Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Paul Krugman’s Take On The Apple Inc. (AAPL) Business Model

Page 1 of 2

Economist and Nobel laureate Paul Krugman took a break from Keynesian economics to blog about his thoughts on Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). Krugman, by his own admission, is not much of a tech observer. But his conclusion — that Apple Inc. (NASDAQ:AAPL) may in fact be more challenged than Microsoft Corporation (NASDAQ:MSFT) — is largely based on an easily observable economic phenomenon.

Network effects — the notion that a product becomes more useful based on the number of users — permeates the tech landscape, and remains the driving force behind the business model of many tech firms, particularly Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT).

Apple Inc. (NASDAQ:AAPL)

Network externalities are crucial when it comes to operating systems
When companies are dependent on the sale of operating systems, they are beholden to the nature of network effects. Windows, for example, has no value in and of itself other than its ability to serve as a platform to run other programs.

A consumer buys a Windows PC because most of the PC software in the world has been written to run on Windows computers. The more people own Windows computers, the more software is likely to be written for Windows, and thus the more valuable a Windows PC becomes.

Krugman’s take on the Apple business model
Losing Windows would hurt Microsoft Corporation (NASDAQ:MSFT)’s business, no doubt, but it isn’t Microsoft’s whole business by a long shot. In contrast, Apple’s entire business is built around its mobile operating system. iOS powers Apple Inc. (NASDAQ:AAPL)’s iPhones and iPads, which account for the overwhelming majority of the company’s revenue and profit.

If these devices ran a competing operating system, consumers would be unlikely to buy them. For the prices Apple charges, its products are technologically inferior to the competition. But if you want iOS, you have no choice but to buy Apple products.

Consumers want iOS in large part due to its app ecosystem. Krugman writes that a deeper bench of apps appears to be iOS’ primary advantage:

Now, unlike Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL) isn’t selling an inferior product. But it’s selling products that are little if any better than competitors, at premium prices. How can it do that? Again, network externalities:  mainly a much deeper bench of apps.

That’s definitely the case, and there’s a litany of examples to prove it. Most recently, Electronic Arts‘ decision to make Plants vs Zombies 2 an iOS exclusive (for the time being).

Consumers vs IT managers
Krugman argues that, on a comparative basis, Apple’s lock on the mobile market is much less concrete than Microsoft’s lock on the traditional PC market, primarily for one reason:  As an enterprise company, Microsoft Corporation (NASDAQ:MSFT) has historically sold to the heads of IT departments.

Given the nature of corporate bureaucracies, IT departments are much more likely to stick with a platform. In contrast, individual consumers can be fickle. By focusing on selling directly to the consumer, Apple Inc. (NASDAQ:AAPL) may have built a larger cultural footprint than Microsoft, but it’s more susceptible to shifts in consumer preference.

BYOD blurring the line
Krugman offers no supporting evidence for his theory, although it appears to make sense intuitively. However, the notion of IT departments calling the shots when it comes to electronic preferences is fading fast.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!