Re: Apple vs. Netflix

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By a1wes
July 20, 2006

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[This is in response to the July 19 Post of the Day]

After getting ripped apart here and seeing it posted as the post of the day, I feel the need to partially defend myself on a few fronts.

I don't think that my views differ immensely from Spartans, at least the final segment regarding Apple's foray into downloadable movies. It is not currently a practical move.

However, although Spartan is very pleased with Apple and touts it as an unassailable company, I think that he is perhaps blinded, as many are, by what are immediate or short-term successes for the company rather than actual long-term abilities.

When he came back (Apple bought his NeXT Computer in 1996), Apple had lost all it's luster, and had a 2% market share of computers.


This is where Apple's strategy is - to grow their computer business from their current 2.5% market share - and it appears to be working already

Well, it does not appear as if Jobs has actually done much else besides fall into the iPod/iTunes gift. In about ten years he has raised the company's computer market share a mere 0.5%, even though it has one of the most recognizable brand names in the business?

It is possible that the new Boot Camp software will allow Apple to increase its market share by making it's hardware completely compatible with Windows. However, this is not a stated fact that will occur; it is an estimation, guess, or assumption. If anything, this reminds me of when AOL decided to allow much of their special content to be accessible to the public Internet. What drove AOL was a) its placement as a neophyte's introduction to getting on the Internet, and b) the content that was only accessible to its users. Once Instant Messenger and other features went to the web, making AOL no different from the other cheaper ISP's, nobody wanted AOL anymore.

Once the Macintosh ceases to be a Macintosh and becomes, for all practical purposes, a Dell or Gateway or HP, it suddenly will lose much of its protection. Although the Mac platform was not going to grab a dominant market share, it was at least relatively stable with loyal customers. As Apple begins to slowly move away from its own operating system, it will also have to fight on a much more competitive landscape. I know their computers will still have the latest Apple OS as well, but the person buying the Mac because of BootCamp will be buying it for its PC capabilities, not its 'other' OS. It is possible that Apple will grab a larger market share, but this is certainly not a guarantee.

I am currently glancing at reports from the Apple earnings announcement, and the gains made over the last quarter seem to be middling at best. There appears to have been an increase in computer sales of 12%, which is certainly encouraging, but hardly a massive growth, especially when the already-saturated iPod market grew 32%.

In his first run with the company, they went from being founded by Jobs and Woz to creating more new millionaires in a single day than any company in history during their IPO in 1980.

Making millionaires during an IPO is something to be proud of. Having the stock basically remain at roughly the same levels for the next 20 years (one split in '88 I believe) is not exactly long term success. Certainly the stock has done very well over its entire life span, but if you look at its price just before the iPod drove Apple back to life, the stock was sitting at an approximately $10 valuation, with 2 splits (second coming in 2000). I cannot seem to find the IPO valuation at this moment, but I believe it was in the $20 range. So for 20 years of patience, an investor would be rewarded with a 100% gain. Alright. Better than a 100% loss, but not exactly what an investor would be drooling over.

Of course, Apple's stock has risen phenomenally in the past four or five years, due entirely to the iPod. Yes, as Spartan claims, the iPod/iTunes marriage is better than any other integrated music product out there currently. But neither iTunes nor the iPod does anything that another product out there cannot do. The aspect that makes them better than the competition, in the end, is how they look.

I do not think, as Spartan suggests, that anyone will knock iPod off of their throne, but I also do not see how the current huge growth could continue. Especially when the iPod is only better because of its looks. I firmly believe that the obsession with the iPod is due largely to its current status as a "cool" item, and that the tide could and likely will turn away significantly just as the "cool" cell-phone gadgets go through continuously.

Of course, perhaps Apple will continue to just be at the leading edge of the personal digital companion and be able to hold that market share. But until they have either a) better technology, b) are significantly ahead of the rest of the market, or c) cheaper/better priced for what one gets I have to remain in the camp along with the other doubters. Not that I am down on Apple, just not ready to anoint them all-powerful.

As for my comment regarding Microsoft's desire to put out a bug-less product, perhaps I did not express myself accurately and precisely. Of course all of Microsoft's products have bugs in them. What I meant to convey is, first and foremost, a desire to reduce the number of bugs even at the immediate expense of the company's fortune. Secondly, I have never come across someone who bought a Microsoft product that was a complete dud, as have a number of my acquaintances who went out and got a new iPod model the week it was released only to have the screen go black within a week or the batter to stop recharging after two weeks. Microsoft has its own problems, and I do not have a firm belief that that company is going to return to its stock-dominant ways anytime soon, so I don't want to be labeled a Microsoft lover. I have had my trials with them. My point was that Apple will release a product before it is ready primarily to look good in the short term and hope that things work out in the long term. As a potential investor, that scares me. Apple seems to be treading on shaky ground.

Ok, let me try to bring this back to Netflix. The debate got started when an article was linked discussing Apple's eventual foray into movie downloads, which obviously pertains to Netflix in that it would immediately make Apple and Netflix competitors. The reason behind my post was to point out that Apple is not the behemoth company that everyone thinks it is vs. the puny little Netflix. The greater debate on the board the past few days has been trying to figure out why the possibility of movie downloads, which most of us think are highly impractical and will be highly impractical for many years. When Apple hinted at its own potential move into the market place, it immediately posed the question to us Netflix stockholders as to whether we should be worried. My point was to show that Apple is not going to be able to create a viable movie-download product just because they want to, although the current general view of the company seems to be that they are an unstoppable all-powerful force.

I will, in closing, admit that I perhaps went slightly too far at times in my portrayal of Apple's current business status. It is certainly not a poor business or business model by any means. I believe that my somewhat extreme comments were a reaction to the extreme love that Apple is getting that I think is undeserved and believe will be eventually shown by a decline in the company's growth.

This has been a great back and forth on the board, and I have really been enjoying being part of this banter, even though it got me into the whipping boy position!

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