Wednesday, February 15, 2012

Is a Network Effect Rocketing Apple to the Stratosphere?

One of the big goals of any social networking site is to create an environment that engenders a "network effect," where all the right design elements come into play to attract the attention of a diverse audience and leverage the global scale of the Internet to create exponential growth.

Example: Facebook's uncluttered design and sharing applications created a network effect that sent it racing past MySpace to become a virtual vortex for all social media.

I think we might be witnessing something tantamount to a network effect in business with Apple the last several months. Six weeks after a holiday season in which Apple racked up all time highs in iPhone and iPad sales, the company is seeing a continued surge in sales as friends and relatives come in contact with these devices and are seduced by Apple's form and fun factors.

My wife got her first iPhone (a 4S) over the holidays and she has fallen in love with it. Siri is like a new friend. A recent dinner party we went to turned into an iPhone seminar when all the women began comparing features and apps. She later felt like she needed to apologize to the host for waylaying the evening.

My daughter, who has been using Android phones for years looks at her mother's phone and says, "Wow."

Because the seemingly limitless functionality of the iOS was somewhat overwhelming, my wife decided to take a user's class at the local Apple store. The class began early in the morning, before the store opened to regular customers. When they opened the doors for regular business, she was there to witness a mob scene. There were no new product announcements, it was just a regular day of business.

Apple stores generate more sales per square foot than any other store in the world, and the company is building new ones around the world at an unprecedented rate. According to some data, average transactions at the Apple store have risen to between $280 and $380 dollars when new products are released. Their most profitable product is the iPad, which doubled in sales over the holidays.

Of course, that's just the result of Apple retail stores. Apple's online web store is the third largest behind Amazon and Staples according to a Forbes survey. Most iPhone sales take place through AT&T, Verizon and Sprint. And the iPhone, iPad and iPods are also available in other retail outlets such as Best Buy and Target.

Apple computers are becoming a smaller and smaller slice of the Apple pie, yet Apple profits doubled in its latest report — iPhone 4S and iPad accounted for 72 percent of those profits.

Siri is obviously a game-changer. The artificially intelligent personal assistant software is both liberating and entertaining. It's the main ingredient driving iPhone 4S sales. Fifty percent of iPhone 4S buyers were upgrading from another iPhone. By including functionality like Siri in the iOS, Apple has created unprecedented brand loyalty in the cell phone market, where typically owners will upgrade to any phone that gives them the best bang for the buck with a new contract agreement.

Holiday sales weren't hurt by Blackberry's network flameout either. Blackberry users accounted for 25 percent of the iPhone 4S sales. Today, it was reported that Apple passed Samsung Electronics Co. in the fourth quarter to become the world’s biggest smartphone vendor.

The iPad is expected to get Siri when the next version is announced in March. So you can expect another stampede at Apple Stores.

But there's more. The death of Steve Jobs has brought worldwide attention to Apple's unique corporate culture. Walter Isaacson's biography of Jobs has remained at or near the top of the New York Times best sellers list since its debut in late October 2011.

In the book, Isaacson clearly outlines how Job's philosophy created a design-predicated company culture that puts the goal of building absolutely perfect people-products ahead of profit motivations. This mandate for craftsmanship stands in revolutionary contrast to most corporate business practices, but it's becoming clear which philosophy customers respond to better.

The book raised some questions about how well Apple will be able to continue the magic with Jobs gone, but dispels any notion that Apple's industry-shaking success is a fluke. Even more so, the book makes it clear that Jobs focused the waning years of his life on leaving Apple with the right governance and a clear blueprint so that its unique business methodology would be his legacy to the world.

It's beginning to look like the convergence of all these elements might propel Apple into the business stratosphere at a jaw-dropping rate. Millions of shares of the stock were sold and bought at all time high prices within a few hours morning. The stock streaked past $525, gaining three percent and pulling the entire tech sector along with it.

Maybe a vision of Apple's future was what Steve Jobs saw on his deathbed, when his sister reported that his last words were, "Oh wow, oh wow, oh wow!"

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