As Earnings Season Rolls On, Apple Leaves Competitors in the Dust

This article is part of our Rising Stars Portfolio series.

As earnings season rolls on, the ripple effects of Apple's (Nasdaq: AAPL  ) success are being felt everywhere. Competitors are not only directly attacking Apple's products, but also segments that seemed to be safe from Apple are having to reorient themselves to a life in which traditional rivals matter less and finding a way to hold the line against new uses of Apple products is the new normal.

Tales of woe
The story reads like a joke at first. "Logitech (Nasdaq: LOGI  ) announces negative sales of Google (Nasdaq: GOOG  ) TV product." Negative sales. That's impossible, right? But then you read further into the company's earnings call and realize that returns outpaced actual sales. Ouch.

Then there's Nintendo (OTC BB: NTDOY.PK), which had previously announced that its new 3DS was still being outsold by the legacy DS system by a 2-to-1 margin. In its recent earnings release, Nintendo announced further misery for its new system: Sales of the 3DS plummeted 80% from the previous quarter. To spur sales, Nintendo had to offer deep price concessions on a system that is still very new to the market and should be selling briskly. Simply put, this is an unprecedented move for the company. Nintendo has never had to offer such deep cuts on a major product this close to release.

Finally, we have Motorola Mobility (NYSE: MMI  ) announcing that it expects to move only 1.3 million to 1.5 million tablets this year. Remember when the company's Xoom was lauded as a potential iPad killer? Not so much anymore. In fact, analysis from popular blog Daring Fireball showed that the iPad could be outselling Android tablets by as much as 24-to-1. Further analysis of browsing habits on tablets showed that the iPad is 53 times as popular as its closest rival, the Samsung Galaxy Tab.

Hail to the disruptor
The headline from The Wall Street Journal announcing Nintendo's slumping sales sums it up best: "Nintendo: Apple's Latest Prey." There's little doubt, though, that some of these wounds are self-inflicted as well. Google TV is a mess of a product that was widely panned for its complicated nature. Consumers have yet to accept 3-D whether in video games or expensive TV sets. Android's tablet offerings have proved underwhelming and have weak developer support. Not to mention that manufacturers haven't been able to crack the iPad's aggressive entry-level pricing.

However, these tales do illustrate a simple fact: The iPhone and iPad are incredibly disruptive devices across a wide breadth of rival technologies. Thanks to their portability, a legion of dedicated developers finding new uses of the technology, and their ubiquitous nature, iDevices are expanding into new arenas and knocking shell-shocked incumbent leaders backward.

On to new frontiers
While Nintendo's 3DS is the most obvious gaming platform that Apple threatens -- it is, after all, a mobile system -- this could be a canary-in-the-coal-mine announcement.

Consider that Electronic Arts (Nasdaq: ERTS  ) has called the iPad its fastest-growing device for gaming. Gaming companies lust after Apple's huge user base -- more than 200 million iOS devices have been sold to date.

The best part of all is that the video-game industry isn't firing on all cylinders right now. Sales have been slumping for years as consumers increasingly shift away from powerful consoles and toward games on smartphones or Web platforms like Facebook. This is the exact type of situation Apple loves to disrupt.

The MP3 player market existed with a number of struggling rivals before Apple came in and dominated it. The smartphone market was already quite large before Apple introduced the iPhone and a quantum leap of smartphone usability followed its arrival. Tablets had been around for a decade before Apple finally solved the puzzle.

Hey, Microsoft, that's a target on your back
Now, video games are a badly broken market and Apple stands at the doorstep. The model of costly systems that are subsidized by $60 games is a lumbering dinosaur. A less-powered system that not only offers a wide array of games but also has tie-ins to entertainment offerings like Netflix, Hulu, and digital media has the largest market moving forward. That's exactly the kind of system Apple can offer. Would a slightly upgraded Apple TV that connects with ubiquitous Apple devices like the iPhone and iPad as a controller be difficult for Apple to implement? I don't believe so. Given time, Apple could solve the challenges that face this set-up.

So while Microsoft's (Nasdaq: MSFT  ) Xbox 360 has been -- to the company's credit -- the best at morphing video-game systems into entertainment hubs this generation, it'll have far more competition in this area when it releases its next system.

At some point, Apple will be the greatest rival to Nintendo, Sony, and Microsoft in video games. Not because it offers the most powerful system. Not even because it'll offer the most "innovative" product. In the end, it'll be because Apple best understands what consumers want and will change the way the video-game console cycle works.

Then it's up to the developers to create innovative ideas around the product. While Nintendo is lauded for its constant creativity, its next-generation system is largely a tablet that connects to a video-game system. Will that product be as innovative when hundreds of thousands of developers are creating games controlled by an iPad that show up on their TV through a refreshed Apple TV product? Continuing to stay ahead of hundreds of thousands of developers toying around with a similar concept will be daunting for Nintendo. The games won't be as in-depth as a Zelda or Mario opus, but they don't need to be, either.

Disruption, an inexact science
This isn't to say there won't always be an audience of gaming enthusiasts who prefer dedicated consoles. However, with Microsoft seeing over a billion in sales each year to Xbox Live and Kinect propping up its recent results, losing a portion of the mass market to Apple would hurt. For a company like Nintendo, that's a pure play on video gaming, and it could be a fatal blow.

We don't always know what direction technology disruption will take, but for Apple, the pieces are in place to aggressively move into the living room. Before the first real shot has been fired, this is Apple's market to lose.

If you'd like to stay updated on all things Apple related, follow me on Twitter. Or make sure to add any of the companies mentioned here to our free My Watchlist service, which provides up-to-date news and analysis on all your favorite companies:

Eric Bleeker owns shares of no companies listed above. You can follow him on Twitter to see all of his technology and market commentary. The Motley Fool owns shares of Microsoft, Apple, Google, and Logitech International. Motley Fool newsletter services have recommended buying shares of Google, Microsoft, Apple, Netflix, and Logitech International, creating a covered collar position in Microsoft, creating a bull call spread position in Apple, buying puts in Netflix, and creating a write covered call position in Logitech International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2011, at 7:06 PM, shanghaid wrote:

    We usually can see which way technology disruption can occur if you look for it. The video game story has been developing since the app store took off and Apple fell into portable gaming and then recognized it and ran with it. Giving a new capability - even if not high end, in a way one never could have had it, starts the ball rolling. Mobile phone users now always have a viable gaming system. Over time, the technology develops and crosses over with the less convenient mainstream technology and disrupts it.

    On a slower time horizon, but obvious for years, cameras on phones have been developing to eventually displace pocket sized digicams. Expect to see hits at Nikon and Canon in a couple of years or less. I cannot do things on my Canon I can do with my iPhone. Editing, posting to the web, in camera HDR, etc.

    I you look hard enough, you can see all the industries being disrupted by either the ease by which the web enables publishing or by the way the App Store enables new business models. Bloggers are knocking out media giants for readers' attention. I just did some international travel and a handy phone app which listed attractions and plotted a walking route on a map - all for $6 - prevented my buying of a $15 Frommer's or $10 Lonely Planet guide. The list goes on. The first competent app can displace an industry giant. Hopefully the "giants" recognize this and acquire the start-ups.

  • Report this Comment On July 30, 2011, at 9:10 PM, AnotherDisrupter wrote:

    It was interesting to note that this quarter Apple sold more Apple TV's (it's hobby) than Motorola sold Xoom's (it's iPad "Killer").

  • Report this Comment On July 31, 2011, at 5:49 AM, khaledmrd wrote:

    The reason of some return & slow sales of Logitech Revue box is the that Logitech changed it's Policy Just before new Google TV platform by lowering price by 60% so that is expected to put Revue box on almost halt until new price hit markets. also next Gen Google TV is compatible with current Hardware.

  • Report this Comment On July 31, 2011, at 6:04 AM, khaledmrd wrote:

    with current Google TV Logitech HD Video Chatting and new price it will be a major player

    Also Google TV 2nd Generation in September is expected to be great with many Like Android store & new Interface & & Android Gaming

    As Google did with it's 2nd Gen Androids for Tablets & Smartphones

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