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Reverting to the mean

Quarterly financial data is often a lagging indicator of strategic success. RIM’s vital signs were exceptionally strong up until early 2011. Consider the following graph showing RIM’s device growth.

Using language commonly heard among analysts, one would say that the company was “reverting to the mean” and growing nearly in-line with the market. In other words, exceptional growth was over but continuing growth was likely. The company was returning to something “normal.”

However, keen observers of the market would have been hard pressed to find any reason for justifying that performance. Seen through a disruptive lens, it was evident as early as 2008 that RIM’s strategy was not sustainable. The company had a very weak smartphone product relative to emergent iOS and Android ecosystems. And yet, the company continued to prosper for nearly three years, through 2008, 2009 and 2010. Those shorting the stock during this period would have been unrewarded.

But then in early 2011 it fell off a cliff.

There was no reversion to the mean but an acceleration toward oblivion. The share price dropped to book value or below liquidation.

This pattern was very similar for Nokia. It too looked fairly strong on paper until early 2011 when it found it necessary to fling itself off a platform.

This pattern of disproportionate decline is a mirror image of the disproportionate ascent of Apple.

It might sound like a spectacular story; an anomaly, a once-in-a-lifetime reversal of fortunes. However, the moral of this story is that this is not an exceptional phenomenon. Disruption happens. It happens quickly and perhaps most quickly in this industry, and looking at trailing indicators like revenues and profits is of no help. I’ve only witnessed sharp expansions and sharp declines. I’ve never witnessed steady state, quiescent markets in technology. The history of platforms is always virtuous cycles followed by vicious declines. Whatever amplifies success seems to also amplify failure.

Rather than assuming that businesses are in a state of average growth or in some anomalous state above or below that average (from which they’ll recover) we need to think of them being either growing or failing. Going straight up or straight down.

If this is the case, how can anyone expect to manage this? Orthodox management theory assumes continuity but the world seems discontinuous.

In a discontinuous framework it’s important to look for unfair, unsustainable advantages that can be capitalized. Once exploited the advantage often disappears. The victim assumes it becomes sustainable. The survivor looks for another advantage. Resting is not an option and the mean is only an illusion.

  • http://www.isophist.com/ Emilio Orione

    A competitive technological advantage is due to be closed by competitors.
    It’s like tactic advantage in war. There are plenty of examples.
    For instance in wwii, when allies used mobile radars in airplanes it seemed that the air war at night was won, the planes with radar had a substantial tactical advantage over enemies that no one could defeat them, and in fact for some time they had a clear advantage over enemy.
    But when the advantage is to high enemy tries at its best to close it and soon german planes become equipped with radar trace technology that guided their planes exactly to the point were allies plane was the advantage ceased.
    A technological advantage it’s like a tactical advantage, competitors fight to close it and in due time they close it. How much time?
    Usually at most the time to build a new product, one to two years they close the gap.
    You have a better display, processor, memory and in case of rim mail network, that is loved by consumers, competitors will find a way to make competitive products in little time.
    You have to move on to the next technology to keep advantage, but soon it becomes a game with no winners because the products become good enough and the new technological advantage is no longer seen as a value by consumers.

    What wins war then? Strategy.
    Simply put strategic advantage is no easily closed by enemies in war or competitors in tech.
    What is a strategic advantage in technology? Brand, services and ecosystems in various ways that requires to much space to be explained.

    • Sacto_Joe

      I agree with you. Of course, while a tactic can be countered, a strategy can be matched. I believe we are seeing this starting to happen with Microsoft, where they are emulating Apple, clear down to the stores. Even the “branding” is being matched, where Microsoft is making products under its own name and Google is becoming “Googerola”. Still, Apple has some differentiators left. For example, who else makes machined aluminum enclosures for its whole product line? Indeed, who else even has the potential to do that kind of machining on such a massive scale?

      But even Apple’s strategic advantage pales in comparison to their core strength: Innovation. Other companies will innovate upon occasion. Apple alone innovates continuously. That’s what makes them The Shark: They never stop swimming.

      • Walt French

        @Sacto_Joe wrote, ”…a strategy can be matched. I believe we are seeing this starting to happen with Microsoft, where they are emulating Apple, clear down to the stores.

        Apple alone innovates continuously. That’s what makes them The Shark: They never stop swimming.”

        Methinks it’s more than innovation. Google self-driving cars are very innovative; their glasses are innovative, but neither seem destined to be introduced under Google’s aegis and turned into profitable products—valued by consumers enough to reflect all the work that went into them.

        Apple’s past decade has been marked by finding consumer needs that their technology could address. In many cases, such as iOS, it required a huge, multi-year, secret effort; others, such as iCloud, were not so much innovative as they were carefully tuned to users’ Jobs To Do (e.g., easily sharing family photos).

        Analysts rightly comment on the short list of Apple SKUs, but in truth, Apple has a huge set of services bundled into their products, and messaging — whether to remind casual users to upgrade or how fast’n’easy it is to share photos with friends — is becoming a challenge, given the huge number of the Jobs To Be Done that they’re addressing.

      • xynta_man

        Yup, it’s more than innovation per se, but also the ability to make its fruits usable and market them. One of Apple’s advantages is the ability to innovate “where it matters” and not spend billions of dollars on generic R&D a-la Microsoft.

        For example: high-resolutions screens were available years before the “Retina Display” in the iPhone 4, yet they weren’t really used in consumer electronics, since it didn’t make sense: it was too expensive since no one had the balls to purchase them at scale, no existing software could take advantage of it, etc.

        By having an idea where they should go and doing an integrated product (i.e. having and end-to-end control), Apple has been able to push the industry forward time and time again, while most observers at the time only thought that those were gimmicks and stunts.

      • xynta_man

        Yup, it’s more than innovation per se, but also the ability to make its fruits usable and market them. One of Apple’s advantages is the ability to innovate “where it matters” and not spend billions of dollars on generic R&D a-la Microsoft.

        For example: high-resolutions screens were available years before the “Retina Display” in the iPhone 4, yet they weren’t really used in consumer electronics, since it didn’t make sense: it was too expensive since no one had the balls to purchase them at scale, no existing software could take advantage of it, etc.

        By having an idea where they should go and doing an integrated product (i.e. having and end-to-end control), Apple has been able to push the industry forward time and time again, while most observers at the time only thought that those were gimmicks and stunts.

      • Mark

        >> . . . while a tactic can be countered, a strategy can be matched.

        I’d argue that emulating Apple down to the stores is at the level of tactics, not strategy. For something to qualify as strategy, you need more than just a hope to get more sales. Strategy can’t be reduced to a goal. If a general was asked what was his strategy for winning, he can’t say “my strategy is winning”. If he did that would be recognized as a rhetorical deflection. Likewise, a business leader can’t say his strategy is to increase sales. That is the goal. And you can’t adopt another company’s strategy as your own, and certainly not if you don’t know what it is, which I’d argue that few business leaders can even understand.

      • http://www.isophist.com/ Emilio Orione

        I don’t believe Microsoft is really matching apple’s strategy, they are mimicking it.
        Samsumg copied apple’s tactic with profit, but they have to show that they can maintain success now that blatant copy is no longer an option.
        Microsoft from its position could not copy tactic, but their strategy has always been windows everywhere and I don’t think they abandoned it.
        They covered it with an apple like facade, shops, brand, vertical integration of hw and sw, but under the cover you always have a windows everywhere thinking that kills the user experience.
        W8 is not fully optimized for touch, think only to how you switch from portrait and landscape mode, you have to configure the graphic resolution using mouse designed dialog boxes and a lot of “clicks” and W8 is clearly not well suited for mouse, it is a bridge between two worlds that has a chance to make everyone unhappy.
        Furthermore the core values of the two companies are greatly different and values are the fundamental of the strategic view.
        Position of windows phone’s in the market, position of surface etc… are all signal of a confuse strategy covered by a marketing tactic that wants to position microsoft as an apple alternative.

  • cellojoe

    Doesn’t the discontinuous picture resolve the innovators dilemma? The innovator only experiences the dilemma if he convinces himself that it is safe to ride the wave of an already established technology. If you realize that you live in a disruptive world, you cannot be tempted to laziness by illusory safety.

  • Genidma

    This is why Building a disruptive innovation cycle and disrupting your revenue streams y yourself is so important. Lest, someone else ends up doing it and taking a chunk out of your market share.

    • cellojoe

      This is why I think it is vital for Apple to eventually appropriate some of the best minds from the companies they themselves disrupt. One of Apple’s primary advantages is that the company had a near-death experience of epic
      proportions. They’ve experienced both edges of the disruptive sword,and lived to tell the tale. They need to continue to infuse that sense of desperation into the company’s mindset To avoid complacency.

      • vincent_rice

        This is why I like to see the occasional complete f*ck up by Apple – the Maps debacle for instance. It’s not terminal and it’s not in fact that much of a big deal but it was mis-handled and there will be red faces all around. It will remind certain multi-millionaires within the organisation that Apple is judged differently to every other company and half-baked won’t cut it.

        I fully expect to see Apple Maps becoming an outstanding market-leading service within 18 -24 months.

      • eric in austin

        +10

      • cellojoe

        so true. The problem is the perfect size: large enough to keep Apple alert, small enough to not do any measurable harm.

      • xynta_man

        While I agree with your idea, I personally think that the whole map situation is mostly a fuck up of presentation and setting expectations: the new maps were “sold” as the “next big thing” and best in the market, and by some metrics they could very well be, but Apple should’ve went with the Siri route and labeled it “Beta” for the first year or so, saying that user feedback is needed to make maps even better.

      • Mark

        I could shoot a lot of holes in this theory, but suffice it to say that there was no smooth path to make the transition from Google maps to anything else. We like to think there always is, but there isn’t. If the blogosphere wasn’t hysterically shrieking on how bad maps were most people would have thought they were pretty good except for public transportation.

      • xynta_man

        You could be right, but it’s one thing when Apple releases something “the worlds best, most powerful and beautiful” and it has problems and a whole another problem when something “in Beta” has problems.

        Siri had problems, when in was released, both in availability and in recognition quality, and yes some blogs tried to raise a stink about it, but most of not all of those attacks were deflected by a simple “Beta” sign, as in “hey it’s in Beta – that’s OK – it’ll be better”.

        Sure, even having a Beta sign on Maps wouldn’t stop some people from complaining, but than you could also say “hey it’s in Beta – that’s OK – it’ll be better, just like Siri”, yet you can’t. Sure, the new Maps will get better, but mitigating the problems with a Beta sign isn’t an option now.

      • Mark

        Agree except for the “half-baked” maps part. This idea is not original to me (JL Gassee made the point) but in my opinion their sin was not managing expectations. As an IT veteran, that alone has easily been a sufficient reason for many a failed project. But let’s not confuse that with a technical failure. The maps are working roughly in line with each vendor’s purpose for having them. I think many are going to find out that Google’s map work the way they do because of their business goals. How that ever became a definition of how maps should function is only a testament that, as in politics, there are no unbiased information sources. ;-)

  • SamLowry

    RIM could and should have seen the writing on the wall in 2008 from the iPhone, but I think one factor missing in this analys is Android. While the iPhone ate away from RIM’s former customers, the Android explosion in 2011 and BYOD accellerated RIM’s decline, even though Android is much less attractive for corporate customers than iOS.

    • Dave

      “RIM could and should have seen the writing on the wall in 2008 from the iPhon”

      Well, ever heard of corporate antibodies?

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  • http://twitter.com/WalterMilliken Walter Milliken

    I find myself wondering if disruptions are typically associated with shifts in the identity of the customer, like happened with smartphones. For early cellphones, the carrier was the customer. RIM made the enterprise their customer, while Apple made the end-user the customer. Though it doesn’t seem like this happened so much in the desktop PC market; maybe it’s happening a bit now with the BYOD movement.

    • http://www.isophist.com/ Emilio Orione

      Disruption usually increase the market. It is not a change in customers it’s an increase you are describing.
      First only carriers, than both carriers and enterprise, finally carriers, enterprise and end users.
      The dynamic of adoption between the three groups vary and influence each others, but nevertheless all groups are targeted by apple.
      The apple disruption was guided by end users but also the agreement with at&t has had its importance. Carriers has been targeted even before end users.
      After the initial success, apple has started to target enterprise, with business stores and the creation of marketing forces with specific corporate expertise.

      • http://twitter.com/WalterMilliken Walter Milliken

        I’m not sure if Apple saw Cingular (now AT&T) as a customer, or more likely as a gatekeeper controlling access to their potential customers. The telcos (including VZ, eventually) gave in to Apple’s terms, not it to theirs. Apple’s philosophy historically seems to be that their customer is the end-user, not intermediate layers like enterprise or carriers.

        They are now treating enterprise more as customers than in the past, perhaps, but I see it as being secondary. Even in enterprise support, I think Apple has been coming at it from the customer side, not the IT side — making their customers’ devices more useful at work, but not necessarily doing a lot to help the IT management side, certainly not to the degree MS cares about that, as far as I can tell.

      • http://twitter.com/WalterMilliken Walter Milliken

        I’m not sure if Apple saw Cingular (now AT&T) as a customer, or more likely as a gatekeeper controlling access to their potential customers. The telcos (including VZ, eventually) gave in to Apple’s terms, not it to theirs. Apple’s philosophy historically seems to be that their customer is the end-user, not intermediate layers like enterprise or carriers.

        They are now treating enterprise more as customers than in the past, perhaps, but I see it as being secondary. Even in enterprise support, I think Apple has been coming at it from the customer side, not the IT side — making their customers’ devices more useful at work, but not necessarily doing a lot to help the IT management side, certainly not to the degree MS cares about that, as far as I can tell.

      • http://www.isophist.com/ Emilio Orione

        Well, carriers are treated differently from other phone makers certainly, but neverthless they are apple’s customers. At&t got an esclusive dealing, verizon at the end got a custom phone for its network, they all buy in volumes with a different price.
        Apple cut deals with them from a dominating position for its appeal to end users but there is a deal and even if carriers try to favor the other platforms, in their hearts they cherish Apple’s ROP and the money they make with iPhone.

      • http://twitter.com/WalterMilliken Walter Milliken

        I don’t think Cingular/AT&T’s exclusive deal was so much Apple pandering to a carrier customer as a recognition on Apple’s part that it was going to be very hard to get any *other* US carrier to agree to their terms at the time. VZ certainly wouldn’t have.

        There was also the GSM/CDMA technical issue; only two national US carriers matched the world GSM standard: AT&T and T-Mobile. And T-Mobile had oddball frequency bands. Giving AT&T an exclusive wasn’t much of a concession on Apple’s part, I think. The duration of the deal was rather long, though, and may have hurt Apple’s US sales a bit in the later period.

        However, the only other US carrier that really mattered was VZ, and they certainly weren’t going to bow to Apple until Hell froze over. Which it eventually did, but not much before the AT&T exclusive ran out.

        I’m not saying Apple doesn’t listen to carriers — I think the “virtual SIM” idea got scrapped because of the carrier response. But my read is that the carriers are strictly secondary customers from Apple’s point of view, and given only enough concessions to keep the channel open. I.e., they listen when *all* the carriers react in a certain way (such as in the SIM case). Otherwise the carriers are left with the choice of shooting themselves in the gut and dropping the iPhone, or going where Apple is pushing them.

        That’s not to say that the carriers don’t like the business the iPhone brings them, but I suspect they’d rather have ABA — Anyone But Apple — making the killer phone. Though Samsung seems to be copying Apple’s branding strategy and limiting carrier differences in Galaxy models now, so maybe the genie’s out of the bottle.

      • http://www.isophist.com/ Emilio Orione

        Yep, Samsung is going versus a more limited copying of apple products tactic and a more attention to copy apple’s strategy.
        You know, strategy can’t be copyrighted might have a relation to this change in politics, but perhaps is also a smarter move.
        If two things are matched Samsung could go toward an increasing success:
        1) Samsung own design choices must met customer espectations and judging from the new Samsung not copied from apple icons, they are still a little too far from good design but who knows
        2) Samsung must take the whole apple packet of values and strategies, not choose only the easier or the best strategies, they must try to achieve the apple’s attention to details and to user experience and I don’t believe will ever happen, the dna of the two companies is too different.
        Microsoft too is trying to mimic some of apple’s strategies and I doubt even they will succeed, because apple’s strategy is an all or nothing thing and is not easily achieved.
        Apple’s way of being in business is a good thing for industry and I hope more and more companies will try the apple’s way, but it will be easier for new companies and it will require time, not just a new hand of paint over the surface.

  • Chris Jones

    (With Horace’s help) it’s easy to see how the fortunes of smart phone players go straight up or down, and don’t revert to the mean. But what about Microsoft and their Window/Office business? It seems that for decades they have been the mean, experiencing neither rapid growth nor decline. Can we compare them to the smart phone business. Is it simply a longer time frame or is it a fundamentally different business model?

    • Kizedek

      The difference is they have enjoyed a monopoly. You can compare the Windows/Office business to other monopolies, that’s for sure! How about public transport or something? No real innovation, just increasing stagnation, increasing bureaucracy and increasingly disgruntled customers.

      • dbkahn

        What about Google in the advertising business? It seems that they’ve reached “steady state” growth of 25-30% for the last few years, but no one has been able to disrupt them. The platform is not so much a monopoly as a massive network-effect play (Craigslist is another business with very strong network effects). People advertise on Google, because that is where intent data lives. Challengers for this space seem most likely to dislodge Google by slicing off niche verticals and offering a better value for advertisers (in display/branded ads, mobile, etc.) and experience for users.

      • Kizedek

        Yes, they are another one that seems fine for the moment. But we may yet see Google’s ad revenue fall off a cliff as it gets disrupted.

        In the mobile devices space, they apparently get more income from iOS devices than from Android devices! And it is iOS income that keeps their growth/revenue steady, not the growth in the user base of their own platform (however you define Android).

        With first Siri, and now Apple Maps in iOS 6, that may all be about to change. As Horace’s charts show, RIMM looked fine according to usual metrics well into 2011, but the underlying story was that a disaster had already taken place.

      • http://www.isophist.com/ Emilio Orione

        I agree but I will be more general.
        Search can be disrupted by new search methods, like siri (voice) or augmented reality.
        Google is investing in augmented reality and voice because google see itself correctly as being in the search field, not search using a desktop computer field, but while on computers google is the standard for users, in new ways of search users won’t even know what search engine will be used, so there is room for an entrant to disrupt.
        The key difference could be privacy, like apple is doing in iOS. Apple offers different search engines than google, so perhaps less state of the art search in maps, siri or others, but more privacy, that’s the deal users are giving value buying apple.
        Google could fight a new augmented reality search engine with its own augmented reality tool, but fighting a “protected privacy” search engine would hurt google’s cash cow and going with privacy, disrupting itself, would be a tough decision for google, perhaps too tough.

      • http://twitter.com/WalterMilliken Walter Milliken

        I think Google is more threatened with disruption from Amazon than Apple via Siri and Maps. I see Amazon as potentially stealing all the really profitable searches (the “I want to buy something” searches). Facebook may or may not be an issue for them as well. I think Amazon also qualifies as a potential disruptor here, since people don’t think of it as a search competitor.

        I’m not sure how Google feels about Amazon, though — certainly they’ve reacted to the Kindle Fire, but that may only be because they have the usual worry about being locked out of a potentially popular platform for ads.

    • http://twitter.com/Truthwayseeker John R. Josephson

      It appears that Apple is on a trajectory to achieve a near monopoly of post-PC personal-computing, similar to that recently enjoyed by Microsoft and it’s hardware partners, except that Apple will control both hardware and OS. This position might well persist as a “steady state” business for a decade or more.

    • JLB

      Microsoft disrupted IBM

  • ronin

    This might be your most profound post ever. And it is exactly why I didn’t short RIM when the iPhone launched. It was clear the fall would come but equally clear it would not be immediate.

    Not only does this post it lay waste to much of management theory it also makes (more) laughable technical stock analysis.

  • http://www.facebook.com/profile.php?id=753430146 Bobby Eubank

    Can you comment on Microsoft? It seems to not face massive and abrupt declines

    • xynta_man

      The network effect of the Windows/Office ecosystems is too strong for Microsoft to achieve a fast fail, even if they release three Vista’s in a row, yet IMHO in the long term they are pretty much fucked, if they won’t get their act together and get some successes in new markets.

      It’s been how many years since Microsoft entered the web game? They still bleed billions of dollars (dollars from their Windows/Office cash cows) on their online endeavors, without any real gain from it — not only are their online division losing a massive amount of money, but it fails to show any signs of real growth in the market.

      The game console space is a joke — not only does it not make any significant money for Microsoft (even after all those buried dollars which were spent to enter the market), but it can’t transfer its current relative “successes” going forward. Going from one console generation to another is “by design” always a total gamble with unpredictable outcome, at least if consoles keep their current business model.

      The whole media game (plays-for-sure, ZUNE, etc) was and is a total disaster in terms of any real result. The mobile side of things is also going slow.

      So what does that leave for Microsoft? If they won’t show any success in mobile with WP8, than their ecosystem will just lose its strength over time, with more and more people using mobile and web (platform-agnostic) tools and services, eventually killing off their relevance and business.

  • Dave

    Horace, you will never write an article better than this one.

    I feel your pain, but thank you for this one.

  • Dave

    Horace, you will never write an article better than this one.

    I feel your pain, but thank you for this one.

  • Walt French

    Another fine post, and yet another reminder of how misuse of standard phrases help confuse us.

    (The last such I noted was “the law of large numbers,” which posited some magical mechanism for Apple being forced to shrink.

    Reversion to the mean is a great concept when you have a process involving both structural understanding (“RIM is a great company and will be so tomorrow”) and randomness (technology is changing in unexpected ways and new competitors are showing up). Oh, and a stable, well-defined mean. Wikipedia’s article hits the highlights.

    In the smartphone business, perhaps the long-term mean success is zero. (Certainly true if you include the many non-players that might like to be in the business, e.g., Amazon or Facebook, as well as the has-beens.) I.e., you have to out-compete—to earn your success every day.

  • JaneDoe12

    Horace, this is a very good article and it’s so well written.

  • Nigel

    Horace, would you consider the marketshare performance of the Mac over almost 3 decades to be an exception to this?

  • Joyanta

    Hi,

    This is an interesting article.

    But it also interesting to note how consumers buy mobile phones at least in Europe (in particular in London, where I am from) based on pay as you go (you pay for the hand set up front which is by no means cheap) or subscription (you are in 18/24 months+ contract and get the phone for free. To get out of the contract you have pay a penalty). This “lock up” means you are locked to a device for significant amount of time; but it may well be the case the pace of innovation cycle in the smartphone is less than 2 years. This may imply the there is a lag between what phone you have right now and what the latest phone available in the market. “Normal consumers” can’t immediately adopt a better phone so easily as they can do for search engines for example, as hard cash is involved.

    So in the London underground, in 2008, 2009 so many people had rim phones in London (sure you always have a portion having Apple phones), but then suddenly by end of 2009 people suddenly have android phones and by 2010, even I had mine.

    I am ignoring many things like it takes time to for people to accept new phones and so they might as well carry on with the on the old ones, also how effective the marking was for the phone by various stake holders in the industry….all i am saying is switching from one device to another is hard and costs money and thus there may be a lag and thus in revenues too.

  • Joyanta

    Hi,

    This is an interesting article.

    But it also interesting to note how consumers buy mobile phones at least in Europe (in particular in London, where I am from) based on pay as you go (you pay for the hand set up front which is by no means cheap) or subscription (you are in 18/24 months+ contract and get the phone for free. To get out of the contract you have pay a penalty). This “lock up” means you are locked to a device for significant amount of time; but it may well be the case the pace of innovation cycle in the smartphone is less than 2 years. This may imply the there is a lag between what phone you have right now and what the latest phone available in the market. “Normal consumers” can’t immediately adopt a better phone so easily as they can do for search engines for example, as hard cash is involved.

    So in the London underground, in 2008, 2009 so many people had rim phones in London (sure you always have a portion having Apple phones), but then suddenly by end of 2009 people suddenly have android phones and by 2010, even I had mine.

    I am ignoring many things like it takes time to for people to accept new phones and so they might as well carry on with the on the old ones, also how effective the marking was for the phone by various stake holders in the industry….all i am saying is switching from one device to another is hard and costs money and thus there may be a lag and thus in revenues too.

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