Posts Tagged ‘Alekhine defence’

Memo to Ms Ahrendts

MEMO

Re: Apple Inc: Play not to lose: Minimax strategy

Dear Ms Ahrendts

Congratulations on your recent appointment. We have been commenting on Apple for a number of years in this Blog, and from the perspective of game theory. You should challenge everything about the data – market share figures, consumer loyalty and the source of the competitive threat. Apple does need to refocus, to reshape its strategy in order to compete in an evolving game that exhibits both convergent technologies and rapidly changing set of consumer preferences. Are you a brand? Are you a design company or an innovator? Analysts look at Apple in terms of profit margins and a company trading on earnings estimates and revision of the estimates. With new product launches across the i-suite of products, coupled with an underlying iOS ecosystem, they look forward to new product launches, and endless queues by early adopters and loyal fans at different cities across the world. But from our perspective, observing Apple as a player in a game, we would adjudge that you are not winning the game.

Confused consumers

First of all, your product offerings are in danger of becoming nodoids: in other words, they come to represent nothing more than a roll-out across a common platform of a suite of not dissimilar products absent any innovation. Consumers are either underwhelmed or disappointed. Once they ask the nodoid question: ‘is an iPhone an iPad or is the iPad an iPhone?’ the game dynamic switches from a game of playing to win to a game of playing not to lose. This is happening. Secondly, the analysts expect the i-Watch – so what? Analysts continue to debate the next big thing. So what? Could it be IPTV or cloud solutions?  So what? You know that you are not in search, you know that you are not in digital mobile advertising, you are a late entrant into cloud services, you failed to acquire Twitter, SIRI failed, Newton failed in the 1990s and in 2013 you allow us to believe that you are not a player in IPTV.

We have argued this before #tuncnunc discussing a range of game solutions to consider: launch a nano iPhone or engage in a telecom alliance with 4G LTE providers such as China Mobile. The 5C launch is about maximising profit margins; a nano offensive play, however, would ignite a $99 ‘sweet price’ competition for full functionality smartphone devices. Forward guidance on the stock estimate above $500 may adjust for these events in 2014-15 but these events may now be too late from a game perspective to play to win the long game. In other words, no longer is it about how Apple is performing in 2013, it should be about Apple’s likely performance in 2023.

 

 

Second mover advantage: SMA & Minimax

So an alternative for you to consider in your new role is to secure the second mover advantage [SMA] by playing not to lose. First, recognise that your market shares are increasing at a decreasing rate. Correct that trend. The iPhone 5 delay, for example, created a zero-sum switch to rivals, notably Samsung, in the UK and possibly across the EU. Your smartphone market share is under threat in Asia as the convergent smartphone and tablet game evolves to become Apple’s game to lose. Start thinking like your competitors – reason like this: ‘I think-you think-I-think’: Apple thinks that Samsung expects it to defend the iPhone, so Samsung will attack the iPad. But Samsung believes that Apple will reason this way, and so assuming that Apple will defend the iPad, Samsung will attack the iPhone. But Samsung also knows that Apple will reason this way.

This line of reasoning suggests that some kind of a decision tree ‘what-if’ analysis will reveal which strategy is Apple’s optimal choice. But it is more complex than that – we argue in our new book Decoding Strategy that how either player does in the game depends on what each believes the other is likely to do. Apple has to choose to play a minimax strategy, that is, a strategy that minimizes the maximum amount Samsung can expect to get in the evolving smartphone and tablet game, and thus maximize the amount Apple can expect to win. It is for you to patch a minimax strategy into your strategic vision for 2014 and beyond. To quote T.S.Eliot: ‘What we call the beginning is often the end, and to make an end is to make a beginning, the end is what we start from’. With best wishes in t+1…..

Spin-0 for Apple in a French defence: from iPod to iNext or acquire a telco?

In our previous Blog entries, on the smartphone and tablet market, we referred to the market as a game, G. In G a new phenomenon has occurred, created by a convergence of technology coupled with rational consumers asking: is the iPhone5 = a mini iPad or is the new iPad mini = iPhone6? This line of questioning, we believe, translates the Apple products into a scalar (spin-0) with no strategic direction. A scalar product, if you recall from physics, only needs a numerical value, and is not attached to a direction. Where is Apple going? Earlier this year, IDC Research reported that Apple’s share of the global market for tablets fell sharply in 2012 from 65% to 50%.

Strategists therefore need to ask the entropy question: do gains necessarily accrue to Samsung, Amazon and Asus or are rational consumers simply waiting or delaying buying Apple devices? To find an answer, we posit that Apple products and non-Apple products may share common features and functionalities but they do not overlap, thus creating lines of adjacent vertices in an evolving market share game.  Furthermore, Apple may have the greatest App store in the game but as it continues to rotate through iPod, iPhone and iPad to iNext, spherical  competitors from anywhere at any time to will enter the game and win.  Rational consumers delaying a purchase and the convergence in rival technologies facilitate competition, and by Q4 2011 Google powered devices began to close in on Apple’s dominance. More recently, Microsoft’s Surface, the Google-Samsung Nexus 10 running on the latest Jelly Bean software, the Amazon Kindle Fire HD and the Asus-Google Nexus 7 have emerged as formidable competitors in the game.

What if the XBox music internet service has the potential to impact on iTunes? Investors are not clueless about the technology convergence nor are they aloof to the need for an optimal strategic response from Apple. With a cash balance that is equivalent to a quarter of its CAPM, investors will want more investment. They may ask: why not acquire a telco? The iPhone5 can indeed promise 4G technology, albeit not everyone, who has an iPhone 5, nor anyone anywhere in the world, who is thinking about buying an iPhone 5, will be able to avail of 4G. There is no point really in offering rational consumers a new fountain pen without the ink! As rival competitors continue to enter the game G, the family of competitors grows and new features and functionalities create entropy and adjacent vertices that will limit Apple’s progress unless they join the family.  For example, today in November 2012, Apple is not a key player in social media, digital mobile advertising, OLED Smart-TV, nor is it dominant in cloud computing, NFC and mobile e-wallet payments. They could be in time, many investors hope that they will – sometimes this is not how it works.

Apple can fail: who remembers the Newton in the 1990s? Or the more recent befuddled roll-out its mapping service?  The more we observe G the more convinced we are than it mirrors a game of chess. But is it a game of French defence where it will be challenging for Apple (White) to hold on to the centre as opponent’s attack its Queen (iOS) quickly and swiftly, faster than any counterattack from Apple.  Maybe Apple should stop defending its pawn line of iPod-iPhone-iPad? Acquire a telco. In chess language, Black is out to attack the pawn line. What is Apple’s optimal sequence of moves? Is the ecosystem a sub-game of Alekhine defence by Google (Black) or Android alliance (Black), allowing its King’s Knight (Android) to be positioned across the board so as to weaken White’s centre pawns? We will take up these issues in next Blog entry – our continued recommendation for Apple is to play not to lose rather than play to win.