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Is Apple Inc. About to Hurt Its Ecosystem?

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Apple (NASDAQ: AAPL  ) is considering bringing iTunes to Google's (NASDAQ: GOOGL  ) mobile operating system, Android, according to Billboard. Such a move would be a departure from Apple's current business model, and could erode a key argument for longtime shareholders, making it easier than ever for Apple's customers to defect to products made by rival firms, including Samsung (NASDAQOTH: SSNLF  ) .

On the surface Billboard's report doesn't much make sense, but it's worth exploring why it would be such a tremendous mistake.

Why David Einhorn is comfortable holding Apple for the long haul
Hedge fund manager David Einhorn has been an outspoken Apple bull, and it's been one of his fund's largest holdings since 2010. He has argued repeatedly that Apple's ecosystem insulates its business from competition, protecting it from the market forces that brought down its predecessors. He summed up this rationale in an interview with CNBC last November:

People look at Apple and ask, "Is it the next Motorola or BlackBerry?" People paid fancy multiples for those stocks and got crushed and they don't want to go through that again. But I think Apple's a little bit different from those companies, because the ecosystem component [drives] recurring sale[s]. If you have an iPhone, you're more likely to buy the next iPhone. They have over a 90 percent renewal rate on that basis, which is something those other companies never had.

As Einhorn notes, Apple customers are notoriously loyal, not just because they like the products but also because the company makes it so difficult to leave. A customer who's heavily invested in Apple's ecosystem (via purchased movies, apps, books, and music) is one who's likely to stick around. Switching to a rival device is possible, but would mean giving up access to most, if not all, digital purchases.

Samsung is jealous
Apple's chief rival, Samsung, is obviously envious of this ecosystem. It has gone out of its way to cultivate its own customer loyalty, and has achieved some modest success, but still lags far behind Apple.

Samsung doesn't control the Android operating system, making it easy for owners of its Galaxy phones to defect to handsets manufactured by Google's other hardware partners. This means that, while Samsung's dominance may seem overwhelming today, it could eventually fall by the wayside, replaced by some other manufacturer peddling devices with the exact same operating system.

In an attempt to counteract this disturbing possibility, Samsung has gone out of its way to push alternatives to Google's services -- its own app store, access to exclusive services like Milk Music, and Galaxy-only wearable devices. Samsung's changes to Android were becoming so substantial that Google had to pressure the Korean handset maker to stop. Samsung ultimately caved to Google's demands.

Making it easy to ditch the iPhone?
If Apple were to bring iTunes to Google's mobile operating system it would undo much of the lock-in effects of its ecosystem, undermining the very force Samsung is working so hard to replicate.

If longtime Apple customers knew that they could easily access their digital purchases on an Android device, they would have little reason to stick with Apple's hardware. Sure, some things wouldn't carry over (apps) and many customers would likely stay if for nothing more than familiarity with Apple's products and user interface. But if iPhone owners decided that they preferred Samsung's newest Galaxy, it would be easier than ever for them to make the switch.

iTunes music is in decline
For that reason, I think it's unlikely that Billboard's report is accurate. Unlike the decision to bring iTunes to Windows, which ultimately facilitated the iPod's success, Apple has nothing to gain by porting iTunes to Google's platform; to do so would only put Apple's legendary customer loyalty at risk.

That said, it's worth noting the context of Billboard's report -- it comes on the heels of a decline in iTunes music business, a disturbing trend that I've highlighted before. Even though total iTunes revenue is growing, paid music purchases are slipping industrywide -- down 5.7% last year -- fueled, at least partially, by the growing popularity of music streaming services.

That itself is a threat to Apple's long-term success -- if people aren't buying music, it's difficult to lock them into an ecosystem in the first place. I doubt Apple is going to help accelerate the process by porting iTunes to Android.

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Read/Post Comments (8) | Recommend This Article (0)

Comments from our Foolish Readers

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 April 02, 2014, at 6:50 PM, vinceds wrote:

    I personally think it's a smart move as it will broaden their market.

    Its true there's a risk of defection but I think most Apple customers are very loyal and will stay loyal as long as the products and service satisfy them.

  • Report this Comment On April 02, 2014, at 7:23 PM, annaarron wrote:

    Apple’s gross margins have been declining since fiscal year 2012, and will continue to decline as the company moves into emerging markets.

  • Report this Comment On April 02, 2014, at 9:41 PM, tzchoo wrote:

    My own experience is that I used to have at 30 over friends and co-worker that I know of, using iphone up till iphone 4s. Now at least 80% of them had switched to Android. I am still using iphone5, but if Apple is not coming up with bigger screen, I am afraid my next phone won't be an iphone. If Apple opens up the itunes to Android, it will make it that much easier for me to switch. I have been holding on to Apple primary reason is all the available apps that I have and been using. As far as design and quality of phones, it is undeniable that the competitions are catching up fast and some has surpassed iphone, with cheaper price. One such is the HTC one.

    It is a pity that Apple who revolutionized the smart phone industry had so far been blinded with their false belief on one hand operation and refuse to come up with bigger screen size much earlier. I guess the term "scientific myopia" does apply.

  • Report this Comment On April 02, 2014, at 10:34 PM, skippywonder wrote:

    @tzchoo What country do you and your friends live in? I ask because your comment is full of grammatical and syntax errors so it sounds like you may be describing a place other than the US. Apple does not have 80% defection rate in the US. In fact its retention rate is enviably high (80%+).

    Apple's concerns in developing markets is different from its concerns in its developed markets. And I think is not "undeniable" that the iPhone 5s is surpassed by cheaper phones. There are phones in the same league, but these are not the more affordable phones.

  • Report this Comment On April 02, 2014, at 10:56 PM, desertracer1 wrote:

    These article is written by a self absorbed idiot and these poster's are so educated that they are plain idiots. What a bunch of wimps.

  • Report this Comment On April 02, 2014, at 10:57 PM, desertracer1 wrote:

    This....and yes I am stupid.

  • Report this Comment On April 02, 2014, at 11:01 PM, tzchoo wrote:

    Hi Skippywonder, I am from Malaysia. Apologize for my grammatical errors. I understand that different countries with different income levels have different impacts on iphone adoption rates. That's why I mentioned that my comments were based on my own experience with my circle of friends.

    I agree with you on the popularity of iphone 5s as compared to 5c. Again, my own take on this is that first, the 5c has not been priced low enough to compete with Android devices and secondly, most of the people using existing iphones would probably go for 5s anyway.

    I believe and cautiously optimistic that bigger screen will play a key factor to generate more iphone sales for the coming quarters. BTW, I am long on Apple option.

  • Report this Comment On April 03, 2014, at 9:34 PM, skippywonder wrote:

    @tzchoo, I was just curious. And I'm sure your English is much better than my Malay!

    I think Apple priced the 5c with room to cut the price in coming years. I believed that when they first announced the price. So now it is no surprise that they are coming out with a cheaper model. I think that model will eventually replace the iPhone 4 they are selling in India. So I think they do have a strategy to compete in some markets on price but they don't want to do anything that will cut into the margins they have on their top of the line model.

    It may have been a mistake to wait for a larger screen, but since the most recent quarter saw yet another record for iPhones sold, there are obviously a lot of people who want an iPhone regardless of the screen size.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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