Competition Is Apple's New Reality

 | Apr 04, 2013 | 1:00 PM EDT
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Investors and potential investors in Apple (AAPL) have to accept a new reality going forward: Apple is no longer the only game in town, not by a long shot. Truly understanding Apple's new competitive landscape is more critical than ever to produce a future valuation of the company. To understand Apple's potential future, one has to understand Apple's recent past. And to that, you have to dust off your old marketing books.

Banking on FMA 

In marketing, there is a basic concept known as FMA, or first mover advantage. I realize most Real Money readers are probably familiar with the concept of FMA, but it never hurts to brush up. FMA, simply defined, is the ability to occupy a significant portion of a market by being the first to exploit it with a new good or service. FMA is also a technological advantage. Another very important aspect of FMA is not only do you occupy a significant portion of the market, but you also get to experience above-average profit margins due to the absence of competition.

The iPhone was Apple's crowning FMA product. When the first iPhone debuted in 2007, no one had any idea what to make of it. That gave Apple several years of virtual dominance as other phone companies finally realized they needed to come up with a better mousetrap. More so, the rapid growth of the smartphone and the consumer shift to a more mobile lifestyle laid the groundwork for Apple's next blockbuster product, the iPad.

But guess what? The FMA advantage that Apple had with the iPad was a lot shorter than the iPhone. Why? Because by the time the iPad rolled out, Google (GOOG), Microsoft (MSFT), Samsung and even Amazon (AMZN) had plenty of years observing Apple developing smartphone technologies and other technologies to create their own mobile products a little quicker.

The New Apple

As I've said all along, Apple remains the innovator with products that are still obsessively desired. And I wouldn't doubt for a second that Apple could give us another new product that will create another new mobile market (I have heard rumors that the company is supposedly working on a smart watch). But technology customers are always seeking and willing to try the latest gadgets. If you look at the time between product versions, it's getting shorter in response to increased competition.

Technology enhancements can also serve as a price reduction without moving the sticker price. If a smartphone comes out with better capabilities, enhanced speed, and other improvements and sells for a similar price to a competitor's product, then the perceived inferior product will look more expensive. That's what Samsung and BlackBerry (BBRY) are hoping to do with their latest versions. On the other hand, you still get classic price wars with the likes of Amazon heavily advertising the nearly identical similarities between its Kindle Fire HD tablet and the iPad 3. The only difference is the price tag.

Apple's financial picture is likely to transform into one where it will have to accept slightly lower margins. But the lower margins can be exchanged for higher volume. More than 5 billion people still don't have a smartphone. The growth opportunity is there, but the reality is that Apple is no longer the stock that people must own at any price.

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