The Secret to Apple's Success

With the way Apple (Nasdaq: AAPL) not only straddles the burgeoning tablet and smartphone markets but also holds sway across the computer, home-entertainment, and media fields, the moves it makes can have an impact on the future of hundreds of companies. With that in mind, we're taking a look at the week in Apple news to see how the latest activity affects the Cupertino giant, its suppliers, and even its competitors.

The secret to Apple's success: less innovation needed
Around the Fool there's been a lot of debate recently about Apple and its supposed need for innovation. Writer Chris Baines argued that Apple needs to constantly innovate to stay relevant, making the likes of Microsoft (Nasdaq: MSFT) a comparatively much safer investment. Rule Breakers analyst and writer Tim Beyers says Apple's need for innovation is exaggerated; product improvements have largely been incremental tweaks to existing product lines.

I tend to agree with Tim. For example, the iPad was little more than a larger iPhone upon its launch. Apple's genius was that it was the first company to understand what customers wanted in the nascent tablet market. The company then delivered with an easy-to-grasp user interface at the right tablet size. Without any real "innovation," Apple was able to expand its iOS operating system to a whole new growth avenue.

Similarly, as Tim pointed out, what was the real innovation in the iPod's early years? The company added a click wheel, and later a color screen, but the real story was that Apple was the first company to lock consumers into high-capacity MP3 players. Customers were generally pleased with the product and stuck with Apple's products through future upgrades.

Apple's success is largely the result of its tight focus on a small number of product lines that are complementary to one another. For example, despite all the "innovation" needed to sustain Apple, here's how its research and development compares with Microsoft's over the past half-decade.

Source: Capital IQ, a division of Standard & Poor's.

It might look as though the scope of Apple's R&D is limited. However, whereas Microsoft might have dozens of teams trying to create "the next big thing" in divergent areas, Apple has followed a different strategy: It allowed others to create the growth markets and then took its existing platforms and technologies to address what users really wanted from these markets. The iPod, iPhone, and the iPad entered markets that had long existed; Apple was simply the best at addressing what users wanted. After the initial release of the iPod, changes have largely been incremental upgrades to the same platform and technologies.

Detractors might say that Apple's success in the past decade was largely a result of two breakthroughs: the iPod and the iPhone. To an extent, that's true. The iPod fueled growth early in the decade, and the iPhone provided late-decade growth and laid the foundation for the iPad. Surely Apple can't come up with a third game-changing innovation, right?

Well, once again we find that Apple doesn't really need to reinvent the wheel so much as stretch out its calculation of pi by a few more decimals. Apple's focused efforts on creating iOS and a rich development community around it now yields a powerful platform that can scale out to new markets. The most logical market would be home entertainment, but other incremental improvements, such as better capturing of mobile advertising through iOS, could also yield outsized gains.

Oh, and there's also the little fact that both the tablet and smartphone end markets still have plenty of growth left in them. So that'll go a long way toward providing the growth needed to justify Apple's higher earnings multiple.

6 million iPads?
While Research In Motion’s (Nasdaq: RIMM) CEO boasted in a conference call on Thursday that that his company's PlayBook is "way ahead" of the iPad, reports from rumormonger DigiTimes say RIM and other tablet makers might be falling farther behind. According to DigiTimes, Apple is gearing up for a monthly production of 6 million iPads for its next-generation model. For context, Apple sold 4.2 million iPads in the entire last quarter.

The tablet market is hot, but it's hard to believe that it's that hot. I'd caution investors that these kinds of reports are shaky and often untrue, and that Apple could be ramping initial production higher to meet launch demand.

Disrupting the media?
Tech blog Engadget recently posted a survey from DirecTV (Nasdaq: DTV) that asked users about their interest in a digital NFL Sunday Ticket that could be viewed with digital devices such as Apple TV and the Roku Player.

So far, although Netflix (Nasdaq: NFLX) has fully embraced a transition to digital set-top boxes to spread its streaming services, traditional media channels have been hesitant to move online. That's because cable channels enjoy mass distribution under their current arrangement with cable operators, and they could threaten that relationship if they give away too much content over the Web.

In the end, one of the largest deterrents to having consumers cut the cord and move online is the lack of live programming such as sports, which makes DirecTV's survey of offering live NFL broadcasts all the more intriguing. Along with Disney (NYSE: DIS) unit ESPN's decision to start offering many live events on its ESPN3 site, the advent of live media streamed online could create another powerful catalyst for consumers to shift behavior away from cable, and toward devices such as Apple TV and the iPad, which are built for consuming streaming media.

That's it for this week's Apple news. If you're searching for other opportunities in the mobile world, we've created a special report featuring a mobile giant that The Motley Fool has put its own money behind. Get instant access to this report right now.