Can Apple’s Lead Be Sustained?

An interesting report from DigiTimes notes that during the first half of 2014, there will be a shortage of fingerprint sensors -- the key differentiating feature in the iPhone 5s. This is due to the fact that LG and Samsung (NASDAQOTH: SSNLF  ) will be adopting fingerprint sensors in its upcoming high-end smartphones. This shows the danger to Apple's (NASDAQ: AAPL  ) business model from a long-term perspective.

Yes, Apple innovates. But everybody can -- and will -- copy
The sad truth is that anything that Apple does, Samsung, LG, Motorola, and so on can copy. If Apple can perpetually find ways to stay a step or more ahead of the competition, then this "innovation problem" isn't really a problem at all. However, the key question that Apple bulls/investors need to ask themselves is just how long this innovation can continue?

Just as the PC markets became largely commoditized, so will the smartphone and tablet markets. Sure, there will be a market for the high end and, if Apple does keep innovating, it can own this fairly lucrative and high-margin part of the business. However, the big fear is that Samsung, LG, and many others will, year-after-year, bring these high-end features at mid-range or low-end price-points -- indirectly hurting Apple's business.

It's all about the brand and the ecosystem
Apple's two major lines of defense as hardware becomes commoditized are the software ecosystem and the Apple "brand." It's clear that consumers love Apple and even seem to be willing to pay a premium over a comparably outfitted device. Further, the Apple "ecosystem" -- from the software to the Apple stores -- is also a real advantage, particularly in keeping the high end.

It's not inconceivable that Samsung and others will go ahead and open their own stores stateside -- Samsung is already very aggressive about doing the "store within a store" thing at Best Buy. But there's still a fundamental gap between the value of Samsung's brand and the value of Apple's that could prove to be helpful in defending sales, even against very aggressive marketing campaigns from Samsung.

Foolish bottom line
Apple is an innovator, but the problem is that the lead that can be had from being an innovator in this fast-paced environment against deep-pocketed competitors such as Samsung and LG is not sustainable. The differentiation needs to continue to come from the intangibles, as it is clear that just about every smartphone/tablet vendor can do nice industrial designs with great internals. 

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Comments from our Foolish Readers

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  • Report this Comment On January 08, 2014, at 1:57 PM, johnestromjr wrote:

    Doesn't Apple own that fingerprint scanner technology? If they ARE protected by a patent it should preclude others from "copying" unless it's FRAND technology and they have to license it to their competitors. If the latter, why wouldn't Apple make sure they had ALL of the fingerprint scanners needed to satisfy their production needs ahead of their competitors. Something is mighty strange if the patent owner doesn't make sure their needs are covered.

  • Report this Comment On January 08, 2014, at 3:09 PM, Cintos wrote:

    Certainly there is a shortage of high quality, technologically advanced fingerprint scanners. Except for Apple's patented, in-house (bought company & IP) technology, sensors have always been "swipe" technology, not press & activate. Until another firm replicates Apple's user experience, and as long as every other smartphone vendor is scouring the realm for such a product, there will be a "shortage." But, it would be FOOLish to suggest Apple will encounter a shortage....

  • Report this Comment On January 08, 2014, at 3:38 PM, zippero wrote:

    Ashraf, Samsung has already imploded and nothing (fingerprint scanner, greater screen PPI, etc.) is going to save it. Samsung just announced a 20% Q4 earnings miss, and your Samsung is invincible theme gets more ridiculous by the day. Counterpoint Research just stated that Apple now owns 2/3 of the high-end smartphone market now, up from 1/3 last year. As for Samsung, its share of the high-end market is now just 21% and falling even more going forward due to the Apple-China Mobile deal. Counterpoint's Tom Kangaroo says it looks like Samsung is getting squeezed out of the high-end completely due to the Galaxy S4 failure and the 64-bit iPhone 5S. Android phones are all headed to profitless commoditization like the Windows PC makers, and just ask yourself how innovative Dell and HP are today. Commoditization means no profits to re-invest, but Apple's hardware and software excellence give it the brand and pricing power to re-invest in the latest cutting-edge technologies and ultimately pull away further from the commoditized Dells and Samsung's of the world. It's a virtuous cycle of profits, innovation, and high quality for Apple, but it's a downward vicious cycle of red ink, no innovation, and crappier and crappier quality for the commoditized Windows PC and Android phone makers of the world.

  • Report this Comment On January 08, 2014, at 3:39 PM, zippero wrote:

    Kangaroo = Kang

  • Report this Comment On January 08, 2014, at 4:09 PM, brewer wrote:

    LOL, can Apple ever lose it's lead would be a better question.

    Who has stepped up to out innovate Apple? If you believe it's Samsung, then you have not been paying attention. At all.

    There is not a single android that can even touch last year's model in terms of usability. Android has no ecosystem at all compared with iOS. And, none of Android is usable in business, while iOS is being used in all sorts of situations.

    Your site is presently pointing to tiny parts sellers (sensor technologies) to apple for growth in investment. That's foolish to invest in such a speculative environment, particularly when Apple is such a safe investment at this point. No one who has owned it for more than a year in the past twelve has lost ANY money, not that it can hold up forever, but investors who ignore that and listen to the doom and gloom are beyond help, IMHO.

    Besides which, the real tech of motion detection now is completely owned by Apple. Not the little gyroscope makers. Apple, with a motion coprocessor built into THEIR chip. Android can't touch it, so they will keep advertising old iOS features as of they are new, and people who should know better will keep believing them.

  • Report this Comment On January 08, 2014, at 4:12 PM, brewer wrote:

    Ashraf? This is the same guy who has written obtuse doom and gloom articles about AAPL on 'seeking alpha' where they censor anyone with an informed opinion, and do not allow their writers assumptions to be challenged.

    Should have not even bothered reading.

  • Report this Comment On January 08, 2014, at 4:19 PM, Waldo wrote:

    I agree 100 percent with brewer and zippero. Ashaf Eassa may have no positions in the stocks mentioned, but it is apperant that he is a Samsung backer. The executives at Sansung had NO problem rewarding themselves financially this last quarter for putting out mediocor products. If Samsung wants to impress, come up with your own operating system instead of using Google's easily hack able system.

  • Report this Comment On January 08, 2014, at 5:57 PM, fauxscot wrote:

    It's tempting to beat up Mr. Eassa, but he is far from an Apple hater... he's a warier investor than most. I've beat him up, too, until I finally figured out where he is coming from.

    Usually, I can find 9 or 10 things to disagree with him on, but he's got a 5S and loves it, and has a decent respect for what Apple has done. And it makes me more convinced than usual when I counter things I don't agree with. All in all, for those of us who hope Apple has no upper bound, we need a few folks who think there is to keep us grounded.

    I'm waiting in the wings until 1/27 (new date for earnings release) before drawing out too many arrows in this interstitial period. Hopefully, we bulls will dance in the streets, but only time will tell. (I hope that the delay from 1/23 to 1/27 is due to apple having too many dollars to count!)

  • Report this Comment On January 08, 2014, at 6:58 PM, lrd555 wrote:

    Touch ID, A7 64 bit chip; 64 bit iOS 7. Android fragmented into a million different OSes.

    Mmmmmm.... sounds like Android's got challenges.

    Catching up means fragmenting Android even more. Developing individual solutions in order to match each advantage Apple currently has. Or wait forever for a Google solution.

    It's good to be Apple.

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