Technical Obsolescence, from Victor Niederhoffer

July 2, 2007 |

I've found in my 45 years of business experience, as a rule, starting with Tyco's toy racecars (by far the fastest) was that the company with the superior speed or design or popular fancy was always overtaken by a competitor who came up with a comparable or better product. As a complete layman, I wonder how long it will be before someone comes out with a better phone than Apple, and whether this makes the profits form the iPhone ephemeral. Please excuse my ignorance in this field.

George Zachar comments:

Technology acceptance is heavily influenced by network effects and compatibility issues that make the diffusion of digital products take a different trajectory from their non-digital predecessors.

John Floyd adds:

"Leapfrogging" is a real danger. It is also evident in the way Japan evolved in car manufacturing in the 1960s and 1970s. I can remember driving in my uncle's "nouveau Datsun" as a five-year-old and hearing him tell me about the benefits in terms of cost, fuel efficiency, luxury, etc.

From a stock performance perspective I would imagine tests exist and can be done to look at stock performance post introduction of a new product for a variety of markets and products, Apple obviously included. What seems likely difficult to quantify is the "wow" factor: the market's potential to extrapolate huge multiples going forward based on various forms of growth, as happened in cases like the Internet stocks.

Henrik Andersson writes:

It seems like Apple is holding on to their market share for portable music players even though it might not have a superior technology. I can envision the same happening for the phone, which I think would be very suitable for WiMax in the US rather than 3G.

James Lackey writes:

There are so many elegant angles to the iPhone. When you look at the products vs. cycles, prices and innovation, many examples of car production vs. tech can be used. Examples include the furious competition, lower prices, and leaps of innovation.

The iPhone may be a leap of innovation. Of course others will adapt and prices will fall. What is uncertain is how much innovation and cost will trickle down to the sedan market of cell phones. Perhaps that equation, how the mass market accepts it and is willing to pay for the new bells and whistles, will set the pricing and production of future iPhones. Will the iPhone be a sporty two-seater high performance vehicle or just another used sedan at 50% off current retail in five years?

Barry Gitarts writes:

I think your questions apply to the smart phones which have been on the market for years from companies like RIMM or PALM and the iPhone is the answer.

To paraphrase Steve Jobs, people are used to thinking that something is wrong with them, when the real problem is the phone they are using. But Apple is not an iPod or iPhone story, it is a Steve Jobs story. Just look at how Apple did when Jobs was at the helm and then when he left and then when he came back. Is there any doubt he is the man responsible for the value creation reflected in Apple stock?

When I watch Jobs talk about his products, his passion and dedication reminds me of Howard Hughes and Airliners as portrayed in The Aviator. While there is no doubt that new technology will come out that will give the old technology a run for its money, how does one know the new technology will not be developed by those who developed the old one?

J.P. Highland writes:

It won't be about someone producing a better phone, but someone being capable of delivering a cooler phone. The IPod might not be the best mp3 player in the market, but there's something irrational about it. People love it and will keep buying unless the meme fades. But so far people are in love with Apple and the success of the IPod has permeated to the iPhone and the PowerBooks are doing well.

Comments

6 Comments so far

Greg Rehmke on July 2, 2007 8:44 pm
It is great the way industry leaders sometimes charge into different but related industries. The free-wheeling computer industry doesn’t suffer from the dense regulations and Congressional lobbies that blanket the phone, cable, and cell phone industries.

Verizon, the leading wireless firm, has its roots as a heavily-regulated Baby Bell (Bell Atlantic). It is a pain to deal with (at least it has been for me). Having “the most reliable” cellular network, neither Verizon nor any other major cell phone company allowed their phones and users to switch calls to free wifi networks when available.

Apple enters the cell phone business with a phone that automatically switches to wifi. Apple’s iPhone is partnered with the weakest cellular network, which, being in last place, was willing to cede more control to Apple. Instead of standing in a cell phone store giving your address to a Verizon employee, iPhone buyers activate their cell phones at home using iTunes. That saves somebody money, and allows Apple to sell the iPhone online from their own company store (though with a four-week wait for now).

Just as the most innovative electric cars will likely come from outside the established auto industry, the most innovative cell phone comes from outside the cell phone industry.

The Apple TV device is a similar push to compete with the endlessly irritating services of local cable monopolies.

It is interesting that Apple’s latest ventures are into long-regulated cable and wireless sectors. Apple’s close integration of hardware and software gives them an advantage entering such fields. Hewlett-Packard, Samsung, Sony and Dell lack the software expertise, just a Microsoft lacks hardware and design expertise to match Apple.

What felled Apple and Jobs the first time around, according to Jobs and others, was that they got a bit complacent and greedy. They had great products and high-margins with early Macintosh computers. But they kept their prices too high for too long. Anyone serious about a personal computer in those days, it was believed, should be willing to pay $3,500 and above.

Microsoft developed (and licensed) many of the best Mac features and offered their Windows operating system cheap to dozens of personal computer companies.

Greg Rehmke
Thomas Bjurlof on July 2, 2007 10:28 pm
The weak link may be the network, not the iPhone. EDGE (used by the iPhone) or 3G technology may not do the trick if YouTube becomes a mobile killer app.

Fourth generation network technology (e.g. WiMax) coupled with an open platform for mobile devices (mobile Linux anyone?) may be the next big thing. Last I checked license payments on today’s mobile mobile phones were close to 60%.
Thomas Bjurlof on July 2, 2007 10:45 pm
Correction: Licensing rates are close to 28-29%. Four firms own about 60% of the patents for 3G technology. WiMax (and Linux) are based on open standards.
Acetrader on July 3, 2007 10:47 am
who cares if someone makes a “better” phone than the I-Phone or a better MP3 player than the I-Pod. The bottom line is Apple wins because they have created products that are FASHIONABLE…my 12 year old daughter and all her fiends want anything Apple first and foremost because of the brand…that the products work is great as well….
Paul de Souza on July 4, 2007 8:42 pm
This is a truism in general terms.. it is the way of competition and even chaos theory can be used to describe this phenomenon.. however, one must accept that in finite terms its about the ability to innovate, speed of that innovation, and the shortest time it takes to bring that timely innovation to market.. Apple are good at that.. they will respond quicker than most because they have cash resources from Itunes to drive that innovation engine whilst having the wind behind them already with a captive audience of youngsters that veiw the brand cool already…. it wont be anytime soon… but it will be inevitable that competition will engulf or accelerate them even further ahead
Steve on October 2, 2007 6:14 am
I am with you on this one. It’s just a wizz-bang phone. A couple of years ago everyone was all the rage for the Blackberry, Motorola RAZR, now its the iPhone. There’s no monopoly on cell phone innovation, Motorola, Nokia, Sony-Erickson, LG, etc are all on the drawing board working on how they are going to top this.

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