• There is a lot of value to recognizing early trends, and acting upon them
  • That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
  • It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
  • Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
  • Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years

I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider.  It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:


Firstly, it is important to understand that capturing young buyers is very valuable.  If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain.  Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value.  While we may realize that older people have more discretionary income, many loyalties are developed at a young age.  Over the years, the younger buyers will be worth considerably more.

When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.)  Thus, my generation tended to stay with those brands a long time.  But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas.  Now, the American car companies are in trouble because a generational shift has happened.  Market shares have changed considerably, and Toyota is now #1.  Keeping the old buyers was not enough to keep GM and Chrysler healthy.

That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases.  It portends good things for Apple, and not good things for leading PC suppliers.  Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.)  We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales

Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing.  Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance.  Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation.  Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed.  Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.

Not all innovation is alike.  Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value.  Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage.  D&E innovations are valued by insiders, but not much by the marketplace.  Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched.  They don’t create customer loyalty. 

However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created.  Apple is still #1 in digital music downloads after nearly a decade.  And they remain #1 in mobile app downloads despite a small share in the total market for cell phones.  If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.

Thirdly, this should impact your investment decisions., reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market.  It’s defend & extend behavior is doing nothing for shareholder value.  Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits.  As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year! 

Too often people invest based upon size of company – thinking big = stability.  But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true.  Others invest based upon dividend yield.  But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP).  Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs). 

Investing has to be based upon a company’s ability to maintain profitable growth into the future.  And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly.  Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions.  Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.

Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:

  1. Dell is trying to Defend its old customers, and it’s not capturing new ones.  So it’s future is really dicey
  2. Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today.  Dell is in a price war.
  3. Apple is pioneering new markets with new products, and it is capturing new customers.  Especially younger ones with a high potential lifetime value
  4. Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
  5. You should sell any Dell stock you have – it has no chance of going up in value long term.  Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.