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Apple's Real Competitor Is Apple Itself And It's Just Bought That Competition

This article is more than 10 years old.

Given the fierceness with which Google , Apple , Samsung and the rest compete it might seem a little strange to say that Apple's real competitor is Apple itself. But in one way this is in fact true. Interestingly, the insight comes from the work of the recently departed Nobel Laureate in economics, Ronald Coase. He pointed out that even a monopolist can face competition: from the used versions of its products already out there in the marketplace. As David Henderson puts it:

Had I had room, I would have quoted a question that my former University of Rochester colleague, Ron Schmidt, a master teacher, posed in about 1976 and that I got the wrong answer to. The question: "What is General Motors 's biggest competitor?" [Remember that this was before the Japanese producers were a large part of the market.] My (wrong) answer: "Ford." Ron Schmidt's answer: "The used car market."

And we can make the same sort of comment about the smartphone market as well. Indeed, Businessweek is mulling over and nearly getting to the same point:

Apple is expected to introduce its newest smartphone on Sept. 10, raising the question of whether consumers will rush out to get the latest iPhone even though older versions work just fine. The sixth-generation iPhone is rumored to have a fingerprint sensor mounted in the home button of the phone to make it more secure for payments, an improved camera, and other design refinements.

Although the iPhone remains a killer franchise, with nearly 390 million phones sold as of last quarter, fatigue may be setting in. Apple sold 18.2 million iPhones last quarter, down 17 percent from the previous three-month period. Investor concern that the smartphone brand has lost some of its magic is one reason the company’s stock has fallen about 8 percent this year. “There’s less and less difference between a new smartphone and one from a couple of years ago, so people feel less need to upgrade,” says Benedict Evans, an analyst with Enders Analysis.

Each generation of smartphone does get better, this is true. Better cameras, more memory, faster processors, all these get added each time around. But since the original iPhone and then the hectic race by Samsung et al to catch up there's been no great revolution. Smartphones still do largely what smartphones did then. Or more importantly, a smartphone that's a couple of years old still largely does what a new one can do. Thus we can indeed say that one of Apple's major competitors is Apple itself: more specifically that Apple in 2014 will be competing against what Apple produced in 2011 and 2012. It needs to keep driving the technology forward so that people will indeed be tempted to purchase the latest and greatest iPhone, rather than happily settling for something pre-owned.

Thinking through the market in this manner allows us to put a different gloss on Apple's recent foray into having a trade-in program. By running the trade-in program itself it not only sells a new contract, as I outlined there, it also takes control of a large part of that second hand market in iPhones. Which means that, if we accept that the used market is a major (or possibly even the major) competitor to Apple, that Apple has just bought out its competition. And it's bought out that major competitor for nothing. Which is really rather clever of them.