a market for which laser sharp focus makes sense. Apple makes very focused hardware, but the software allows customers to use it in very diverse ways.

  • graphex

    Diversification mitigates gains.

  • beidaren

    “Diworsification” – Peter Lynch

    • http://nmuppala.wordpress.com Nalini Kumar Muppala

      Die-worse-if-I

  • vincent_rice

    The central, single most important business lesson to be learnt from Apple.

  • Hh

    Horace, your MBA education notwitstanding, you appear to lack a basic knowledge and/or understanding of what portfolio theory says and what it applies to. (no trolling intended)

    • r.d

      “MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, many theoretical and practical criticisms have been leveled against it. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there is growing evidence that investors are not rational and markets are not efficient.[4][5]”

      Of course finding patterns in random data is what Modern Science is all about. The fact
      that most consider economics hard science is even more disturbing.

      • Walt French

        Markowitz made a brilliant insight when he realized that risk was not additive, that you could have a portfolio full of different risks and the overall risk could be lower than a portfolio of many lower, but undiversified risks.

        That insight is tautologically true as long as you can actually define what uncertainties you face.

        The popular approach these days is to assume log-normal returns distributions for stocks over any likely time horizon, but that, is an unnecessary part of diversification. Markowitz himself has worked with the difficult issues of measuring risk differently from how he first did it about 60 years ago. (Yes, at least as of 12 months ago, his mind was still going strong.) Taleb’s complaints about mis-characterizing risks through “the Gaussian copula” (and its use in correlations) are true, but vastly overstate the challenge faced by real investors.

        I hardly know what to make out of your shot at finding patterns in random-looking data. Perhaps you didn’t read the accounts about discovering the Higgs boson. There basically is NO useful data these days that is not swimming in randomness, and Finance understands it a lot better than people who assume that Glucosamine works because a friend’s knee feels better after he started taking it. The first effort to reduce the issue of bad measures of risk was in 1973, and that approach is today used by serious investors everywhere, whether slavishly or intuitively.

        The quoted cheap shot — I can’t imagine a single experienced investment professional who would support its specific claim in a critical debate — is really a distraction to understanding Apple’s or any other firms’ successes and failures.

      • handleym

        Taleb is not complaining about correlation matrices so much as about martingales. He has (valid) technical complaints about the extent to which correlation matrices can be measured, given the timescales of relevance; also about the fact that in times of panic the independent random variable assumption breaks down, so that you cannot assume financial random variables are normal because the conditions for the central limit theorem do not hold;
        but the real issue is martingales.
        Much of modern finance is about reshaping outcome profiles so as to shift risk into the tails, sometimes to mislead others, sometimes misleading oneself. This is the infamous “picking up nickels in front of a steam-roller”. It’s fine to say that “well, people can gamble however they like” but, as we have seen on MULTIPLE occasions, this is not how it works. What actually happens is that one the 999 throws of the dice where I win and pick up the nickel, I get to earn a ton of money; and on the counterbalancing 1 in 1000 throws where I lose everything, well, the government (ie you nice taxpayers out there) step in to make sure I don’t actually have to lose everything, or anything.
        In libertarian paradise, sure, play whatever games you like with your own martingale; but in the US as we actually have it, this sort of thing, with an implicit taxpayer guarantee behind it, is unacceptable. THAT is what Taleb is primarily about.

  • WFA67

    The argument against diversification is fascinating. While my portfolio stocks have solid fundamentals, the fact that AAPL has risen to almost 50% of same is driving my advisors crazy. However, since the non-AAPL stocks do no better than track the S&P fairly closely, then what’s the point of lightening up on Apple shares? To date, AAPL has been rather a fine ‘hedge’ for me. Could I then call it a ‘diversifying’ stock?

    • beidaren

      no, it’s called Texas hedge against the market drop.

  • Yacko

    It isn’t just the product line. The number and variety of parts needed is also limited, many fitting more than one device. I would guess that Dell, HP and Lenovo have a larger variety – lower quantity supply chain that makes savings difficult. This PC Magazine article delineates the number of form factors Samsung has to ride herd on, with different screens, processors, memory, batteries etc.

    http://www.pcmag.com/article2/0,2817,2408689,00.asp

  • Greg Lomow

    One thing to note – portfolio theory applies to managing a basket of investments; it does not necessarily apply to managing a company. For instance, 40-50 years ago, corporate management advocated creating conglomerates that were made up of a diversified set of business units – for instance, one corporation might be diversified and own businesses across railroads, shipping lines, oil & gas, chemicals, real estate, finance, hotels, etc.

    This approach has fallen out of vogue because management ‘gurus’ found that a single management team could not effectively manage widely diverse businesses (and hence the splitting up of conglomerates in the 1980′s to ‘unlock their buried value’). In other words management decided to focus their efforts by ‘keeping close to the knitting’ (and other similar management buzz phrases).

    One question that is still open is “how much focus is too much focus?” One thing that is not clear yet (and may take many years to decide), is whether Apple’s hyper-product-focus is truly the best approach. It certainly seems to be serving Apple well, but we don’t have enough history or examples of this approach to draw general conclusions despite the fact that it has been working so well for Apple over the last 15 years.

    • Walt French

      The Nobel-winning proponent of diversification would be astonished at the bogus claims against diversification that Horace quoted from wikipedia.

      For one thing, he’s been married to the same woman for at least the couple of decades that I’ve bumped into him at conferences. Probably a lifer. Looks like a very non-diversified kinda guy that way.

      So sometimes diversification is genius, and for other challenges it’s idiot. The missing component to all this is in returns to scale. Well-thought-out corporate decisions are REALLY hard to come by, and that expensive resource has to be applied to the most profitable use if you want to maximize success at a tolerable risk of failure.

      Apple is not the only firm to do this. Google did not get to where it is by dicking around with futuristic goggles and cars, but by carefully thinking through how to build an incredible complex of computers, all serving the one purpose of solving a terribly hard problem — understanding what you are likely to want online. The difference is that in the last decade, Apple has kept upping its game, sniffing out new unsolved problems that are important to people, and then ALSO figuring out how to make the most out of what they can do.

      That’s optimization, or the same sort — to a first approximation — that I do when I build Markowitz-efficient portfolios. (See Wikipedia’s discussion on him if you want a better understanding than the untruths that Horace elected to quote and claim relevant). Diversification is GREAT when confronted with the unknown, and it can even work in index funds where you know almost nothing except how to diversify. But it’s still valuable as you increasingly concentrate on a couple of wonderful insights, until you can only handle one thing, or when you no longer care about the risk of total failure.

      • http://www.facebook.com/profile.php?id=1497348123 Terry Miller

        Horace could’ve been a bit more specific, but I think he means that the popular view of the theory as applied by most companies to product portfolios is debunked.

        So yeah, no Nobel laureates debunked, but still most of the business world out there, which diversifies products like crazy.

  • http://www.aaplpain.com Travis Lewis

    Nice article Horace. Love the wiki grab.

  • http://www.facebook.com/bob.arker.731 Bob Arker

    Diversification is protection against ignorance. – Warren B

    • LRLee

      Diversification is a protection against ignorance. It makes little sense for those who know what they’re doing. – Warren Buffet
      http://financialquotations.org/Warren+Buffet-financial-quotes/

      • http://twitter.com/imatias Matias

        It makes me a little sad that comments like this one get acclaimed and shared – it is a shortcut and shortcuts aren’t true very often (btw, I consider myself as being pro-Apple (I use their products every day and respect the company’s trajectory both in terms of strategy/vision and stock performance), this comment is more for the sake of financial theory references that were made)

        Diversification at the corporate level is not systematically a bad thing, even less so during the past decade and the multiple crisis we’ve witnessed.

        First, nobody knows how to properly evaluate the diversification degree of a company, what to benchmark a diversified company’s performance against, and tons of other issues linked to methods choices, statistical instruments and measurement bias. (Read “Research Roundtable Discussion” (Villalonga 2003 – Harvard Business School) for a quick summary of researchers in favor and against diversification at the corporate level).

        Then I looked at the numbers: I took a look at 8 US diversified companies’ performance from 1999 to 2011 (and included Warren Buffet’s Berkshire is in the 8) and put it against the S&P 500′s performance over the same period. Of course I’m not free of the statistical and measurement bias I mentioned above, but that is hardly the point here.

        I did not find that diversified companies traded at a discount, au contraire, and the degree of diversification and R&D spending seem to be in cause. The correlation with the diversified firms’ performance is respectively negative with the degree of diversification of the activities of the firm and positive with R&D spending as a percentage of sales.

        Other arguments in favor of corporate diversification are (amongst others) economies of scope (Panzar and Willig 1981), efficient internal capital markets (Weston 1970, Gertner, Scharfstein and Stein 1994), centralized decision-making (Williamson 1975, Stein 1997), financial benefits of combining unrelated activities (Lewellen 1971), synergies from related activies (Rumelt 1974), cash flow stability in downtrend market, etc. etc.

        When a diversified company is not *too* diversified (meaning their activities are somewhat related and/or they don’t have hundreds of different BUs), is large enough, and has a strong leader and innovation position, then diversification can be good, very good in some cases.

        Now most people would probably agree that these arguments are mostly intuitive. And yet those same people appear to be against diversification, either because they vaguely remember something about Markowitz and the investor being the one who should diversify – not the company, or (worse) because they just think they know better (better than the others individually and in aggregate (i.e. the market)).

        Diversification isn’t great for all companies or investors, but it certainly shouldn’t be dismissed automatically like it’s been the case in a lot of these comments.

        (for the curious ones: I used price-to-book as a proxy for tobin’s q (close enough in a low inflation period like 1999-2011 (2.5% average/year)), pearson r coefficient, and SIC codes (2-digits) for the degree of diversification of a company, and a few other things)

  • vladiim

    This has really solidified the benefit of Apple’s focus for me – awesome.

    The first question that pops in to mind is “when do Apple products become ‘too good’”?*

    Will they reach a performance surplus or do they HAVE to keep competing with themselves (iPhone vs iPod, iPad vs Mac)?

    *My question comes from Christensen’s argument of integrated companies succeeding in not-good-enough circumstances.

    • http://www.facebook.com/profile.php?id=1497348123 Terry Miller

      Of course they reach a performance surplus, this is why iPod mini, iPod nano, iPod shuffle, iPod touch, MacBook Air (initially a premium product, now baseline MacBook), MacBook Pro with Retina and now the upcoming iPad mini exist in the first place.

      They are products which take another Apple product and reformulate it for a lower price point, and wider appeal, while cutting features.

  • http://twitter.com/leftnotracks Scott Falkner

    I would count the rMBP and 11˝ MBA as new products added since February, 2010.

  • Walt French

    A hat tip to Gruber for surfacing a fine piece from the HBR:

    Why don’t successful people and organizations automatically become very successful? One important explanation is due to what I call “the clarity paradox,” which can be summed up in four predictable phases:
    Phase 1: When we really have clarity of purpose, it leads to success.
    Phase 2: When we have success, it leads to more options and opportunities.
    Phase 3: When we have increased options and opportunities, it leads to diffused efforts.
    Phase 4: Diffused efforts undermine the very clarity that led to our success in the first place.
    Curiously, and overstating the point in order to make it, success is a catalyst for failure.

    More at http://blogs.hbr.org/cs/2012/08/the_disciplined_pursuit_of_less.html

    Looks to me that the author exactly captures the defining issue I struggled to describe above: making sure that one’s efforts are applied where they do the most good (in the face of many uncertainties about what WILL do the most good). Absent that focus (or, unstated, that talent), diversification merely gets you a bag of crap, not a portfolio of successes.

  • ChKen

    “This theoretical view into asset management applies in spades to product portfolio management. The idea that it’s better to spread one’s bets and cover all segments is “safer” has been thoroughly debunked by Apple.
    Understanding the “fundamentals” of a product is far more important than having lots of products for the sake of diversification alone.”

    I don’t think this is interpreting MPT correctly. I understand the point Horace is making, but what Apple has done isn’t a refutation or debunking of MPT, but instead, finding an optimal mix with very few products. One doesn’t need to have dozens or hundreds of assets to reduce one’s non-systemic risk significantly; as few as 8 to 13 can do quite a good job, if you get the right ones.

    • Kizedek

      see my reply to Busy Bee

  • Paul Sauer

    Brilliant post.

  • Busy Bee

    The idea that it’s better to spread one’s bets and cover all segments is “safer” has been thoroughly debunked by Apple.

    I cannot parse this sentence. This bothers me because I really wonder what you think has been debunked. Not spreading your bets is riskier; it has more upside and more downside. Taking a large enough sample of companies that made riskier choices, you would expect some of them to have done better than the control sample that was risk-averse, and some of them to have done worse. I don’t necessarily think Apple gambled and won, rather that they used more sophisticated ways of evaluating risk that include the effect of adding to a portfolio on the profitability of the original parts of that portfolio. But even if you interpret the portfolio theory as meaning that it was a priori riskier for Apple to have a smaller product portfolio, the fact that a posteriori they did exceptionally well does not contradict that interpretation of the theory.

    • Kizedek

      I think I get what you are trying to say: that the portfolio theory is not debunked because you could say that Apple merely has a smaller portfolio to spread their risk over?

      However, it depends on how you interpret Apple’s “portfolio”:
      1) by looking at the complete table of all Apple’s products — which is in itself a very limited portfolio, relatively speaking.
      2) by looking at each type of product line one at a time (phone, tablet, all-in-one desktop, laptops, etc.)

      Going by the latter, their is no portfolio to speak of — their is one phone, one tablet, one all-in-one desktop, one pro laptop, one consumer laptop, etc. (only the iPod shows a portfolio at the moment).

    • http://www.asymco.com Horace Dediu

      I’m referring to product portfolio. The way portfolio theory has been applied in product portfolios has led to a crisis for many companies. The belief that having a portfolio of products is inherently better than having one is ingrained in many organizations. These products are positioned on “segments” of market that are arbitrarily defined and are the equivalent of “spreading one’s bets” because the positioning is not based on an understanding of the fundamentals of how purchase decisions are made.

    • http://www.facebook.com/profile.php?id=1497348123 Terry Miller

      You’re getting lost in theories. It’s very simple.

      When you diversify products, you have to diversify marketing, you have diversification on your stores, and suddenly it’s a giant mess.

      Which is easier to market, one product or a hundred product? Which has a bigger chance sticking in people’s minds?

      Diversification can be a good thing when you want to invest your money so they you don’t lose them all. No marketing, stores and platforms there.

      But products, it’s a complex machine already, so keep it simple.

  • http://www.vault45.com/ Sotek

    As Mark Cuban says, “diversification is for idiots.”

  • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

    “The idea that it’s better to spread one’s bets and cover all segments is “safer” has been thoroughly debunked by Apple. Understanding the “fundamentals” of a product is far more important than having lots of products for the sake of diversification alone.”

    I think that there are some nuances in these statements that have been missed in the heat of the comments. If anything, Apple’s recent history has proved that a company needs a product portfolio. Steve Jobs’ 2×2 matrix of desktops and laptops is a product portfolio. iPod variants constitute a product portfolio. The difference between Apple and other companies is that Apple thinks a lot about the products that need to be included in their portfolio instead of trying to sell random combinations of feature variations as a risk management tool. Their product portfolio evolves based on what they learn from the consumers.

    Analysis around the jobs to be done are one way of building a portfolio, but there is also another cause why companies cannot provide one size fits all products: humans are different and they approach the same job in different ways. A 190cm and 120 kg man with big hands and thick fingers will handle Internet browsing on an iPad in a different way than a thin man or woman. A 55 years old person, with decreased eysight, finger precision and speed will handle it differently than a restless child or teenager. A person living alone will handle it differently than one who does not.

    These are the reasons why I think that Apple needs to build a smartphone and tablet portfolio, but that does not mean that the size of the kitchen table should change.

    For fun, the best product portfolio presentation I have seen: http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce.html
    “The idea that it’s better to spread one’s bets and cover all segments is “safer” has been thoroughly debunked by Apple. Understanding the “fundamentals” of a product is far more important than having lots of products for the sake of diversification alone.”

    I think that there are some nuances in these statements that have been missed in the heat of the comments. If anything, Apple’s recent history has proved that a company needs a product portfolio. Steve Jobs’ 2×2 matrix of desktops and laptops is a product portfolio. iPod variants constitute a product portfolio. The difference between Apple and other companies is that Apple thinks a lot about the products that need to be included in their portfolio instead of trying to sell random combinations of feature variations as a risk management tool. Their product portfolio evolves based on what they learn from the consumers.

    Analysis around the jobs to be done are one way of building a portfolio, but there is also another cause why companies cannot provide one size fits all products: humans are different and they approach the same job in different ways. A 190cm and 120 kg man with big hands and thick fingers will handle Internet browsing on an iPad in a different way than a thin man or woman. A 55 years old person, with decreased eysight, finger precision and speed will handle it differently than a restless child or teenager. A person living alone will handle it differently than one who does not.

    These are the reasons why I think that Apple needs to build a smartphone and tablet portfolio, but that does not mean that the size of the kitchen table should change.

    For fun, the best product portfolio presentation I have seen: http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce.html

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  • http://www.itvale.com/ Saad Fazil

    Horace, you seem to imply that portfolio theory = product proliferation theory. Strictly speaking, what Samsung deploys is product proliferation theory and not portfolio theory. They might sound similar but are different. I think your analysis still applies regardless of the term, but I think it’s an important (even if subtle) difference to note. With product proliferation theory, one of the objectives is to raise barriers to entry for new entrants/competitors (which is hardly one of the objectives in investment portfolio strategy).

    I am no expert and would be happy to convinced otherwise.

    • Walt French

      Interesting idea. Let me guess: the notion of proliferation is that there will be e.g., 28 different Samsung products and 5 others; buyers wouldn’t devote 30 minutes to understanding the various features on each of the 33. So they’ll just choose randomly a few models to consider in 5-minute depth, giving Sammy a 28/33 chance?

      (That’s a behavioral econ issue that is marginally relevant in institutional portfolios but I see it looming large here.)

      • http://www.itvale.com/ Saad Fazil

        Not quite. The idea is not that users will choose products at random and that they will not have enough time to understand. The idea is that consumers have different choices, and companies should create products that are slightly different to cater as many needs as possible, such that a new entrant cannot claim a new market. Arguably proliferation works better for consumables (e.g. breakfast cereals) because of varied tastes and perhaps lower marginal costs to the supplier.

      • Walt French

        OK, I get it — sorta.

        Presumably the theory also prescribes a sweet spot, past which too many proliferations are undesirable. What determines that?

        And just for an example, a phone might differentiate from another by say, four body colors, radio standard (GSM vs CDMA), data speed (2G, 3G or 4G), low, medium or high CPU/GPU capability, two or three screen sizes, slide-out keyboard or not… many more variations. Already I count over 400 different combinations, and we haven’t actually touched on distinctions between stock Android, MotoBlur, BB10, TouchWiz, iOS and WP8, which might make a much larger impact on a consumer’s experience.

        It strikes me that the proliferation is meant to overwhelm the differences between manufacturers by emphasizing the differences within one manufacturer’s line. Would you agree?

      • http://www.itvale.com/ Saad Fazil

        All the points you make here make sense to me.

      • http://www.itvale.com/ Saad Fazil

        All the points you make here make sense to me.